A case that was decided last year by the New York Supreme Court, Kings County, illustrates the importance of protecting the confidentiality of proprietary supplier and manufacturing sources.
In this case, a wholesale distributor of off-price apparel engaged an employee to assist the distributor in sourcing merchandise from overseas manufacturers. The distributor and employee made a number of trips to a South American country where the distributor sourced merchandise through a business broker who provided introductions to local apparel factories.
After a few years, the employee left the distributor to work for a competitor that began to place orders for merchandise with these same factories through the same broker.
The distributor subsequently brought an action against the employee and the competitor for unfair competition claiming that the identity of the broker and associated factories constituted trade secrets, which the employee misappropriated for his own and the competitor’s benefit.
Under New York law, a former employee may generally solicit a business’s customers, so long as the employee is not bound by a non-compete agreement, does not solicit the customers while still employed by the business and does not rely on customer information that was wrongfully obtained or which constitutes a trade secret. The courts have applied a similar standard when evaluating whether the identity of a company’s suppliers may be treated as a trade secret, often also considering whether the company had exclusive arrangements with those suppliers.
In determining whether information is a trade secret, New York courts frequently apply a six factor analysis:
- the extent to which the information is known outside of the company;
- the extent to which it is known by employees and others involved in the business;
- the extent of measures taken by the company to guard the secrecy of the information;
- the value of the information to the company and its competitors;
- the amount of effort or money expended by the company in developing the information; and
- the ease or difficulty with which the information could be properly acquired or duplicated by others.
The court ultimately decided the action in favor of the employee and competitor, determining that the identity of the broker and the associated factories were not trade secrets. The distributor did not establish that the broker or the factories had promised to or did, in fact, sell exclusively to the distributor and did not show that the identities of the broker and the associated factories were confidential. The distributor also failed to provide evidence that it had undertaken great effort in discovering the factories, in establishing a business relationship with the broker or in keeping the identities of the parties secret.
The lesson here is that businesses that depend on key suppliers should not rely on trade secret protection alone to protect these relationships. Instead, they should take steps to identify as proprietary that information which they wish to protect and should enter into appropriately tailored non-compete and non-solicitation agreements with their employees that are designed to prevent them from disclosing or otherwise taking unfair advantage of such information of which they become aware during the course of their employment.
Credit: R. Brian Brodrick
Brian is a partner in Phillips Nizer’s Corporate Law and Securities & Private Placement Practices.
While the Supreme Court’s recent healthcare and marriage equality rulings garnered a lot of attention, there was another decision at the end of the Court’s term that may be more meaningful to the business of fashion – Kimble v. Marvel Entertainment, the Spiderman patent litigation. Steven Kimble secured a patent for a Spiderman toy that shot the character’s “webs” from a hand. Marvel, owner of the character, purchased the patent to resolve a claim of patent infringement, promising to pay royalties on sales of the toy.
The popularity of the toy outlived the twenty-year patent term. Under a fifty-year-old Supreme Court decision, the obligation to pay royalties under a contract ends when the patent term expires, even if the agreement contains no termination date. Court decisions have applied the same rule to copyright licenses and assignments.
The Spiderman case called for the Supreme Court to reconsider the rule and permit the continued collection of royalties as provided in the contract. Although conceding that the fifty-year-old case might have been wrongly decided, as a number of courts and commentators have noted, the Court declined the opportunity to overrule it. Instead, it advised that, if the rule is to be changed, it is up to Congress to do so. Spidey is now free to cast his web without writing any more checks.
The decision is a reminder to licensors that patent and copyright rights do not last forever. In contrast, trademarks last as long as they are used and protected and trade secrets last as long as their secrecy is maintained. Joining a license for patents and copyrights with related trademarks or trade secrets can be a good way to maintain royalties after the patents and copyrights have expired. Licensees, on the other hand, should periodically investigate whether they are paying royalties under patents or copyrights that may have expired.
Credit: Helene M. Freeman
The U.S. Copyright Office delivered a Christmas present to the creative industries: The third edition of the Compendium of Copyright Office Practices. Unlike its predecessors, the third edition is not merely a set of instructions to the Copyright Office staff for administering the registration and recordation functions of the Register of Copyrights. The new version is intended to provide guidance to applicants for copyright, as well, setting forth what is and is not copyrightable and identifying who is entitled to claim copyright ownership.
Fabric and jewelry designers will find its lists of non-copyrightable subject matter and its examples of the distinction between copyrightable and non-copyrightable designs instructive. While the Compendium reflects significant judicial decisions, collected in a table of authorities, it also ventures into areas that have been considered unsettled.
