By Linh V.
On January 24, 2011, Huawei Technologies Co., Ltd., a Chinese telecommunications giant, filed a lawsuit against its partner, Motorola Solutions, Inc., an American telecommunications giant, in a United States district court to stop Motorola from disclosing Huawei’s intellectual property information and trade secrets to Nokia Siemens Networks in the process of a $1.2 billion deal between Motorola and Nokia. This suit stirred up much discussion due to Huawei’s checkered past and its ties to China’s government.
Huawei is a networking communications equipment supplier headquartered in China with world-wide locations. It began in 1988 as a distributor of small telephone exchange products. After slowly expanding distribution throughout China, in 1997, it released its first GSM (mobile phone) product. In 1999 – 2003, it worked with IBM to undergo product development and was able to expand into the overseas market by 2001. Now, it is the second largest supplier of mobile telecommunications infrastructure equipment in the world, behind Ericsson. It also currently specializes in research and new technology development and holds over 50,000 patents. In 2009, its annual sales were $21.8 billion with a net profit of $2.67 billion.
Motorola is headquartered in Illinois. It started in 1928 as the manufacturer of battery eliminators for car radios. In the 1940s, it mainly sold televisions and radios and produced a hand-held radio used during World War II for communications between U.S. and its allies. It also developed radio equipment for NASA, the world’s first large screen portable television, and the first color television picture tube. After Motorola sold its television business to Panasonic, it started making cellular products in 1988. Between 2007 and 2009, it suffered a $4.3 billion loss, causing the corporation to split up in January 2011 into Motorola Mobility, Inc. and Motorola Solutions, Inc. with the belief that investors will perceive two simple businesses as being more advantageous to one extremely diverse and complicated business.
Huawei and Motorola met in 2000 and came up with a deal in which Huawei would develop and design new technologies for cell phones, sell these products to Motorola, who would then resell them to consumers under the Motorola brand. Since Huawei was relatively new in the telecommunications market at this time and needed to expand and grow its customer base while Motorola wanted to maintain its hold on the cell phone market through new technology development, this deal was seen to be a win-win for both parties. To date, Motorola has sold and re-branded over $878 million worth of Huawei’s equipment.
Shortly after this deal in 2000 closed, suspicion arose that Huawei was committing espionage as a puppet of the Chinese government. As a result, government regulatory agencies in various countries, such as the Indian Telecom Ministry, made Huawei’s ability to bid on large-scale projects in the respective countries difficult by blocking Huawei’s license bid applications.
Problems surrounding Huawei did not end there. In 2003, it was sued by Cisco for copying model numbers and codes that were used in Cisco routers to help consumers switch to Huawei’s cheaper versions of the routers. The suit was settled after Huawei agreed to pull the products off the market and change the design codes. Details of the settlement are unknown.
In 2008, Motorola sued Lemko Corporation, sixteen individuals, and Huawei. The sixteen individuals were previous Motorola employees who Motorola claims were simultaneously employed by Lemko for the purposes of stealing trade secrets. One of the main employees, Hanjuan Jin, was specifically accused of transferring proprietary information from Motorola to her personal e-mail account and then to Lemko. Her husband, Shaowei Pan, was a prior employee of Motorola as well and is also Chief Technology Officer of Lemko. Pan was also alleged to have had met with Huawei officials while employed with Motorola. Basically, Motorola was claiming that there was a secret relationship between Lemko and Huawei for the purposes of stealing Motorola’s trade secrets. Currently, after having been amended numerous times, the suit is still pending.
In 2009, as a result of Motorola’s huge loss, Motorola contacted Huawei to explore the possibility of Huawei purchasing Motorola’s wireless networks infrastructure business in which equipment and services are provided to wireless network carriers and its associated assets. Although Huawei submitted a non-binding bid, Motorola decided to sell its business not to its long-time partner but instead to one of its long-time partner’s direct competitors, Nokia. In July 2010, it announced the $1.2 billion transaction, which has since been approved by the regulatory antitrust bodies in the U.S. and European Union but is still pending with the Chinese Antitrust authorities (“MOFCOM”: Ministry of Commerce of the People’s Republic of China).
