Archive for November, 2008

How to Prevent iPod Technology Falling into the Wrong Hands

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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The SEC vs. the Body of Internet Law

November 6th, 2008

The SEC spends a lot of time thinking about public statements- and misstatements.  It looks at a company’s communications and holds the company liable for *everything* it says publicly, whether statements were made as part of a formal “announcement” or just in some marketing collateral.  This is reasonable- to do otherwise would let companies cite one set of facts “on the record” for shareholders and paint a different picture elsewhere.

In August, the SEC published some proposed rules governing websites.  It seems to be worried that companies could use third-party websites to get around the integrated-communications policy.  E.g. a company could describe some negative results in a press release while simultaneously linking to a an analyst’s blog that offers mitigating opinions.

Most people can probably agree this would be a manipulative business practice.  The SEC would like to hold companies liable for statements made on sites hyperlinked from a company website.  On its face that seems like a reasonable proposition.  Unfortunately, it flies straight into one of the bedrock rules for conduct and liability on the Internet: site owners are not liable for statements made by third parties.

The law that creates this rule is known as 47 USC Sec. 230, was enacted by Congress in 1996 and has been interpreted and upheld numerous times over the past twelve years.  It is as fundamental as any rule gets in the still-young arena of Internet law.

Santa Clara University Professor Eric Goldman wrote a comment letter to the SEC about the conflict between Sec. 230 and the SEC’s proposed rules.  In addition to explaining why the SEC’s rules are problematic, the letter does a fantastic job summarizing Sec. 230, major cases under it and its position today.  Definitely a worthwhile read for operators of sites that solicit third-party content and the people who advise them.

I find this area fascinating.  The SEC has a very long history of regulating corporate communications and its new rules flow directly from that tradition.  At the same time, the civil liability it seeks to impose is clearly preempted by Sec. 230, creating a head-on collision between the SEC and existing law.

Criminal liabilities are a different matter- 230 does not address them at all.  In the end this may be the way through, but it would be a tight, unhappy squeeze if third-party statements could lead to criminal liability, but not civil ones.  Stay tuned to see how the SEC’s proposed rules evolve based on comments it receives.

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