This is particularly apparent in the section devoted to the copyright in websites. Insofar as the Register of Copyright is concerned, the format, layout and “look and feel” of a website are not copyrightable; but the content—text, photographs, audio and audio-visual works—are copyrightable. The website creator may have a copyright in the collection or compilation of these materials, consisting of their selection and arrangement, even if it has not created the contents. If the website’s terms of service require a user to convey “exclusive rights” in user generated content, uploading by the user of his or her content to the site will entitle the site to claim ownership of the copyright in the content. But the Copyright Office does not make registration easy. It requires the users who authored the content to be identified by name in the application for registration. If there are too many to name all, the application should list several authors and indicate the number of additional authors and the staff of the Copyright Office may ask for a more complete list to verify that the identification of authors of user-generated content has been maintained by the site owner. And any registration for the content on a website will pertain only to the particular version submitted with the application, so new matter added after registration will not be covered by the prior registration. Although it may be made available for display throughout the world, a website is considered an “unpublished work”, unless downloading or sharing of content is authorized.
The Compendium does not have the force of law and the Copyright Office has frankly stated that it has addressed unsettled areas in the hope that its reasoning will be considered persuasive should the issues be presented in future cases. But the Compendium does control how the Copyright Office will address applications for registration and a review of its provisions will assist applicants for copyright in avoiding common problems that can impede registration. It is readily available on the Copyright Office website, www.copyright.gov, and each chapter can be downloaded or accessed separately as a pdf.
Credit: Helene M. Freeman
Did you hear the one about the man and woman who walk into a bar and say they interned for a luxury fashion company, a magazine conglomerate, a movie studio, a modeling agency, a jewelry designer or the Los Angeles Clippers and say they should have been paid for it?
It’s not a joke. The legal assault on the unpaid internship continues to pose serious issues for unwary employers. More and more unpaid interns (typically, but not always, students or recent graduates) and their attorneys are rejecting the age-old rite of passage/symbiotic relationship that requires them to work long hours and perform varied tasks without pay in exchange for the opportunity to learn the business, make meaningful contacts, pad a short resume and demonstrate the moxie to make big money from future paid employment. Interns and former interns who never before (outwardly) complained about their arrangements are finding clear support from federal and state wage and hour laws requiring payment of minimum wage and applicable overtime premium pay for all the hours they work—just like regular employees—and are filing and participating in lawsuits to get what they believe they are owed. The public interest website ProPublica compiled and updates a chart tracking filing and status of interns’ lawsuits (http://goo.gl/jBYR9U).
I Don’t Want to Pay My Interns…
Okay, and you don’t have to—if your unpaid internship program satisfies all six of the following factors:
- the internship, even though it may include the actual operation of the facilities of the employer, is similar to training that would be given in an educational environment;
- the internship experience is for the benefit of the intern;
- the intern does not displace regular employees and works under close supervision of existing staff;
- the employer that provides the training derives no immediate advantage from the activities of the intern—and indeed, on occasion, its operations may actually be impeded;
- the intern is not necessarily entitled to a job at the conclusion of the internship; and
- the employer and the intern understand in advance that the intern will not be entitled to wages for the time spent during the internship.
If that does not sound like the program in place for your summer (or other) unpaid interns, you should carefully re-evaluate whether you are in compliance with the federal Fair Labor Standards Act and applicable state law. The test creates a very high threshold, but not an impossible one—for example, it may be satisfied where, among other things, an intern receives educational credit for an internship program that extends a classroom educational experience for her or his benefit to provide experience and training in a company setting. However, employers most often fail the test where an intern does work generally performed by paid employees, is left to work independently or does productive work for the company’s benefit (even if it also benefits the intern). In all of those cases, the intern likely will be entitled to payment for his or her services.
I’m Not Going to Pay My Interns…
Okay, but be aware of the potential consequences for misclassifying someone as an unpaid intern, which include all the back wages owed (including overtime for hours worked in excess of forty in a workweek) for three years (under federal law) or more (under some state laws), penalties of 100% or more of the unpaid wages and the obligation of paying not only your own legal fees, but those of the intern who sued you. Additionally, understand that many of these cases are brought as class or collective actions on behalf of other similarly situated interns. When you add to the mix the fact that companies rarely keep accurate working time records for those interns they elect not to pay, it all makes for a potentially very expensive proposition—particularly when weighed against the option of simply paying minimum wages in return for work performed. Given the wealth of resources and advocates for unpaid interns, the time has come for employers to toss out the “that’s the way it has always been around here” mentality and carefully re-evaluate their unpaid internship programs.