As part of the agreements between Motorola and Huawei, Motorola approached Huawei to try to obtain its consent, informing Huawei that the deal would require disclosure of some of Huawei’s confidential information to Nokia because Motorola would be transferring some of its employees to Nokia. Huawei refused to give consent. Motorola then tried to come up with measures to protect the confidential information, such as the “firewall” proposal in which certain employees who had access to commercially available Huawei products would remain the only employees, once transferred to Nokia, with access to that information. Huawei found this proposal insufficient to avoid trade secret misappropriation. Discussions between the two parties continued throughout 2010 until January 24, 2011 when Huawei filed a claim with a U.S. court.
In accordance with its agreements, Huawei and Motorola planned to settle the dispute before the arbitration tribunal in Switzerland. To avoid making the arbitration ineffective before it even began, Huawei requested a temporary restraining order and a preliminary injunction against Motorola and Nokia to stop the transfer of any confidential information to Nokia. Motorola responded to the claim arguing that this action was a pretext for Huawei’s actual intent of preventing the transaction from closing, an effort in retaliation to the Lemko lawsuit that Motorola previously filed. Huawei was granted the temporary restraining order.
The Court heard testimony from several witnesses stating that the transfer of confidential information was not necessary to effectuate the deal and that the “firewall” proposal that Motorola previously suggested would not be effective in preventing the misappropriation of the confidential information. In finding that (1) Huawei had a strong likelihood of success on the merits of trade secret misappropriation claims, (2) Huawei would be irreparably harmed if Nokia obtained its confidential information because it would allow Nokia to gain an unfair advantage at its expense, (3) the balance of hardships weighed in Huawei’s favor because it had a lot to lose in the disclosure of the confidential information and there was no evidence that the deal between Motorola and Nokia would fail to close without the information, and (4) the public interest would be best served by enforcing valid agreements and trade secrets to protect “standards of commercial morality,” the Court awarded Huawei the preliminary injunction and ordered that Motorola cease transfer of confidential information to Nokia.
Since the Court did not ban the deal between Motorola and Nokia, they are still going through with it upon approval by MOFCOM who has been sitting on the application. Some believe the Chinese government was specifically waiting for the outcome of the lawsuit before deciding on the application. Some are concerned that this is all part of a strategy that Huawei and the Chinese government have been working on to improve its weaponry. The more possible theory is that Huawei is in bad faith attempting to monopolize the telecommunications industry by stopping its competitors from consolidating. Huawei has once been quoted that it will use its “rich IP and patent portfolio” to stop the consolidation of equipment vendors around the world. By making it difficult or impossible for these competitors to combine, Huawei can assure its spot at the top of the telecommunications market. The confidential information that Motorola was attempting to transfer to Nokia was not the type of jackpot information that would allow Nokia to dethrone Huawei. Rather, it was mainly information given to consumers in regards to its products. Granted, the information also included future products but the two parties could have easily reached an agreement that would include monetary compensation to Huawei.
Sure enough, in April 2011, Motorola and Huawei issued a joint statement announcing that both parties have agreed to dismiss their claims in courts, including the complaint that Motorola filed against Huawei in conjunction with Lemko. In allowing Motorola to transfer its commercial agreements with Huawei to Nokia, Huawei will be compensated a fee and Nokia will be allowed to receive and use the confidential information that Huawei previously attempted to prevent disclosure of. Financial terms of the deal were not revealed.
By Patrick U.
On September 7, 2010, Hewlett-Packard (HP) filed a complaint against Mark Hurd, former HP President and CEO, in an effort to obtain an injunction to prevent Hurd from joining competitor Oracle as President and member of the board. HP alleged (1) breach of contract and (2) threatened misappropriation of trade secrets. The claim for breach of contract alleged that Hurd was under contractual obligations to maintain the confidentiality of HP’s trade secrets, and that Hurd violated those obligations. The threatened misappropriation claim alleges that, in his position at Oracle, it will be impossible for Hurd to avoid using or disclosing HP’s trade secrets.
