Friday, December 10, 2010

Confidentiality Agreements

When I was young and stupid I signed a Confidentiality Agreement without much thought, like the way one clicks those 'EULAs' when you download free software. I left that firm, and my idea was to run a fund going strictly long low volatility stocks, worldwide, which was based on over a decade of prior research and practice. I would put in some of my money, and by giving half to a White Knight get access to brokerage enabling me to trade world wide at sufficient scale to demonstrate this was a dominant strategy.

When my old boss found out he initiated litigation, confirmed my earlier suspicions (eg, when your ex boils your bunny, it's bad for your bunny but highlights it's good she's your ex). His claim was based on the Confidentiality Agreement I signed when I joined his firm in 2004, that included the following:
Employee agrees that all inventions, discoveries, computer software programs, trade concepts, designs, patents, ideas and copyrightable and/or patentable material made, conceived or developed by Employee during the term of this Agreement shall be owned in full by the Firm. The Parties acknowledge and agree that this paragraph does not apply to an invention for which no equipment, supplies, facility or trade secret information of the Firm was used and which was developed entirely on the Employee’s own time, and (1) which does not relate (a) directly to the business of the Firm or (b) to the Firm’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for the Firm.

I had substantial prior use of the strategies related to low volatility investing, having run a low volatility fund as a stand-alone for 5 years in the late 90's, written a dissertation on the subject, and applied it within a hedge fund for a year prior to joining his firm. Yet, given the confidentiality agreement above mentioning anything related to 'ideas or trade concepts', my pet idea was potentially available to everyone but me. A lawyer sees these trading concepts, and can't distinguish between something common as a built-in Excel function and a complex, unique algorithm. As my litigious ex-boss stated:
anything that you invented since September 1, 2006 that relates to the profitability, accruals, volatility, and capital issuance of equities cannot be anything but derivative of your work at Telluride

Unfortunately, this is a legitimate claim in American courts, given judges have no idea what "profitability, accruals, volatility, and capital issuance" means. Sure, I would probably win a jury trial on this point, but they had all my hard drives, and discovery was continuing and unconstrained, so I probably violated some law. Most importantly, by the end of the trial I'd be broke. After 18 months of litigation we settled. I no longer had enough money to start my fund, so my career went a different way.

Never anticipate good faith from people outside your family; remember, everyone thinks they are being reasonable, they just interpret 'reasonable' from a different vantage point. If your portfolio managers are making 5% of their pnl whereas they could make 20%, handicapping their ability to pursue alternatives can be quite valuable. Making an example out of someone never makes sense in isolation, it makes sense in a broader context.

The above selection is very common, and have seen this paragraph in several confidentiality agreements (lawyers do a lot of cutting and pasting). Because of my litigation several people have emailed me about similar situations, and I generally find their problem is not the non-compete, rather the confidentiality agreement, and they don't even know it. It can be a license to enforce a perpetual non-compete.

I'm not a lawyer, and thus am officially unqualified to give out legal advice. So, of course, pay a lawyer a couple hundred bucks to read over such a simple statement and give you suggestions. Going forward, I will be sure to amend the above to specifically note it does not pertain to ideas I have demonstrated previously, spelling them out in specific. That way, in my unqualified opinion, I will have a better chance of having the case dismissed, avoiding litigation, or at least circumscribed. But that's my opinion, not advice, because I am not part of the legal guild, and my advice is not only worthless, but would be illegal if presented as advice.


David Merkel said...

At my last firm, I amended the agreement such that I owned any intellectual property that I generated, but that they would have an unlimited license to use the property, but not sell it. They could use/sell the results without limit.

And now, they have dissolved, and I travel on.

Anonymous said...

What does an 18 month litigation usually cost?

Dave said...

"Going forward, I will be sure to amend the above to specifically note it does not pertain to ideas I have demonstrated previously, spelling them out in specific."

When I signed a confidentiality agreement at a start-up ten years ago, there was a space in it to do just that. I listed a U.S. patent I had, along with a couple of web domains I'd purchased, one of which related directly to the start-up's business. I left there a couple of years later, and had neglected to renew that particular domain, which the start-up promptly bought.

Anonymous said...

You make an excellent point about the challenge of capturing/retaining the value of one's human capital when working for an employer.

My guess is that in the wake of the Sergey Aleynikov conviction employers, in some cases, might be more aggressive in the future in pursuing former employees.

The beauty of the Economic Espionage Act is that the federal government prosecutes what might seemingly be a commercial dispute.

Unknown said...

Please accept the apologies of this lawyer for what my brethern have put you through. Personally, I am just glad that the law I practice does not involve torturing or ruining people's lives.

mahmud said...

Really this is a good and very informative post. Thanks for sharing helpful information.