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Are Apple and IBM Competitors?

Many people knowledgeable about these two companies may be surprised to learn that IBM has persuaded a U.S. District Court judge in New York that indeed, they are competitors.  The judge has enjoined Mark Papermaster, a 25-plus year employee of IBM, from working for Apple Computer.  While at IBM Mr. Papermaster was a product development executive in the area of blade servers.  After Apple engaged in an extensive, year-long interview process it hired Mr. Papermaster as the senior executive for the iPod/iPhone development team.

Of course, Apple was well aware of Mr. Papermaster’s non-compete agreement with IBM, which prohibited him from working for a competitor, and I assume that it seriously considered whether it could defend a challenge of this sort by IBM.  Apple probably concluded that servers and iPods were sufficiently far apart that it would be safe hiring Mr. Papermaster.  The fact that this decision went against it highlights once again the extent to which the outcome in a case of this sort is determined by the disposition of the judge who happens to draw the case, rather than the underlying legal principles, which give the judge an enormous amount of discretion to rule either way.

The Justia page for this case is here.  It appears that Justia has decided to make access to court filings in the case free of charge, and therefore the legal memoranda arguing each side’s position are available (docket entries 4 and 10).

Docket entry 18 is the judge’s order, which reads in part:

For the reasons that will be stated in a forthcoming Opinion, Plaintiff’s Motion for Preliminary Injunctive Relief is GRANTED. It is further ORDERED that Defendant, Mark D. Papermaster, will immediately cease his employment with Apple, Inc. until further Order of this Court;  . . .  and it is further ORDERED that the Court will hold a status conference on November 18, 2008, at 10:00 am, at which it will discuss, and encourages the Parties to discuss beforehand, an expedited schedule for discovery and trial.

Expect significantly more activity in this case (including an emergency appeal) if Apple and IBM aren’t able to work out their differences out of court.  I suspect that IBM knows that it got a somewhat lucky role of the dice on this ruling.  At least on the face of it, a settlement that assured IBM that Mr. Papermaster would stay away from any server development at Apple should be enough to resolve this dispute.

Of course, my discussion is based on the public record disclosed in the court filings.  In the world of Steve Jobs (who, according to the court filings, was directly involved in the decision to hire Papermaster), what you see and what’s really going on can be very different.  For the back story on this case, see this Fortune article and this Cringely column, from which the following quote is drawn:

Apple still hopes to convince a judge that it is correct about Papermaster. But if Apple fails in that, Steve Jobs will just pick up the phone and choose IBM Microelectronics as the fab to build the next generation of Apple’s PowerPC processors – a contract worth billions, but ONLY if IBM drops all legal action.

Apple will win in the end — I guarantee it. And the way Jobs negotiates, Big Blue will probably end up losing money on the chip deal, too.

Update: This case was settled in January 2009.


Judge Fabricant's Preliminary Injunction Decision in HRH v. Sheppard

Attached below is Judge Judith Fabricant’s lengthy decision in Hilb Rogal & Hobbs v. Sheppard, decided by Judge Fabricant in the Suffolk Business Litigation Session early this year. To my knowledge, this decision and order became publicly available only recently.

This restrictive covenant case is interesting in one unusual respect: it involves what some lawyers like to call “employee raiding” – a perjorative term that one sometimes hears when a large group of employees leaves to join a new firm. Here, the group was unusually large, consisting of 24 employees who resigned en masse, leaving Hilb Rogal & Hobbs (HRH) identical resignation letters and advising HRH to contact the same lawyer in the event any legal communications were necessary.

HRH filed suit and moved for a preliminary injunction, presenting Judge Fabricant with a complex set of facts (the employees did not all have the identical agreements), and factual variations in their circumstances.

The decision breaks no new ground in Massachusetts noncompete law, but it’s worth making a few observations about how the Judge approached the case:

  • Employees whose agreements were entered into in connection with a business that had been sold to HRH earlier were treated much more strictly than the “rank and file” employees, as one would expect given Massachusetts law.
  • The Judge viewed HRH’s claim of interference with contractual relations favorably, given that the new employer offered it’s prospective employees defense and indemnification for anticipated litigation arising from a breach of their agreements. Since employers are often asked to provide this sort of protection for new employees who fear litigation of this sort, this decision emphasizes that a decision to hold the employee harmless can backfire.
  • While the Judge was unwilling to say that agreements signed by employees as a condition of ongoing employment lacked consideration, she did treat this as an equitable factor that weighed against issuance of a preliminary injunction.
  • There is no discussion of “raiding” in the decision and order.  In the past I’ve seen lawyers argue that the fact that the new employer hired a large number of employees should, of itself, give rise to some presumption of liability.  However, to my knowledge no Massachusetts judge has ever recognized a cause of action for “raiding”.  I don’t know if HRH made that argument in this case, but if it did Judge Fabricant did not address it.

