Managing Intellectual Property Litigation

by Lee Carl Bromberg
Bromberg & Sunstein LLP
Boston, Massachusetts
May 21, 1997

Protecting Intellectual Property Assets
MCLE, Inc. 1997, 1995

This article has appeared in the 1995 and 1997 editions of Protecting Intellectual Property Assets. The most recent version is reprinted below. Due to changes in the law and other factors, previous versions may differ from the version below.

TOOLS FOR LITIGATION MANAGEMENT

Programs for the management of intellectual property are put to the test when litigation arises. It is then that systematic efforts to obtain patent protection, to register trademarks, to register copyrights and to establish trade secret rights are likely to pay off. Other members of our panel have discussed the policies and procedures that are essential for the identification and protection of these assets, including evaluation programs, policing activities, careful docketing, budgeting, and the key role of interaction between company management and counsel. Carefully drawn employment agreements with invention assignment, non-disclosure and non-competition provisions are also central to the protection of intellectual property assets, which are perhaps most in danger when valuable employees leave to form competing businesses. Litigation has an uncomfortable way of bringing to light gaps in a company's policies and procedures for obtaining and protecting intellectual property rights. In addition, litigation over intellectual property rights presents its own unique problems for the client, for counsel and for the attorney-client relationship. While there is no known formula for a smooth path in the notoriously unpredictable litigation arena, certain tools are essential for the effective management of intellectual property litigation.

A. Engagement Letter. It is good practice to use a written engagement letter (e.g., Appendix A hereto) to clearly spell out the terms of the attorney-client relationship and your billing procedures. Abraham Lincoln is reported to have favored the practice of obtaining a substantial retainer from any new client, on the basis that only then did the attorney know he had a client and the client know he had an attorney. A substantial advance - e.g., $10,000 to $20,000 - in connection with undertaking intellectual property litigation on behalf of a new client is a recommended practice. It not only assures the attorney of payment for initial work on the case, but also signals to the client in concrete terms the serious expense that will be entailed. A client that is not prepared to put substantial resources into the litigation effort should be encouraged to seek alternative means for resolving its business problem.

B. Budget. A litigation budget is an important tool in the management of the litigation for both counsel and the client. Business clients do not like to be surprised by litigation cost overruns. Hence it behooves the attorney to make conservative estimates of the likely expense to be anticipated. Since the course of litigation and hence the potential costs are in many respects unpredictable, it is also important to inform the client that the expense of litigation procedures can vary widely depending upon a number of factors. These include, significantly, the approach to the case taken by the adversary, their aggressiveness and the way in which the court handles the case.

In any event, however, intellectual property litigation is expensive, and the client needs to be made aware of the cost at the outset. For example, attorneys fees and costs for a patent litigation will easily exceed $100,000 unless the case is settled at a very early stage. Expense ranging from $200,000 to $1 million per party for a patent trial and appeal is not unusual. Complicated and bitterly contested cases can cost substantially more. It has been estimated that in the Polaroid v. Kodak, each side spent over $100 million. While trademark, copyright and trade secret litigation may on average involve less expense than patent litigation, it is not unusual for hotly contested matters in each of these areas to involve litigation expense comparable to that experienced in patent cases.

C. Company Resources. A company enforcing and defending its intellectual property rights will be called upon to devote substantial company resources to the effort, in addition to budgeting funds for attorneys fees, expert witnesses and related expenses. Perhaps the single most important component of company resources devoted to litigation effort will be demands on management time. Company executives are usually repositories of essential information for handling the case, including industry standards, history of the products, market, intellectual property assets in dispute, and the particular facts of the controversy which led to litigation. Counsel will likely require many hours of management time to do effective fact investigation in preparing the case. In addition, company documents relevant to the litigation may number well into the thousands or millions and company resources will be taxed to make them available in response to both the needs of counsel and discovery requirements in the case.

Company employees may also be called upon for their expertise in technical, financial and marketing areas to assist counsel in understanding and developing the factual basis for conducting the litigation. In many instances, company employees will be called upon to conduct technical experiments or financial analyses, either as direct evidence of the company's position, or in support of efforts by outside experts employed for purposes of the litigation.

D. Coordinator. The litigation process requires a company coordinator to interface with litigation counsel and to marshall company resources as needed for the litigation effort. In-house counsel will usually perform this role for larger companies. For companies without in-house counsel, or where a one or two-person in-house counsel staff is overburdened by general legal affairs, it will be necessary to designate a company manager to handle the coordinator role. In a small company it is not unusual for the vice president of research and development or the vice president for marketing or, indeed, the chief executive officer to play the role of coordinator. It is essential that litigation counsel clearly apprise company management of the need for a coordinator at the outset of the litigation process.

E. Decision Makers. The need for a properly authorized decision maker with sufficient authority in the company management structure is self-evident. In a small company, of course, the coordinator and the decision maker are often one in the same person. This may not be true in a large company, particularly in intellectual property litigation where the stakes can have company-wide implications. Thus in-house counsel may be able to provide decisions on many aspects of litigation strategy, but require approval from top management for fundamental decisions such as assessment of business risk, settlement, appeal and the like.

F. Case Evaluation Outline. A case evaluation outline is an extremely useful - some would say essential - tool for coordination of the management of intellectual property litigation between litigation counsel and company management, including in-house counsel. At every stage of the litigation, company management are interested to know the prospects for prevailing, the availability of settlement terms, the relative risk of proceeding with the case and the exposure to damages in the event of an unfavorable outcome. These questions are typically a topic of discussion whenever litigation counsel confers with company management, including in-house counsel. In effect, a case evaluation outline is given orally from time to time as counsel confers with his client. It makes sense for counsel to prepare a brief outline of the litigation strategy, procedural posture and substantive issues in the case in order to facilitate clear communication. The case evaluation outline will have to be updated and possibly substantially revised in connection with events during the course of the litigation.

In order to meet the strategic business objectives of the client, it will be necessary for litigation counsel to obtain from company management a full understanding of the business context in which the litigation is proceeding. In this way counsel can tailor strategic choices in the litigation to the company's larger business goals. The case evaluation outline provides a mechanism for facilitating input from both the attorney and the client to shape the appropriate litigation strategy.

