Wednesday, November 26, 2008

Papermaster Injunction -- Was it Inevitable?

The blogosphere has been predictably atwitter since IBM's now-former Vice-President of Blade Development and member of its Integrated Values and Technical Leadership Teams, Mark Papermaster, was enjoined from continuing in his new position Senior Vice President of Device Hardware Engineering for Apple's iPod/iPhone division.

On Monday, Judge Karas of the Southern District of New York released his opinion granting IBM's motion for an injunction against Apple, preventing Mr. Papermaster from continuing in his new job there. The well-written opinion can be used as a good tutorial on the basics of drafting and enforcing non-compete and non-disclosure agreements.

Mr. Papermaster had executed a non-competition and non-disclosure agreement in 2006 in which he agreed that, for one year following the termination of his employment at IBM, he would not engage in or associate with companies that competed with IBM business units with which Papermaster had worked during the previous two years. The focus of the court's analysis was not so much on the appropriateness of the non-compete agreement -- which the court found to be reasonable in scope -- but on the potential for irreparable harm to IBM if Mr. Papermaster disclosed confidential IBM information and trade secrets in the course of his new employment at Apple. This makes sense because absent a showing of irreparable harm, neither the TRO nor an injunction could issue.

So, without dragging this into too much narrative, here are some bullet points that illustrate the uphill battle that Apple faced in trying to free its new employee from the restrictions of his IBM non-compete agreement:

-- The one-year term of the employment restriction was not deemed to be too onerous, and Mr. Papermaster agreed that that and the other geographic and temporal restrictions were reasonable;

-- Mr. Papermaster acknowledged in the agreement that his position provided him with access to IBM confidential information and trade secrets;

-- He agreed that his services for IBM were "extraordinary, special, and unique;" -- He acknowledged that IBM would suffer irreparable harm if he failed to comply with the noncompetition agreement;

-- The court did not accept Apple's argument that it was not a competitor of IBM's, particularly given industry analyst reports to the contrary and Apple's recent purchase of P.A. Semi, a microchip design company that competes with IBM;

-- Probably to IBM's credit, it had offered Mr. Papermaster a "substantial increase" in compensation to stay at IBM or, alternatively, one year's salary if he would agree not to work at Apple for a year;

-- The court found that there was a "substantial risk" that Mr. Papermaster would invevitably disclose IBM trade secrets if he were to continue in his new position at Apple;

Here it is useful to pause to review the elements that the court applied to the inevitable disclosure analysis:

"(1) the extent to which the new employer is a direct competitor of the former employer; (2) whether the employee's new position is nearly identical to his old one, such that he could not reasonably be expected to fulfill his new job responsibilities without utilizing the trade secrets of his former employer; (3) the extent to which the trade secrets at issue would be valuable to the new employer; and (4) the nature of the industry and its trade secrets."

The court found that Mr. Papermaster had acknowledged possessing IBM trade secrets, and in fact had "worked for years with some of the crown jewels of IBM's technology" and had "been exposed to other sensitive and confidential information" through being a member of the I&VT and TLT groups. Given all of the above, it was "no great leap for the Court to find that Plaintiff has met its burden of showing a likelihood of irreparable harm."

The court did take pains to point out that there was no suggestion that Mr. Papermaster "has intentionally acted dishonorably," and that the harm to IBM was "more likely to derive from inadvertent disclosure of the IBM trade secrets that have defined Mr. Papermaster's long career." It also noted IBM's efforts to retain Mr. Papermaster by increasing his compensation, as well as its offer to pay him during the year he was restricted from working for a competitor.

The court acknowledged Mr. Papermaster's argument that "his offer from Apple represented a once-in-a-lifetime opportunity," but pointed out that he "also must accept the obligation he undertook when he became a top executive at IBM."


1. It pays employers to be realistic when drafting non-compete agreements for key employees. Tailor the agreements to the position.

2. It pays employers to be fair, particularly when faced with an enforcement situation. IBM was not obliged either to offer Mr. Papermaster a raise or to offer to pay him for the one-year period of his non-compete. That it did so carried some weight with the court, and makes this look less like a case of a Corporate Titan trying to push around Just An Employee.

3. Long-term employees are handicapped more by non-competes than are employees who have job-hopped in the past. The court took note that Mr. Papermaster had been employed at IBM for 26 years, meaning that most of what he was bringing to the Apple table was what he had learned while at IBM. Had he worked for several companies during his career, and had his tenure at IBM been substantially shorter, his argument that he would not be disclosing IBM trade secrets would probably have been stronger. Long-term employees who are presented with non-compete agreements should consider this before signing, and may want to try to negotiate their position accordingly.

That said, Cnet has an interesting piece challenging the finding that IBM and Apple compete in the chip market such that it was fair to enjoin Mr. Papermaster from taking on his new position at Apple.

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