Here is a link to the full decision.

Judge Gants' Decision in NERA v. Evans

One of the great benefits of the Suffolk Business Litigation Session (the BLS) is that the judges tend to write detailed opinions explaining their decisions. This tends to be less true elsewhere in the Superior Court. Recently-retired Superior Court Judge Allen van Gestel created a tradition of written jurisprudence while he headed the BLS, and his successors are keeping up the tradition. While these decisions are not published in an official reporter, and they are not binding precedent in the strict legal sense, they are often made available on the Internet, on legal search engines such as Westlaw and in the unofficial Mass. Law Reporter. In this way attorneys and the public are informed on how the BLS judges tend to see issues that come before them. And of course, any given judge is likely to be greatly influenced by a decision he or she has authored on a particular issue; there’s nothing better than citing a judge back to herself.

The extensive and detailed opinion in The National Economic Research Associates, Inc. v. Evans, decided by Judge Ralph Gants in early September 2008, shows that the new BLS judges are continuing Judge van Gestel’s tradition of written decisions.

In NERA v. Evans Judge Gants was asked to decide (on summary judgment) a claim that David Evans had violated a covenant not to compete with NERA, his former employer. The noncompete issues were decided under New York law (the choice of law specified in the contract), but a number of other non-contractual claims made by NERA were decided under Massachusetts law.

While Judge Gants’ detailed application of New York state law to the issue of the enforceability of a noncompete provision is of limited relevance (except in future cases where the BLS is required to apply New York law in this context), it is interesting to note that Judge Gants (who ruled that the case should proceed to a damages trial on NERA’s claim that Evans violated his noncompete contract) warned the parties that at trial, NERA would have to prove that the clients that followed Evans to his new job would have continued to have been clients of NERA had Evans stayed at NERA.

This is a potentially difficult burden on NERA, since it requires NERA to prove a hypothetical. Former NERA clients may be willing or able to testify at trial to what they would have done had Evans stayed at NERA. Judge Gants’ ruling on this issue illustrates why noncompete cases (regardless of which state law applies) are usually won or lost at the outset of the case, when the former employer seeks a preliminary injunction prohibiting the former employee from working for the new employer. Once that stage of the case is over the plaintiff/former employer will rarely pursue damages (as NERA did here) given the difficulty of proving damages.

Apart from his ruling on the noncompete contract under New York law, Judge Gants entered some interesting rulings “off the contract” under Massachusetts tort law.

Ruling on NERA’s claim of tortious interference with contractual relations against the new employer, Judge Gants held that the alleged interference must be “improper in motive or means.” The injured party must prove “spiteful, malignant purpose unrelated to the corporate interest.” Since the former employer was unable to provide any evidence of this sort against NERA, this claim was dismissed. While it seems that companies that hire an employee subject to a non-compete agreement are sued as a matter of course under this theory, Judge Gants’ decision shows how difficult it may be to establish liability. One way in which this can be accomplished is to show that the new employer induced or encouraged the former employee to steal trade secrets or confidential information from the former employer, but conduct of that sort is somewhat rare.

NERA also claimed breach of fiduciary duty against the former employee, who had been an officer of NERA, and therefore owed a fiduciary duty to NERA. However, Evans had gone no farther than to “prepare” for competition before leaving NERA, and under the SJC’s Augat v. Aegis decision this claim also was dismissed. Interestingly, Judge Gants held that the fact that the de minimus use of NERA funds by Evans, and his occasional use of NERA’s phones and computer to negotiate his departure from NERA, “fell far short of a breach of fiduciary duty.”

Judge Gants dismissed the former employer’s rather bizarre claim (Judge Gants politely called it “clever”) that Evans had usurped a corporate opportunity belonging to NERA by negotiating his own departure from NERA. As Judge Gants stated, “If ones own employment were to be considered a corporate opportunity, then no officer of a corporation would be free to leave his employment unless he first offered ‘the opportunity’ of his services to his current employer and his employer rejected the opportunity.”

Lastly, Judge Gants dismissed NERA’s M.G.L. c. 93A claim against Evans’ new employer, holding that the inducement of a breach of an employment agreement alone, without improper motive or means, fell short of the type of “immoral, unethical, opppressive or unscrupulous” conduct necessary for a violation of Chapter 93A.

(Note: An earlier decision by Judge Gants in this case is discussed here. In that decision Judge Gants ruled that Evans had not waived attorney-client privilege where, while he was using a NERA-owned computer and using an Internet-based email service to communicate with his attorneys, unbeknownst to him, temporary files containing those communications were stored on the computer.)