G. Strategy Sessions. Periodic strategy sessions to assess the posture and progress of intellectual property litigation are an indispensable tool for management of this difficult activity. Counsel should again clearly apprise company management at the outset of a litigation of the need for periodic meetings to confirm or adjust strategy to conform to events in the litigation and to the company's strategic business objectives.
INTELLECTUAL PROPERTY LITIGATION WITH FORMER EMPLOYEES - THE LEGAL FRAMEWORK

Every business has a strong interest in protecting the assets that make it successful, including good employees, good will, confidential information and intellectual property. There is a corresponding societal interest in providing businesses with legitimate methods for protecting the assets that make them solid contributors to the economy. The departure of an important employee frequently produces anxiety about potential loss or damage to company assets, such as good will or trade secrets or other confidential information. Restrictive covenants in employment agreements provide a means for enhancing the protection of company assets and interests when employees leave. The scope and duration of such restrictive covenants is limited by the countervailing societal interest in free competition, including freedom of employment and the very important issue of permitting the departing employee to earn her livelihood.

A. Employee Competition with Former Employer. The general rule is that absent agreement, an employee "may properly plan to go into competition with his employer and may take active steps to do so while still employed." Augat, Inc. v. Aegis, Inc., 409 Mass. 165, 172 (1991). "Such an employee has no general duty to disclose his plans to his employer, and generally he may secretly join other employees in the endeavor without violating any duty to his employer." Id. These principles further the general policy that at will employees should be allowed to change employers freely and competition should be encouraged. Hence an employer who wishes to restrict post-employment competitive activities of a key employee, or to deter plans for such competition, must do so through a non-competition agreement. Id. See All Stainless, Inc. v. Colby, 364 Mass. 773, 778 (1974).

There are, of course, limitations on what an employee may do in planning to compete with his employer. As the court set forth in Augat, supra, 409 Mass at 172-73:

He may not appropriate his employer's trade secrets. See Eastern Marble Products Corp. v. Roman Marble, Inc., 372 Mass. 835, 838-842 (1977). He may not solicit his employer's customers while still working for his employer (see Chelsea Indus., Inc. v. Gaffney [389 Mass. 1,] at 11-12 [as to executive employees]) and he may not carry away certain information, such as lists of customers (New England Overall Co., Inc. v. Woltmann, 343 Mass. 69, 77 [1961]). Of course such a person may not act for his future interests at the expense of his employer by using the employer's funds or employees for personal gain or by a course of conduct designed to hurt the employer.

In the Augat case itself, it was held that an employee general manager who, while still employed, secretly solicited key managerial employees to leave their employment to join the general manager in a competitive enterprise, violated his duty to maintain adequate managerial personnel and therefore breached his duty of loyalty to his present employer.

Nonetheless, the general rule is clear that employees may compete with their former employer and may make substantial planning efforts for their competitive enterprise while still employed. Augat, supra; Meehan v. Shaughnessy, 404 Mass. 419, 435 (1989). Hence it is essential for an employer who wishes to restrict post-employment competitive activities of a key employee to obtain a non-competition agreement.

B. Non-Competition Covenant. Under Massachusetts law an employee non-competition agreement will be enforced if it is necessary to protect the employer's legitimate business interests and "is reasonably limited in time and space and is consonant with the public interest." Novelty Bias Binding Co. v. Chevron, 342 Mass. 714, 716 (1961); quoted with approval in Analogic Corp. v. Data Translation, Inc., 371 Mass. 643, 647 (1976); Marine Contractors Co., Inc. v. Hurley, 365 Mass. 280 (1974). Such post-employment restraints on competition, however, "must be scrutinized carefully to see that they go no further than necessary to protect an employer's legitimate interests, such as trade secrets or confidential customer information." Alexander & Alexander, Inc. v. Danahy, 21 Mass. App. Ct. 488, 496 (1986). Massachusetts courts will not hesitate to limit their enforcement of a non-competition agreement, in duration, geographic area, or scope to that which is reasonable. See, e.g., All Stainless, Inc., 364 Mass. at 779-80 (two-year non-competition covenant upheld but geographic area limited to sales territory serviced by former salesman).

Non-competition covenants arising out of the sale of a business will be enforced more liberally than such covenants arising out of the employer/employee relationship. Alexander & Alexander, Inc., 21 Mass. App. Ct. at 496. In many situations, the case may involve both an employer/employee relationship and a sale of a business dimension. Further complications may be created by fiduciary obligations arising as between shareholders in a close corporation, partners and the like.

C. Non-Solicitation Covenant. A non-solicitation covenant, which prohibits a former employee from soliciting customers of his former employer, is in effect a narrower form of non-competition agreement, and is comparably treated by the courts. Id.

D. Trade Secrets, Confidential Information, and Nondisclosure Agreements. An employee who acquires trade secrets and other confidential information of his employer has a duty to maintain that information in confidence and may not use it or disclose it. The obligation to maintain the confidentiality of employer trade secrets arises out of the employer/employee relationship and does not expire upon termination of employment even in the absence of a non-disclosure agreement. See, e.g., Augat, supra, 409 Mass. at 172; Eastern Marble Products Corp. 372 Mass. at 838-842. Thus, "although an employee may carry away and use general skill or knowledge acquired during the course of his employment, he may be enjoined from using or disclosing confidential information so acquired." New England Overall Co. 343 Mass. at 75.

The recently finalized Restatement (3d) of Unfair Competition (1995) provides the following definition of trade secret in Section 39:

A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.

In Section 42 of the Restatement, it is provided that:

An employee or former employee who uses or discloses a trade secret owned by the employer or former employer in breach of a duty of confidence is subject to liability for appropriation of the trade secret under the rule stated in Section 40.

Hence the obligation of a former employee to maintain the confidentiality of his former employer's trade secrets is well recognized. Nonetheless, cautious employers employ the belt and suspenders approach of providing a non-disclosure covenant in their written employment agreements with key employees.