On September 20, 2010, HP and Oracle reached a settlement that would allow Hurd to join Oracle. The details of the settlement are confidential, but an SEC filing indicates that Hurd forfeited a large chunk of HP stock options and experts suspect Hurd agreed not to participate in certain business decisions. Hurd will likely not be allowed to make business decisions for a period of time in areas involving Oracle’s growing hardware business.
This note will analyze HP’s claims on their merits and take a quick look at California’s rejection of the inevitable disclosure doctrine.
HP’s claims are really one and the same. HP is claiming that Hurd is in breach of his employment contract because he will inevitably disclose information he is under an obligation to keep confidential. The second cause of action, threatened misappropriation of trade secrets, is an extension of this theory. That, regardless of the employment contract, Hurd will inevitably disclose HP’s statutorily protected trade secrets in his new role at Oracle.
The inevitable disclosure doctrine arises from Cal. Civ. Code § 3426.2(a): “Actual or threatened misappropriation may be enjoined.” Threatened misappropriation has been interpreted, in some jurisdictions, to include situations in which a former employee would “inevitably” disclose trade secrets. Schlage Lock Co. v. Whyte, 101 Cal. App. 4th 1443 (2002). The seminal case on the inevitable disclosure doctrine is Pepsico v. Redmond, in which a former Pepsi executive takes a job at Quaker Oats and Pepsi seeks an injunction to prevent the move. 54 F.3d 1262 (7th Cir. 1995). The court held that “a plaintiff may prove a claim of trade secret misappropriation by demonstrating that defendant’s new employment will inevitably lead him to rely on the plaintiff’s trade secrets.” Id.
Plaintiff in Schlage attempted to apply the inevitable disclosure doctrine in California. 101 Cal. App. 4th 1443. In California, non-compete agreements in employment contracts are per se void. Cal. Prof. Bus. Code § 16600. Through this statute, California seeks to promote employee mobility and protect a person’s right to earn a living. In Schlage, the California Court of Appeals declined to extend the doctrine to threatened misappropriation cases in California, reasoning that it creates an “after-the-fact covenant not to compete restricting employee mobility.” 101 Cal. App. 4th at 1447.
In HP v. Hurd, both causes of action were likely to fail because of California’s policy of favoring employee mobility. Despite the suit’s lack of merit, Hurd (Oracle) and HP settled quickly because of the deep relationship between the two companies. The companies have around 140,000 customers in common, and 40% of Oracle software runs on HP machines. The suit would have soured relations between two companies who have long been synergistic. Interestingly, hiring Hurd signifies Oracle’s hardware ambitions, which is most likely why HP brought the suit in the first place. A legal “firing across the bow.” Watch for this relationship to degrade further over the next few years.
By Patrick S.
Recently, there has been significant coverage in the news about Google, and other Western companies, and their problems in China. Much of the recent coverage has been driven by Google’s January 12th, 2010 blog posting that it had been the victim of a "highly sophisticated and targeted attack on our corporate infrastructure originating from China." Google's problems with respect to this issue were so severe that it resulted in a full blown diplomatic dispute between the U.S. and China. The US government has stated that Google's allegations against China "raise very serious concerns and questions [and] we look to the Chinese government for an explanation. . . [t]he ability to operate with confidence in cyberspace is critical in a modern society and economy." In response to this and related US criticism, the Chinese government has, either directly or indirectly, provided sharp and highly critical anti-US responses. An example of such a response could be found in the Chinese state-sponsored newspaper (The Global Times), which quoted a Chinese analyst as calling Google’s complaint “a U.S. government-initiated strategy with covert political intentions . . . [and that] [a]s the global landscape is undergoing profound irreversible shifts, the calculated free-Internet scheme [advocated by Google] is just one step of a U.S. tactic to preserve [the U.S.'s] hegemonic domination.” As for Google, after first attempting to resolve its differences with the Chinese government, it has now moved forward with its “doomsday scenario” and formally exited China - no small feat for a publically-listed multinational corporation under tremendous pressure to grow its market-share and revenues.
