Video Blog: Start-Up Trade Secrets

TRANSCRIPT & LINKS:

Welcome to Protecting Trade Secrets. I’m Eric Ostroff. I’m a partner at Meland Russin & Budwick and I’m coming to you from my office in Miami Florida. I’m doing something new here on the Protecting Trade Secrets blog. Obviously, I’m on video right now, and I’ll be using video to create blog posts for at least some of the blog posts in the future. I’ll also go ahead and post a transcript of the video down below.

Today I want to talk about issues facing start-up companies who are looking to protect their proprietary information and trade secrets. I recently read an article on inc.com and I’ll go ahead and post a link to the article in the transcript below.

This article told the story of a company called HIDEit Mounts. They had a product that mounted video game consoles and camouflaged them so you didn’t have wires and things sticking out all over your living room.

When this company started out, it was a husband-and-wife team. They didn’t have any experience with product development, product design, or manufacturing, so they did with a lot of startup companies do; they partnered with a manufacturing company and worked with that company to design a prototype and then manufacture these products.

Things were going great. They were selling a lot of products; there were no direct competitors, and the company seemed like it was going to be successful. But then they hit a problem. Another company all of a sudden started selling very similar products, except they were actually a little bit better. And the HIDEit company thought that they might have to go out of business.

They did some research and were able to figure out that it was actually their manufacturer who was behind this competing company. Now thankfully for HIDEit, they went ahead and had their manufacturers sign a nondisclosure agreement early in the relationship. And they were able to use that contract to protect their IP rights and to protect their business. But a lot of startup companies just either ignore, try and use self-help, or don’t give enough thought to potential ways that having a lawyer or using legal solutions can protect against major problems down the road. A lot of companies will use forms off the internet or just won’t use lawyers at all.

The reality is that an extremely modest investment on the front end for a startup company in a competent lawyer who can can create agreements and give advice about ways that this company can protect its proprietary information can go a tremendous way to mitigate against and to deter really serious issues in the future.

So the lesson from this inc.com article for start-up companies is: Don’t think that you’re too early or you don’t have enough money to hire a lawyer. Speak with a lawyer early on in the process. Doing that can solve a lot of really terrible problems in the future.

That’s all for today. I appreciate your time.

 

Can Filing for Bankruptcy Invalidate a Noncompete?

Guest post by Solomon B. Genet.

Debtors and their lawyers sometimes use a bankruptcy filing as an offensive tool. In a recent case, a debtor tried to use his prior bankruptcy to shed his non-compete obligations. While this attempt was not successful, non-compete practitioners should be aware of this effort.

In In re Capps, a July 26, 2018 decision from the District of Kansas Bankruptcy Court, the individual debtor sold his company and signed an employment agreement with the buyer, agreeing to a series of non-compete, non-solicit and confidentiality obligations. The debtor later filed for bankruptcy, and the buyer fired him soon thereafter.  The buyer then discovered that the debtor was breaching his restrictive covenants and brought an action for declaratory relief in the bankruptcy court seeking a finding that the bankruptcy process and discharge did not relieve him of these obligations.

Bankruptcy Judge Nugent agreed with the plaintiff-buyer and rejected the debtor’s arguments, reasoning that: (1) the debtor’s breaches of the restrictive covenants occurred post-bankruptcy, and gave rise to “equitable” (i.e., injunctive) relief and not “a right to payment,” so the debtor did not discharge any debts arising from the agreements; and (2) the restrictive covenants were not “executory” contracts (material obligations on both sides), and therefore could not be rejected through the bankruptcy process.

The Capps debtor was unsuccessful in shedding his obligations.  But—hypothetically—a strategic legal counselor could use the Capps debtor’s arguments in a case with more favorable facts (and perhaps different applicable law) to assist a person subject to a non-compete to obtain relief long before his contracted time-period for his non-compete obligations expired.

A copy of the opinion can be downloaded here.

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