E. Patents and Shop Rights; Improvements and Trailer Clauses. An express agreement requiring an employee to transfer to his employer any rights to inventions developed by the employee is the safest course. However, where an employee was hired to invent, it will be implied as a term of the employment contract that patents on inventions vital to the employer's continued business success must be assigned to the employer, even though the inventions were conceived at home. National Development Co. v. Gray, 316 Mass. 240 (1944). Under the "shop right" doctrine, an employee who uses his employer's resources to conceive an invention or reduce it to practice must afford to his employer a nonexclusive, royalty free, irrevocable and nontransferable license to make use of the invention. This is true even for an employee "whose duties to his employer do not require him to make any inventions" and thus in the absence of any implied obligation to assign. Id., 316 Mass. at 247.

Note, however, that under the shop rights doctrine, the employee remains the owner of the patent and that the employer's nonexclusive license does not put it in a position to prevent competitors from obtaining a license under the patent. Hence the employer can assure itself of enjoying the full value of employee-generated patents only by establishing a clear written obligation of the employee to assign rights in any such inventions. In addition, inventions and improvements made by a former employee on his own after his employment has terminated belong to the employee. This is because "the law looks upon an invention as the property of the one who conceived, developed and perfected it, and establishes, protects and enforces the inventor's rights in his invention unless he has contracted away those rights." Id., 316 Mass. at 246. Thus invention assignment agreements for all technical employees should include provisions, sometimes referred to as "trailer" clauses, which require assignment by the former employee of any improvements or inventions relating to his previous employment.

F. Copyrights. The law defines a "work made for hire" as "a work prepared by an employee within the scope of his or her employment," 17 U.S.C. sec. 101, and provides that the employer is the owner of the copyright, sec. 201. However, in Community for Creative Nonviolence v. Reid, 490 U.S. 730 (1989), the United States Supreme Court interpreted the definition to mean works prepared within the common law master-servant relationship and endorsed reliance on the Restatement of the Law of Agency 2d, to establish a federal law definition of agency to provide a national uniform copyright law. In Community for Creative Nonviolence the artist hired was held to be the owner of the copyright to the work he created under agreement with the organization that commissioned the work on the ground that he was an independent contractor. Prudence dictates that employers concerned with protecting their ownership rights in copyrights obtain written agreements with employees which acknowledge that copyright in any works created by the employee will belong to and be assigned to the employer. The written agreement will avoid any potential ambiguities. This becomes particularly important in certain contexts, e.g., the employment of free lance software programmers to write code for company products.

G. Inducing Other Employees to Leave. A so-called "anti-piracy" clause, which prohibits a former employee from soliciting other employees to leave the company is occasionally found in an employment contract or separation agreement. No Massachusetts cases enforcing such clauses have been found, and they are antithetical to the free movement of labor. Note, however, that a general manager or partial owner who departs from a company may have fiduciary obligations which would be breached by attempting to induce other key employees to leave. See, Augat, 409 Mass. at 173-74.

H. Contractual Inducements Not to Compete. An expensive but potentially effective method for avoiding competition by a employee whose services are no longer desired is to keep the employee under employment contract with full pay and benefits. Difficulties would arise, however, unless the employee agreed to this arrangement. Moreover, it may be economically unfeasible in most instances. Lesser forms of economic persuasion, e.g., deferred compensation benefits, have been upheld where reasonable. See, e.g., Kroeger v. Stop & Shop Cos., Inc., 13 Mass. App. Ct. 310 (1982).
FORM OF EMPLOYEE CONFIDENTIAL INFORMATION AND NON-COMPETITION AGREEMENT

Below is set forth a form of confidential information and non-competition agreement for employees and consultants of Storage Systems, Inc., a mythical company located in Massachusetts.

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STORAGE SYSTEMS, INC.

CONFIDENTIAL INFORMATION

AND NON-COMPETITION AGREEMENT

For good and valid consideration, the receipt and sufficiency of which I hereby acknowledge, Storage Systems, Inc. (the "Company") and I hereby agree as follows:

1. Definitions.

For the purposes of this Agreement, the following terms shall have the following meaning:

(a) "Client" shall mean any individual, firm, corporation, federal or state government agency or other entity (any of the foregoing being referred to below as "Person") for whom or which the Company provided goods or services during the course of my engagement as an employee or consultant with the Company, regardless whether I induced or solicited such Person to give its patronage or business to the Company.

(b) "Prospective Client" shall mean any Person (as defined above) with whom or which negotiations or discussions occurred (as evidenced in writing) during the course of my engagement as an employee or consultant with the Company concerning the provision by the Company of goods or services to such Person, regardless whether I solicited such Person to give its patronage or business to the Company.

(c) "Business" shall mean the business of developing and marketing infectious disease diagnostic kits, materials and instruments or any other business in which the Company may engage.

2. Inventions.

Any and all inventions, processes, procedures, systems, discoveries, designs, configurations, technology, works of authorship, trade secrets and improvements (whether or not patentable and whether or not they are made, conceived or reduced to practice during working hours or using the Company's data or facilities) which I make, conceive, reduce to practice, or otherwise acquire during my engagement as an employee or consultant by the Company (either solely or jointly with others) and which are related to the Company's Services or present or planned business ("Inventions") shall be the sole property of the Company and shall at all times and for all purposes be regarded as acquired and held by me in a fiduciary capacity for the sole benefit of the Company. All Inventions that consist of works of authorship capable of protection under copyright laws shall be prepared by me as works made for hire, with the understanding that the Company shall own all of the exclusive rights to such works of authorship under the United States copyright law and all international copyright conventions and foreign laws. I hereby assign to the Company, without further compensation, all such Inventions and any and all patents, copyrights, trademarks, trade names or applications therefor, in the United States and elsewhere, relating thereto. I shall maintain adequate and current written records of all such Inventions (in the form of notes, sketches, and/or drawings all as may be specified by the Company), which records shall be available to and remain the sole property of the Company at all times. I shall promptly disclose to the Company all such Inventions and shall assist the Company in obtaining and enforcing for its own benefit patent, trademark and copyright registrations on and with respect to such Inventions in all countries. Upon request, I shall execute all applications, assignments, instruments and papers and perform all acts, such as the giving of testimony in interference proceedings and infringement suits or other litigation, necessary or desired by the Company to enable the Company and its successors, assigns, and nominees to secure and enjoy the full benefits and advantages of such Inventions. I understand that my obligations under this Section 2 shall continue after the termination of my engagement by the Company. I further understand that if I am not engaged by the Company at the time I am requested to perform any obligations under this Section 2, I shall receive reasonable compensation for such performance, as well as reimbursement of any expenses incurred at the Company's request. In addition, I understand that the absence of a request by the Company for information, or for the making of an oath, or for the execution of any document shall in no way be construed to constitute a waiver of the Company's rights under this Agreement.