So, one might ask: just what is all this rancor about? Unfortunately, this is not an easy question to answer. In reality, there are many reasons for Google's concerns with the Chinese government including censorship of Google’s search results and the Chinese rule of law with respect to protection of intellectual property. The focus of this brief commentary will be on Google's concerns related to Chinese violation of Google's most valuable asset - its intellectual property.
Google appears to be claiming that, either directly or indirectly, China (and/or its citizens) played a role in allowing, encouraging or tolerating computer "hackers" to break into Google's IT system and illegally perform a number of actions. Of significant concern to Google (and approximately 30 other western-orientated companies, such as Adobe Systems) was the hackers apparent attempts to access and steal intellectual property, including the Company's most valuable asset - its source code, which is defined as the means most often used by programmers to specify the actions to be performed by a computer. Google’s top-of-the-line search methodology, for example, is powered by patented source code developed by the Company’s two founders, Larry Paige and Sergey Brin.
For a Company such as Google that lives or dies by its proprietary source code, this is a crucial issue. More than anything else, Google is a Company that, through its self-created computer programs (i.e. source code), analyzes user-input search terms, retrieves what it believes to be the most relevant result across the world wide web, and quickly presents that data to the end-users. Google's effectiveness and skill at doing this has allowed it to gain the greatest market share in search-related advertising revenue, and provided the Company with billions of dollars in revenue each year. As such, the processes by which Google performs these activities are highly confidential and valuable.
From a U.S. legal point of view, Google's methods and processes for analyzing user-input search terms would be considered a proprietary trade secret. For instance, Section 1(4) of the Uniform Trade Secrets Act defines "trade secret" as "information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." Court cases from across the U.S. that have considered the issues related to trade secrets have offered significant protection to persons or companies that have invested in and created such trade secrets. For instance, in US West Communications, Inc. v. Office of Consumer Advocate, 498 N.W.2d 711, 714 (Iowa 1993), the Court held that "[t]rade secrets can range from customer information, to financial information, to information about manufacturing processes to the composition of products. There is virtually no category of information that cannot, as long as the information is protected from disclosure to the public, constitute a trade secret. We believe that a broad range of business data and facts which, if kept secret, provide the holder with an economic advantage over competitors or others, qualify as trade secrets." In another opinion, a U.S. Court provided even greater potential protection to those creating trade secrets, holding that, in essence, anything which provides its owner with a competitive advantage can qualify as a trade secret if it is appropriately guarded as such. Prince Mfg., Inc. v. Automatic Partner, Inc., 191 U.S.P.Q. (N.J. Super. Ct. Ch. Div. 1976).
Because of this, under general U.S. legal standards, Google could expect its computer source code / programs /processes to be legally protected. Part of the controversy between companies like Google and China is that western-orientated firms are finding that China may not fully respect western-style intellectual property laws, thus putting companies - like Google - that exist only because of their intellectual property, at great risk. As increasing numbers of western-oriented businesses expand into China due to its large domestic consumer market, manufacturing base, and growth potential, firms such as Google are finding that they may be faced with a lose/lose type of decision: either pull-out of China and ensure protection of their intellectual property but lose out on the tremendous market share growth the market offers, or put the Company's intellectual property at risk but enjoy revenue and market share growth. For companies that rely on the protection of their trade secrets to survive and grow, a country's failure to respect the sanctity of intellectual property could, as Google has shown, be a deal breaker. Whatever the growth benefits of investing in China are, if the country will not vigilantly protect foreigners’ intellectual property and trade secrets, companies will increasingly think twice about investing there - to the detriment of China and western Companies. Further, in some cases, firms already invested in China may decide, as Google did, to pack up and leave.