BUSINESS

Keeping secrets

Companies feud over the ownership of ideas

BARBARA WICKENS August 30 1993
BUSINESS

Keeping secrets

Companies feud over the ownership of ideas

BARBARA WICKENS August 30 1993

Keeping secrets

Companies feud over the ownership of ideas

BUSINESS

It was the kind of bizarre moment that viewers of Late Night with David Letterman have come to expect. As a young man lay on the floor on his back, Letterman, the acerbic host of the NBC television talk show, poured milk into the guest’s open mouth. The man’s German Shepherd dog then lapped up the milk. The routine was typical of the hundreds of skits called Stupid Pet Tricks that ordinary people and their pets performed during Letterman’s 11-year run on the New York City-based NBC network. But last January, with his NBC contract about to expire, Letterman signed a $50-million, threeyear deal with the rival CBS network to host a new program that will compete with NBC’s Tonight Show. NBC had to let Letterman go, but since then, lawyers for the two networks have been battling over ownership of Stupid Pet Tricks, the Top 10 List and other skits that Letterman performed regularly on Late Night. NBC claims that the skits are its “intellectual property” and that Letterman cannot legally perform them on his new show. Letterman, in turn, vows that he will perform many of his old routines when his new show starts on Aug. 30. At that point, NBC will have to decide whether to sue.

At first glance, Letterman’s legal battle with NBC appears almost as bizarre as the routines themselves. But it is one of many heated disputes in an exploding—and deadly seriousbranch of law dealing with intellectual property. The term refers to a broad range of confidential information that includes patents, trade secrets and copyrights. At the heart of almost all disputes over intellectual property lies a fundamental question: who owns—and is entitled to profit from—an idea? It is a crucial question for drug manufacturers, software developers and companies in other research-intensive industries. But with technology changing rapidly in almost all sectors of the economy, the concern increasingly extends to more traditional industries as well. For many employees, the question of who owns what ideas arises when they move to a new job and must be certain how much information from their former job they may now use or disclose. In a recent case, General Motors Corp. (GM) of Detroit accused its former head of global purchasing, José Ignacio López de Arriortúa, of stealing company secrets before he moved to Volkswagen AG in Germany in March.

As the workplace changes, more and more employees are wrestling with intellectual property issues. The widespread use of interconnected personal computers, along with the recent drive to flatten out corporate hierarchies, means that many companies have widened the internal access to detailed information about their unique manufacturing processes or business strategies. As well, in highly technical fields such as biotechnology, advances often come in small incremental steps, rather than huge leaps. As a result, even one employee’s scrap of knowledge can be worth millions of dollars in a highly competitive industry. Said Harold Elliott, a part-

ner with Toronto law firm Shibley Righton: “Because of the speed of small technical improvements, intellectual-property law has become very mercurial.”

Recognizing how costly leaks can be, many companies now require new staff members to sign so-called nondisclosure agreements. Those agreements spell out what employees may reveal to outsiders about the company, both while they are employed there and afterwards. “Generally speaking, anything the employee is paid to do, the company owns,” said Paul Barrett, senior patent agent for IBM Canada Ltd. of Toronto. Barrett notes that any ideas or inventions that employees bring to IBM remain their property. To be clear on that matter, IBM encourages workers to inform the company of any technical papers they have published or patents they filed before joining the company. When an employee leaves IBM Canada, either voluntarily or through layoffs, a manager conducts a separation interview with the employee. In that interview, Barrett says, the manager reviews the original nondisclosure agreement and outlines the employee’s ongoing obligations to keep certain information confidential.

Despite efforts to clarify who owns what, many legal grey areas remain. Under existing Canadian common law, employees are clearly prohibited from taking tangible assets such as manufactured goods, customer lists, manuals and other documents with them

when they leave. But problems often arise, Elliot says, with the knowledge and experience that an employee has gained while working at one company. In some instances, for example, information about a proprietary means of production, while not sufficiently unique to require patent protection, may save a rival company months of research and development. So far, Elliott adds, judges have ruled that employees are entitled to “what is in their heads.” Regardless of the specific terms in a nondisclosure agreement, IBM’s Barrett says that “it is very difficult for us to prevent former employees from using the knowledge they have learned here.”

Still, more and more frequently in Canada,

companies are taking their former employees to court to try to do just that. David Elenbaas, a lawyer who practises employment law with McMillan Binch in Toronto, says that most cases do not go beyond the early stages of the proceedings, when the company wins an injunction against a former employee and his new employer preventing them from using confidential or proprietary information. “At that point, the company has often achieved its objective,” Elenbaas said. But there is no clear trend in cases that have actually gone to trial.

The stakes can be considerably higher when rival corporations have a direct confrontation over intellectual property rights. On Aug. 9, tiny generic drug manufacturer Novopharm Ltd. of Toronto and giant Glaxo Inc. of North Carolina went to trial in U.S. federal court over the patents for the ulcer-treatment drug Zantac. It is the world’s best-selling prescription drug, with 1992 sales totalling $3.8 billion worldwide. Novopharm, which wants to manufacture a cheaper generic form of Zantac, contends that a second patent issued on the drug, set to expire in 2002, is invalid because the patented formula too closely resembles the first patent that will expire in 1995.

There are also potentially billions of dollars at stake in GM’s dispute with López and Volkswagen. López joined GM’s struggling European subsidiary, Adam Opel AG, in 1980, and in 1992 he joined the car maker’s North American operation. But in March—two days after he attended a meeting in Germany where executives discussed Opel’s production plans for the next decade— López jumped to Volkswagen, where he was named production director. Within a few weeks, seven other GM and Opel executives joined him.

GM quickly won a court injunction to stop Volkswagen from hiring any more of its executives. But GM also accused López of industrial espionage, saying that he took confidential documents when he quit. Last week, after months of such bitter recriminations, Germany’s federal economics minister, Guenter Rexrodt, personally intervened and attempted to negotiate a ceasefire between the warring auto giants. For companies like GM, NBC and many others, intellectual property is clearly more than an abstract legal concept: it is increasingly the very core of their business.

BARBARA WICKENS