3. Proprietary Information.

I recognize that my relationship with the Company is one of high trust and confidence by reason of my access to and contact with the trade secrets and confidential and proprietary information of the Company. I shall use my best efforts to protect the Inventions and any and all confidential, proprietary or secret information relating to the products, services, customers, or business operations or activities of the Company (collectively, "Proprietary Information"). I shall not, during my engagement as an employee or consultant by the Company or at any time thereafter, disclose to others or use for my own benefit or for the benefit of another any Proprietary Information (whether or not learned, obtained or developed solely by me or jointly with others). My undertakings and obligations under this Section 3 shall not apply, however, to any such information which: (a) is or becomes in the public domain through no action or failure to act on my part, (b) is generally disclosed to third parties by the Company without restrictions on such third parties, or (c) is approved for release by written authorization of the Board of Directors of the Company. Upon termination of my engagement or at any other time upon request, I shall promptly deliver to the Company all Proprietary Information and all notes, memoranda, notebooks, drawings, records, files, and other documents (and all copies or reproductions of such materials) in my possession or under my control, whether prepared by me or others, which are or which contain Proprietary Information or other information or material which is secret, confidential or proprietary to the Company, all of which I acknowledge is the sole property of the Company.

4. Absence of Restrictions upon Disclosure and Competition.

I hereby represent that, except as disclosed in writing to the Company, I am not bound by the terms of any agreement with any previous employer or other party to refrain from using or disclosing any trade secret or confidential or proprietary information in the course of my engagement by the Company or to refrain from competing, directly or indirectly, with the business of such previous employer or any other party. I further represent that my performance of all the terms of this Agreement and of my duties as an employee of or consultant to the Company does not and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by me in confidence or in trust prior to my employment with the Company, and I will not disclose to the Company or induce the Company to use any confidential or proprietary information or material belonging to any previous employer or others.

5. Other Obligations.

I acknowledge that the Company from time to time may have agreements with other persons or entities or with the U.S. Government, or agencies thereof, which impose obligations or restrictions on the Company regarding inventions made during the course of work thereunder or regarding the confidential nature of such work. I agree to be bound by all such obligations and restrictions and to take all action necessary to discharge the obligations of the Company.

6. Non-Competition.

(a) During the course of my engagement as an employee or consultant with the Company, and for a period of one (1) year after the termination of my employment with the Company for any reason whatsoever, I shall not engage or become interested, directly or indirectly, as employee, owner, consultant, officer, director, or partner, through stock ownership, investment of capital, lending of money or property, rendering of services, or otherwise, either alone or in association with others, in the operation of any type of business or enterprise competitive with the Company's Business, in the United States, otherwise than on behalf of the Company.

(b) During the course of my engagement as an employee or consultant with the Company and for a period of two (2) years after the termination of my engagement with the Company for any reason whatsoever, I shall not, otherwise than on behalf of the Company, directly or indirectly as employee, owner, consultant, officer, director, or partner, through stock ownership, investment of capital, lending of money or property, rendering of services or otherwise, either alone or in association with others, (i) solicit any of the employees of the Company to leave the employ of the Company or (ii) solicit any Client or Prospective Client for any purpose except on behalf of the Company.

(c) My holding of any investment in any business or enterprise other than the Company shall not be deemed to be a violation of this Section 6 if such investment does not constitute over five percent (5%) of the outstanding issue of such security and I do not otherwise accept employment with, act as a consultant to, become an officer, director or partner of, or otherwise become actively associated with the issuer of such security.

7. Reasonableness.

I recognize, acknowledge and agree that the foregoing limitations are reasonable and properly required for the adequate protection of the Company's business and do not preclude me from pursuing my livelihood. However, if any such limitation is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable.

8. Breach.

If I violate any provisions of this Agreement, then the time limitations set forth in this Agreement shall be extended for a period of time equal to the period of time during which such breach occurs; and, in the event the Company is required to seek relief from such breach before any court, board, or other tribunal, then the time limitation shall be extended for a period of time equal to the pendency of such proceedings, including all appeals.

9. Equitable Relief; Liquidated Damages.

I acknowledge that any breach of this Agreement by me may give rise to irreparable injury to the Company, which may not be adequately compensated by damages. Moreover, I acknowledge that to the extent that any breach of this Agreement by me may give rise to injury to the Company which may be adequately compensated by damages, such damages are difficult or impossible to calculate. Accordingly, in the event of a breach or threatened breach of any of Sections 2 through 6 of this Agreement by me, the Company shall have, in addition to any remedies it may have at law, the right to an injunction or other equitable relief to prevent the violation of its rights hereunder.

10. Miscellaneous.

(a) Any action or proceeding brought by either party against the other arising out of or related to this Agreement shall be brought only in a state court of competent jurisdiction located in Commonwealth of Massachusetts, or the Federal District Court for the District of Massachusetts, and the parties hereby consent to the personal jurisdiction of such courts.

(b) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

(c) This Agreement supersedes all previous agreements, written or oral, between the Company and me relating to the subject matter of this Agreement. This Agreement may not be modified, changed or discharged in whole or in part, except by an agreement in writing signed by the Company and me. I agree that any subsequent change or changes in the scope of or compensation for my engagement with the Company, the duration of my engagement with the Company, or the reasons for the cessation or termination of my engagement with the Company shall not affect the validity or scope of this Agreement. This Agreement shall be binding upon me and my heirs and personal representatives and shall inure to the benefit of the Company and its successors, assigns and nominees, provided that Section 3 above shall be binding upon such heirs and personal representatives only to the extent that they obtain from me Proprietary Information of the Company.

(d) No delay or omission by the Company in exercising any right under this Agreement shall operate as a waiver of that or any other right. A waiver or consent given by the Company on any one occasion is effective only in that instance and shall not be construed as a bar to or waiver of any right on any other occasion.

