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How to Prevent iPod Technology Falling into the Wrong Hands

Jay Parkhill November 6th, 2008

VentureBeat posted an article yesterday about the very lucrative “advisory” contract Apple is giving Tony Fadell following his departure as head of Apple’s iPod division.  Here is a quick analysis of the legal landscape that may have led to this deal.

Noncompete Agreements Allowed in Many States, but Not California
In most US states companies are permitted to sign employment agreements that prevent a person from working for a competitor for up to a couple of years after the person ends his employment.  California has a different take.  It says that employees are always (with a couple of limited exceptions) free to work anywhere, but the the company can prevent the employee from using company-confidential information in the service of the new company.

California trained and practicing lawyer that I am, I had never focused much on this distinction until I started reading Bijan Sabet’s blog.  Bijan is a Massachusetts VC with a minor quest to get MA and other states to follow California’s rule.

For the record, I think that California has it right (big surprise, I am sure).  The Fadell situation makes an interesting case study.

Apple Pays Fadell to Protect its Competitive Advantage
If Fadell worked in Massachusetts, New York or most other US states, Apple could simply tell him he could not go to work for a competitor.  Fadell’s expertise is in developing portable audio/video players, so this might make him choose between not working at all for a period of time and trying to break into an entirely new area.  Since Fadell is in California, Apple can’t do that.  Instead, Apple had to figure out how much it was worth to keep Fadell on the sidelines.  VB reports that value is $300,000 per year through March, 2010 plus stock worth $7.6M at today’s prices.

The point here is that the burden fell on Apple as the employer to protect its competitive advantage without cutting off Fadell’s ability to make a living.  Fadell could probably have survived even without the extra compensation, but others might not be so fortunate and this is why I believe California has the rule right.  If a person is that valuable, the employer should pay to keep him/her on the bench.

Contrast With Fadell’s Replacement - Mark Papermaster
What makes this case even more interesting is that Fadell’s replacement, Mark Papermaster, is coming to Apple from IBM.  Papermaster apparently agreed to a noncompete restriction in his IBM employment agreement and IBM has now sued him and Apple to enforce the noncompete terms.  I am not certain whether Papermaster lived and worked in New York or whether his employment agreement was specifically governed by New York law.  If it was, he and Apple could have a hard time overcoming the noncompete restriction.

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    I am not a lawyer not do I have an academic background in law. However, I have earned my cred on the street. I think a lot of people are missing the point regarding the IBM v. Apple suit. Everyone is quick to blurt out that non-compete are not enforcible. My experience is that this is a dangerous myth for perspective employees to assume. I am not even going to go close to trying to explain or understand California employment law; how, there are two facts in the IBM v Apple case that no one seems to want to point out.

    1) The ex employee in question did not sign an Employment non-compete agreement, he signed an awards program agreement that had nothing to do with his terms of employment.

    2) The jurisdiction agreed upon in that agreement is Westchester County NY.

    Add the fact that it IBM who is making the suit against the individual, not Apple,I think it is beyond ludicrous to assume that IBM is maying a frivolous complaint. However, what do I know!

    johnmwillis.com
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    • v
    Thanks for the comment. I agree with you that Papermaster is on shaky ground.

    IBM's complaint (copy here- http://blogs.zdnet.com/BTL/images/papermaster1.pdf) cites a Noncompetition Agreement that Papermaster signed.

    I didn't find a copy of the complete agreement on a quick search and I don't know the full context of his employment arrangement, but the basic point remains the same- noncompetes are enforceable in New York and not in California. Fadell therefore gets paid ~$8.4 to be an advisor to Apple and Papermaster gets sued by IBM in Manhattan. It would be hard to find a more stark example of how this issue plays out.
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    • v
    Apple could simply tell him he could not go to work for a competitor. Fadell’s expertise is in developing portable audio/video players, so this might make him choose between not working at all for a period of time and trying to break into an entirely new area. Since Fadell is in California, Apple can’t do that.
    • ^
    • v
    The point here is that the burden fell on Apple as the employer to protect its competitive advantage without cutting off Fadell’s ability to make a living.Apple had to figure out how much it was worth to keep Fadell on the sidelines. VB reports that value is $300,000 per year through March, 2010 plus stock worth $7.6M at today’s prices.
 

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