(e) I expressly consent to be bound by the provisions of this Agreement for the benefit of the Company or any parent, subsidiary or affiliate thereof without the necessity for any separate execution of this Agreement in favor of such parent, subsidiary or affiliate.

(f) This Agreement is governed by the laws of the Commonwealth of Massachusetts, without giving effect to conflict of laws provisions thereof.

_______________________
Signature

_______________________
Printed Name

Agreed to and accepted by

STORAGE SYSTEMS, INC.

By:_______________________ Date:_______________________

Title:_______________________

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ENFORCEMENT OF EMPLOYEE RESTRICTIVE COVENANTS

A. Maximizing Effectiveness. Since the ultimate means for enforcement of restrictive covenants is litigation, a frequently expensive and potentially disruptive course of conduct, the wise employer will take steps to maximize the effectiveness of its non-competition agreements. A written agreement is essential. Ideally the employer will obtain the employee's signature at the outset of employment and not leave this matter for resolution at the termination of employment. Good written company policies on protection of trade secrets and other confidential information, invention disclosure and pursuit of patent protection, conflict of interest and related areas will tend to reinforce the seriousness with which the company regards and protects its assets, and will encourage the employees to comply with their non-disclosure and non-competition obligations. An exit interview policy for departing employees will permit the employer to routinely reemphasize the restrictive covenants to which the employee had previously agreed. Use of a form at the exit interview, such as an acknowledgment upon termination of employment form will permit the employer to doubly reinforce both its seriousness and the employee's obligation to honor the non-competition covenant. Finally, if the employee has departed and the company has good reason to believe that a violation of the non-competition covenant is or is about to be committed, written notice to the employee and to his new employer may help to avert a showdown in court.

The employee's interest is, of course, to avoid any restriction on future activities, particularly if it impairs the employee's ability to earn his livelihood or pursue his entrepreneurial dreams. Particularly for highly trained technical personnel, or for high level employees with many years in a particular industry, the obstacles presented by a non-competition agreement may be formidable. Since the employee is unlikely to be able to avoid signing a non-competition agreement in connection with employment by a well-run company, the employee should at least attempt to have the terms of the non-competition agreement as limited in time, geographical area and scope as possible, and also as clear as possible.

B. Pre-Litigation Efforts; Notice, Negotiation. The expense of litigation frequently makes it worthwhile for the employer to notify a former employee and his new employer of a violation of non-competition or non-disclosure agreements and to seek to secure compliance by a negotiated resolution. Both the employee and the new employer will also be well served if a negotiated settlement is possible. For example, the former employee and his new employer may be able to satisfy the former employer that the employee's arena of activity will not be competitive, or will pose minimal threat to the interests of the former employer. Under these circumstances a written agreement defining the permissible range of conduct as acknowledged by the former employer could well avoid a shootout in court.

C. Litigation; Preliminary Injunction Standard. Where resort to litigation is unavoidable, both sides will concentrate their attention and efforts on the preliminary injunction stage. Unless the case presents serious issues of misappropriation of trade secrets in addition to violation of non-competition covenants, the preliminary injunction stage will frequently be outcome determinative. Under Massachusetts law, the court initially evaluates in combination the moving party's claim of injury and chance of success on the merits. If the judge is convinced that failure to issue the injunction would subject the moving party to a substantial risk of irreparable harm, the judge must then balance this risk against any similar risk of irreparable harm which granting the injunction would create for the opposing party. The judge must evaluate the risk of harm in light of the party's chance of success on the merits. Where the balance between these risks cuts in favor of the moving party, a preliminary injunction may properly issue. Packaging Industries Group v. Chaney, 380 Mass. 609, 615-16, 405 N.E.2d 106, 11-12 (1980). In federal court, the employer must satisfy the familiar four-part test for preliminary injunction by proving immediate irreparable harm, likelihood of success on the merits, the balance of injury favors the employer and the public interest will be served by issuance of the injunction. Camel Hair and Cashmere Institute of America, Inc. v. Associated Dry Goods Corp., 799 F.2d 6, 12 (1st Cir. 1986).

Since employee non-competition agreements typically have one to two years' duration, the result of the preliminary injunction hearing will likely determine the outcome of the case. An employer who secures the injunction will have protected itself against competition by the former employee. Where the employer fails to obtain the injunction, the employee is free to continue with his new employer. Absent trade secret misappropriation issues, the cost of litigation is likely to be disproportionate to remaining issues of damages and hence the case will likely be ready for settlement at that time.
PATENT LITIGATION - EVALUATING THE INFRINGEMENT CLAIM

A. Evaluating the Demand Letter. The first notice of a claim of patent infringement may come in a variety of forms ranging from a polite and ostensibly innocent offer of a license (in some circumstances by press release!) to the service of a summons and complaint for patent infringement in federal district court. Frequently the initial contact is by a demand letter dressed in neutral language in an effort to avoid giving the recipient a basis to file a preemptive declaratory judgment action. A party accused of infringement may bring suit against a patent owner for declaratory judgment of invalidity or noninfringement under 28 U.S.C. sec. sec. 2201, 2202. There are many cases discussing whether the communication received by plaintiff was sufficiently stern to provide the basis for such an action. See, e.g., B.P. Chemicals Ltd. v. Union Carbide Corp., 4 F.3d 975, 28 USPQ2d 1124 (Fed. Cir. 1993). The text of the demand letter itself may range from a few lines to a few pages and will likely give some indication of the seriousness with which the infringement claim is pressed and of the potential for negotiation of a reasonable license.

The identity of the patent holder and of the attorney sending the letter are of obvious significance in evaluating the seriousness of the infringement claim. An unknown individual or small company represented by a geographically remote firm not known for patent litigation will likely create less of an impression than a letter sent on behalf of a financially strong company with the reputation for enforcing its patents represented by attorneys known for the conduct of serious patent cases. Whether or not the patent holder and the recipient of the letter are competitors in the market and what the market conditions are will also have a direct bearing on evaluating the demand letter. Factual investigation will likely be necessary to understand the context in which the claim is being asserted.

B. Patent Claims and Prosecution History. The first step in evaluating the merits of the infringement claim is to study the patent claims and to determine proper construction of the claims. "[C]laim construction is a matter of law. . . ." Markman v. Westview Instruments, Inc., 52 F.3d 967, 979 (Fed. Cir. 1995), aff'd, 116 S. Ct. 1384 (1996). The terms in a claim are given their ordinary and accustomed meaning unless it appears the terms were used differently by the inventor. Envirotech v. Al George, Inc., 730 F.2d 753, 759 (Fed. Cir. 1984). Claim language is construed by reference to the "claims, the specification and the prosecution history." Markman, 52 F.3d at 979. Vitronics Corp. v. Conceptronic, Inc., 90 F.3d 1576 (Fed. Cir. 1996) (reliance on extrinsic evidence improper where intrinsic evidence yields unambiguous meaning of claims).

Hence in addition to studying the language of the patent claims themselves in the light of the specification and drawings in the patent, it is also essential to obtain the prosection history of the patent, called the "file wrapper," for further study and analysis. The prosecution history will disclose what prior art patents and other references were considered by the patent examiner in allowing the claims that appear in the patent as issued. The prosecution history may also illuminate the meaning of terms in the claims added by amendment during prosecution of the patent to overcome a prior art reference or an examiner's objection. Statements made by the patentee during prosecution are binding on the patentee, who may not later claim subject matter given up by amendment during the prosecution. See, e.g., Valmont Indus., Inc. v. Reinke Mfg. Co., Inc., 983 F.2d 1039, 1044-45 (Fed. Cir. 1993). Review of the prior art patents and other references considered during the prosecution of the patent will also help to establish with more particularity what was already present in the prior art and exactly what new feature or combination of features is covered by the claims of the patent.

C. Prior Art Searching. A thorough infringement analysis usually calls for prior art searching to determine whether additional prior art references exist that were not considered by the Patent and Trademark Office during the prosecution of the patent and which provide a basis for a challenge to the validity of the patent, or, at the least, to an unduly broad reading of the patent claims. To paraphrase an old saying from photojournalism, one good prior art reference may be worth a thousand words of argument addressed to noninfringement. In addition, if the prosecution history is itself uninformative, additional patent searching may be the only way to develop a basis for narrowing the scope of the patent claims or for putting forth validity challenges.

The scope of prior art searching to be undertaken is limited only by the imagination and by the financial resources available to devote to it. Since prior art includes that which was "patented or described in a printed publication in this or a foreign country, before the invention thereof by the applicant for patent . . .," 35 U.S.C. sec. 102(a), any patent anywhere, any technical or other publication in any language anywhere can be asserted against the patent to challenge validity. A typical prior art search will involve a search at the U.S. Patent and Trademark Office, at an expense ranging from several hundred to several thousand dollars. Additional searching can be undertaken at the European Patent Office and the Japanese Patent Office, in each case with an expense estimated at several thousand dollars. These three institutions are generally regarded as the best source for prior art patents. Other searching may be appropriate under particular circumstances. In a field with many participants including academics, the "killer" reference may be a paper published in an obscure journal. Frequently, the technical employees of the accused infringer can be employed in searching the technical literature for prior art disclosure that would provide a basis for attacking patent validity. For example, the computer software field is an area where a great mass of technical publications, manuals, reports and the like may provide a fruitful hunting ground for prior art disclosures that would permit challenge of the asserted patent. On the other hand, if the technology is either of narrow interest, or at a mature stage of development at the date of invention, a previously unknown but pertinent technical reference is less likely to be found.

While prior art searching is an uncertain business and extensive searches can involve substantial expenditures, it may in some cases be the most effective way to persuade a patent holder that his infringement claim lacks merit or that he should settle for only a modest license arrangement to avoid a successful attack on the patent.

D. Clearance Opinion - Duty of Care. As soon as a potential infringer has actual notice of another's patent rights, he has "an affirmative duty to exercise due care to determine whether or not he is infringing." Underwater Devices Incorporated v. Morrison-Knudsen Co., 717 F.2d 1380, 1389-90 (Fed. Cir. 1983). "One who has actual notice of another's patent rights has an affirmative duty to respect those rights." Read Corp. v. Portec, Inc., 970 F.2d 816, 828 (Fed. Cir. 1992). The affirmative duty of care arises as soon as the potential infringer has actual knowledge of the patent. State Industries Inc. v. A.O. Smith Corp., 751 F.2d 1226, 1236 (Fed. Cir. 1985). The affirmative duty normally includes "the duty to seek and obtain competent legal advice from counsel before the initiation of any possible infringing activity." Underwater Devices, 717 F.2d at 1390.

A special problem arises because the patent statute permits a treble damages award, 35 U.S.C. sec. 284, which the case law authorizes upon a finding of willful infringement. The patent statute also permits an award of attorney fees, 35 U.S.C. sec. 285, "in exceptional cases." Typically, a case where willful infringement is found will qualify as an exceptional case. Beckman Instruments, Inc. v. LKB Products AB, 892 F.2d 1547, 1551 (Fed. Cir. 1989). The Court of Appeals for the Federal Circuit ("CAFC") has ruled that a party accused of willful infringement may defend successfully against such a charge by relying on an opinion of counsel that the accused structure does not infringe. See, Read Corp., 917 F.2d at 828-29; Fromson v. Western Litho Plate & Supply Co., 853 F.2d 1568, 1572 (Fed. Cir. 1988). Given the duty of care and the importance of attorney advice in connection with the issue of willfulness, it is strongly advisable for the recipient of an infringement demand letter to obtain advice of competent counsel on the infringement claim as promptly as possible. Where the analysis permits counsel to provide an opinion of noninfringement, invalidity of the patent, or both, it is essential for the accused infringer to have counsel provide such an opinion. Obtaining a competent counsel opinion is both a prudent course of business conduct and a strong shield against a later finding of willful infringement in litigation. A finding of willful infringement will be based upon all circumstances, among which the opinion of counsel is of great importance. However, there is no hard and fast rule. A competent opinion of counsel will not necessarily prevent a finding of willfulness, and a failure to obtain such an opinion also will not mandate the willfulness finding. Read Corp. 970 F.2d at 816; Rite-Hite Corp. v. Kelley Co., 819 F.2d 1120, 2 USPQ2d 915 (Fed. Cir. 1987).

E. Criteria for Competent Clearance Opinion. The competency of the clearance opinion from counsel must appear from the four corners of the document. The opinion should make explicit that it is based upon a review of the patent, the prosecution history, the prior art, and a careful appreciation of the pertinent characteristics of the accused device. Westvaco Corp. v. Int'l Paper Co., 991 F.2d 735, 743-44; Underwater Devices, 717 F.2d at 1390; Central Soya Co. Inc. v. Geo. A. Hormel & Co., 723 F.2d 1573, 1577 (Fed. Cir. 1983). Each claim must be separately analyzed and validity and infringement issues should be analyzed in detail. Westvaco, 991 F.2d at 744. Literal infringement as well as infringement under the doctrine of equivalents must ordinarily be considered. Datascope v. SMEC, 879 F.2d 820, 828-29 (Fed. Cir. 1989); but see, Westvaco, 991 F.2d at 744.

The requirements established by the case law for a competent clearance opinion make it necessary that a qualified patent attorney who has ample experience be selected. Studiengesellschaft Kohle GmbH v. Dart Industries, Inc., 862 F.2d 1564, 1578-79 (Fed. Cir. 1988). These requirements also mandate that the client demand and the attorney deliver a thorough and well-reasoned analysis that includes a review of the patent claims, the specification, the prosecution history, the prior art cited during the prosecution, and other prior art that may be germane to the subject. The clearance opinion letter then must set forth the analysis in detail so that the opinion of noninfringement, invalidity, or both is well supported by the analysis and reasoning displayed. A clearance opinion which fails to meet these requirements runs the risk of being disregarded and will not even provide a fig leaf when the question of willfulness is reached. In a case involving technology of any complexity, it is unmistakable that a competent clearance opinion exercise may well involve very substantial expense. However, the expense is likely to pale in comparison to the potential exposure to treble damages and an attorneys fee award in a patent infringement litigation.

F. Fact Investigation. A thorough investigation of the facts relating to the client's circumstances, technology, marketing position, available financial resources and business strategy must be undertaken to assess both the credibility of the threat of litigation and the prospects for potential negotiated solution by license or otherwise.

G. Design-Around. The fact investigation should include an assessment by the client's technical personnel of the possibility for a design-around the patent claims that would avoid any potential for infringement on a prospective basis. The availability of a design-around may provide an important strategic solution to a difficult problem. While a design-around will typically involve research, development, tooling and marketing expense, it may well provide a less costly alternative to license terms proposed by the patentee or to a litigation where the infringement claim is questionable and/or the patent is subject to a challenge on validity grounds. Even with a weak infringement claim and a serious basis for challenging the patent, a well-heeled patent holder can force the accused infringer to expend hundreds of thousands of dollars in litigation expense in order to defeat the claim.

H. Client's Patent Portfolio. The client's patent portfolio, if any, should be reviewed for potential coverage of products made by the patent holder. If the client has one or more patents that are capable of being asserted against the patent holder, or alternatively, offered as part of a cross-licensing resolution of the controversy, the client may avoid both stiff licensing fees or large litigation expense. A client that has been inattentive to obtaining patent coverage for its innovations would be well-advised to begin the development of a patent portfolio. Particularly, in an area of increasing patent litigation (e.g., software patents), development of a patent portfolio is likely to strengthen the client's bargaining position over a period of time.

An individual patent holder, or a patent holder not involved in manufacture and sale of products covered by the patent asserted, however, will likely be immune to the threat of countersuit or the appeal of a cross-license.

I. Market Relationship of the Parties. The attorney advising high technology clients will likely encounter a wide array of economic circumstances within which to assess a claim of patent infringement. Patent holder and accused infringer may both be large participants in the market for goods potentially within the scope of the patent claims, or they may be two among dozens of participants in such a market. The patent holder may be relatively tiny in comparison to the accused infringer or vice versa. The patent holder could be an individual with an interest only in license fees or a damages recovery. Conversely, the patent holder could be a well-heeled company with a questionable patent claim which sees an important marketing advantage in pursuing litigation. For example, if the patent holder has a relatively weak marketing capability and seeks to gain market share in a newly developing market for goods arguably covered by the patent, suit against a competitor with more marketing muscle may help to offset the marketing advantage of the larger rival. Under these circumstances, the patent holder would be interested in perpetuating the litigation for as long as possible as it built its market share.

It is also possible that patent holder and accused infringer could be in a supplier/customer relationship, or that there was a potential for their doing business together where the rewards would offset any potential gain from a license arrangement or a patent damages recovery. The possible scenarios are potentially infinite. Counsel must undertake a thorough fact investigation regarding the client's market position and relationship to the patent holder, as well as the client's strategic business objectives in the short and long term in order to properly advise the client in responding to an assertion of patent infringement.

J. Reexamination of the Patent. Under 35 U.S.C. sec. 302, "any person at any time may file a request for reexamination by the Office of any claim of a patent on the basis of any prior art . . . . The request must set forth the pertinency of and manner of applying cited prior art to every claim for which reexamination is requested." This provision provides potentially potent strategic response to an assertion of patent infringement. Where infringement analysis discloses a sound basis for attacking an issued patent on the grounds of prior art overlooked by or not cited during prosecution of the patent, reexamination may constitute a good strategic response.

A request for reexamination of the patent consists of filing in the U.S. Patent and Trademark Office prior art patents and publications (preferably patents and publications not previously considered by the patent examiner) as well as an element-by-element analysis of each claim alleged to be invalid in light of the cited prior art. Since the opportunity for the reexamination requester to make additional points and arguments is very limited, it is extremely important that the initial submission be as thorough as possible. There are, however, several disadvantages to a request for reexamination. A reexamination does not address whether a product infringes a patent claim; it only addresses whether a claim is invalid in light of a prior art publication or patent. An unsuccessful reexamination request can effectively increase the strength of the patent; i.e., if the patent claims under challenge are allowed over the prior art cited during reexamination, the party attempting to challenge the patent in litigation will have had its prior art weapons blunted and perhaps destroyed irreparably. Finally, the party requesting reexamination has very limited opportunity to present its point of view after the initial filing.

Reexamination initiated by the Patent Commissioner himself proved effective when Compton's New Media, a small software company in California issued a press release at the COMDEX show in Las Vegas, Nevada in November 1993 offering to license its U.S. Patent No. 5,421,671 (the "'671 patent"), titled "Multimedia Search Systems Using a Plurality of Entry Path Means Which Indicate Interrelatedness of Information." The Patent Commissioner acted in response to an outcry in the computer industry because the '671 patent purported to give Compton's control over the most popular techniques for searching for information in multimedia databases. In 1994, the Patent Office issued an office action in the reexamination of the '671 patent in which it rejected all claims of the patent on the basis of prior art.

K. Declaratory Judgment Action; Preemptive Strike. A party accused of infringement may bring suit against a patent owner for declaratory judgment of invalidity or noninfringement under 28 U.S.C. sec. sec. 2201, 2202. In some circumstances, the accused infringer may wish to proceed by declaratory judgment action in order to secure a more favorable venue, to call the patent holder's "bluff," or because the claim is deemed weak on the merits and business considerations mandate an effort to get the earliest possible ruling on the asserted infringement claim.

L. Settlement Considerations. Settlement of an infringement claim by license or otherwise either after receipt of a demand letter or after litigation has gotten underway depends upon the ability of the parties to find a resolution that meets their respective best interests. Important consideration typically are relative merits of the infringement claims, availability of validity attacks, resolution of risk, weighing of the litigation expense, value of market participation, relationship with customers, timing and leverage.

M. Outline of Potential Settlement Terms.
1. Mutual releases.
2. Cross-license.
3. Paid-up or moderate royalty license.
4. Covenant not to sue with respect to alternative configuration.
5. Lump sum for defined period of alleged infringement.
6. License with substantial royalty.
7. Understanding regarding business opportunities for patent holder with accused infringer.
8. Withdrawal of accused product from market.
9. Withdrawal of accused product from market in various configurations.
N. Negotiation of License. Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970), modified and aff'd, 446 F.2d 295 (2d Cir. 1971), cert. denied, 404 U.S. 870 (1971), sets forth a non-exhaustive list of fifteen factors to be evaluated in connection with a hypothetical negotiation. (1) Established royalties for patent in suit; (2) royalties on analogous patents; (3) nature and scope of the license; (4) licensor's licensing policy; (5) commercial relationship between licensor and licensee; (6) convoyed sales; (7) duration of the patent; (8) profitability and commercial success; (9) utility and advantages of the patent over prior art; (10) nature of patented invention and benefits thereof; (11) extent of infringer's use and value thereof; (12) portion of profit or selling price to allow for use of the invention; (13) portion of realizable profit credited to the invention; (14) expert testimony; (15) hypothetical arms-length negotiation.

These hypothetical factors are frequently present in many real life license negotiation situations. The need to employ the patented technology and the profitability of products embodying the patented technology are ordinarily of paramount importance in establishing license terms.

O. Alternative Dispute Resolution. In the face of threatened or actual litigation over patent rights, it is important to give consideration to various alternative dispute resolution ("ADR") mechanisms which may serve to reduce or limit the substantial expense and inconvenience associated with traditional litigation through trial. It must be kept in mind that both parties must agree to ADR in any format. A patentee intent on pursuing a pot of gold in patent damages or a defendant convinced of invalidity and determined to retain its market position can effectively preclude resort to ADR. On the other hand, many patent disputes begin with a demand letter from the patentee followed by negotiations between the parties. Such settlement talks can lead to resolution by license or otherwise either before or after suit is filed. The expense and complexity of patent litigation tend to encourage resort to negotiation at an early stage of proceedings.

In addition to direct settlement negotiation, parties to patent disputes have also employed other ADR mechanisms such as mediation, non-binding arbitration, and binding arbitration. Experienced counsel report that the involvement of a mediator in a dispute where the positions have been well developed will frequently uncover a basis for settlement, particularly in cases in which the parties wish to maintain an on-going business relationship. While arbitration has its advocates, others contend that formal arbitration does little to limit either the time or the expense involved in the adjudication of a patent dispute. A survey conducted by a subcommittee of the American Bar Association Section of Intellectual Property on "The Use of ADR Techniques in Intellectual Property Cases," ABA Section of Intellectual Property Law Newsletter, Vol. 12, No. 1 (Fall 1993), pages 25-27, 49, reports mixed results from counsel who have used ADR techniques in various types of intellectual property litigation.

Some attorneys have also reported success in limiting the expense and delay of litigation by employing summary jury trials or similar shortened presentations before a non-binding neutral decision maker to give the parties feedback on the persuasiveness of their positions in advance of full-scale trial.
FILING SUIT

A. Patent Infringement Claim. A claim for patent infringement arises under 35 U.S.C. sec. 271 against whoever without authority makes, uses or sells any patented invention, within the United States during the term of the patent, or actively induces infringement, or contributes to the infringement.

B. Declaratory Judgement Claim. A party accused of infringement may bring suit against a patent owner for declaratory judgment of invalidly or non-infringement under 28 U.S.C. sec. sec. 2201, 2202.

C. Jurisdiction and Venue. The federal district courts have exclusive jurisdiction in patent infringement cases. 28 U.S.C. sec. 1338(a). Although there is a special venue statute for patent cases, 28 U.S.C. sec. 1400(b), it has now been read in conjunction with recent amendments to 28 U.S.C. sec. 1391(c) to permit venue in a patent infringement case against a corporation in any district in which it is subject to personal jurisdiction at the time the action is commenced. VE Holding Corporation v. Johnson Gas Appliance Co., 917 F.2d 1574 (Fed. Cir. 1990). Hence any company with national sales of a product accused of infringement may find itself forced to defend in virtually any judicial district of plaintiff's choice, including plaintiff's home district.

D. Complaint. See Appendix B for a sample form of Complaint limited to patent infringement only in the case of Storage Systems, Inc.

E. Answer and Counterclaim. See Appendix C for a sample form of Answer and Counterclaim, stating a counterclaim under the Declaratory Judgment Act, 28 U.S.C. sec. 2201, for a declaration of invalidity and non-infringement. Also included in Appendix C is a sample form of plaintiff's reply to defendant's counterclaim.

F. Protective Order. Discovery in patent cases inevitably involves highly sensitive confidential information, both technical and financial. Hence use of a protective order is standard procedure. A sample protective order is attached as Appendix D.


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