We just learned that Goldman Sachs, the venerable investment bank and one of the major movers in the U.S. financial markets, suffered a major security breach, one that teaches just how vulnerable companies are to rapid theft and potential devaluation of their trade secret information.
We know of the breach because the United States just lodged criminal charges against a former Goldman employee, a highly paid ($400K per year) programmer and vice-president for equity strategy tasked with developing one of the firm's most sophisticated trading programs. The facts are startling: the programmer, before he left to work for a Chicago firm, transferred computer code directly from Goldman's server to a London-registered computer server in Germany. Goldman makes it money, in part, using programs like this one to execute trades. This program delivered millions of dollars of value every year to the bank.
So sophisticated was the program that the United States alleges in the criminal filings that it could be used to "manipulate markets."
The stolen program thus fits consummately the definition of a trade secret. With its theft disclosed, what are Goldman’s next steps?
An unnamed source reports that the investment bank say it has "secured its systems," http://tinyurl.com/m2gctg, but has the damage been done? We do not know where the actual code is now, and whether Goldman and/or the United States have foreclosed any possible future transfer In the hands of another bank, with the right implementation, the program could be used to devastating effect. We wonder, too, whether Aleynikov and his new firm if it employed him for any length of time, will be the subject of a civil lawsuit by Goldman to enjoin any work on similar trading models.
Another major question is how Goldman allowed Aleynikov to purloin a "crown jewel" application in the first place. The detection and response systems may have worked well, as one commentator observes in a New York Times piece, http://tinyurl.com/klnn28, but shouldn't an institution as large as Goldman have had controls to flag the export and data transfer of such commercially sensitive code?
For businesses trying to protect their own confidential business information, the story is a caution and reminder that trade secrets are only as valuable as the reasonable precautions taken to prevent their disclosure. For online data, that means, for example, restricted access, password protection, and it may mean, in addition to regular monitoring, firewall and other protocols to limit data transfer,
-Andrew Flake
Andrew B. Flake is a partner in the Litigation Group at Arnall Golden Gregory LLP (andrew.flake@agg.com). Our firm serves the business needs of growing public and private companies, helping clients turn legal challenges into business opportunities. We don't just tell you if something is possible, we show you how to make it happen. Please visit our website for more information, www.agg.com.
Wednesday, July 8, 2009
Friday, June 26, 2009
Potential Sea Change in Georgia's Competitive Landscape
The competitive landscape in Georgia, and decades of judge-made law about non-compete, non-solicit and non-disclosure agreements, may drastically change next year. I just reread the text of Georgia House Bill 73, which you can find at http://www.legis.ga.gov/legis/2009_10/versions/hb173_HB_173_AP_7.htm. Both the Georgia House and Senate have passed it, and the Governor has signed it. If the voters in Georgia approve a state constitutional referendum in 2010, HB 173 becomes effective and applies to contracts entered into after that date.
For companies looking at their existing non-competes, or considering entering into new ones after that time, we’re talking about a sea change. The General Assembly writes that it believes restrictive covenants in agreements “serve the legitimate purpose of protecting legitimate business interests” and “creating an environment that is favorable” to attracting and keeping Georgia businesses. “Favorable” is perhaps an understatement. Compared to the current state of the law, this bill could not be any more protective of business interests.
Right now, Georgia and California are two of the most pro-employee states in the sense that courts are hesitant to enforce all but the most limited non-competes and non-solicits.
The principle is written into our state constitution: any restraint on trade – and these kinds of contracts are considered restraints – are against our public policy. Taking this pro-competition public policy as a point of departure, Georgia’s courts crafted a vast and sometimes challenging to reconcile body of cases about what is and is not enforceable. Frequently, what companies thought were carefully drafted agreements come before trial courts on motions to enjoin employees and are then struck down as unenforceable.
HB 173 is a broadside on all of that law. My read is that it is designed to make sure that a company that wants to restrict an employee (or a seller of business, or franchisee, or independent contractor, for that matter) from competing for a period of time, can do so without concern that a court will invalidate it. The statue, in fact, reads a lot like an instruction manual for the courts, which is a bit unusual: it creates time periods and kinds of restrictions that should be “presumed” reasonable, it specifies burdens of proof and the definitions of key terms from case law, and it instructs courts to do whatever they need to do to make even a poorly drafted contract enforceable.
Some of the remarkable changes we would see if HB 173 becomes effective, and withstands challenge in the courts:
Allowing and requiring the courts to “blue pencil,” or rewrite restrictive covenants to make them enforceable, and considering each restrictive covenant on its own terms (not letting non-solicit and non-competes “rise and fall” with one another)
Allowing restrictions on not just soliciting customer, but accepting business from customers, post-employment
Opening up competitive restrictions against owners or sellers of not shares or LLC member interests
Letting the enforcing party, by sending a written clarification, unilaterally rewrite and narrow the contract terms
Instead of case-by-case determination, presumptions that two-, three- and up to five-year restrictions are reasonable for different classes of contract parties (e.g., employees, franchisees or distributors, or the seller of business assets)
Eliminating the requirements of narrowly drawn scope and description of prohibited activities and geographic area, and of predictability of the covered geographic area
Careful planning is going to be the order of the day. We have a major statute crashing head on into a detailed, if not completely static, set of cases and legal principles. With some major “if’s,” though – whether the referendum passes and what it looks like, and then what our appellate courts say about how this new statute squares with existing law and the state’s constitution – HB 173 presents Georgia businesses with some major competitive opportunities. We’ll keep track of the bill, and provide more detailed analysis of its individual provisions, as its effective date becomes imminent.
-Andrew Flake
andrew.flake@agg.com
For companies looking at their existing non-competes, or considering entering into new ones after that time, we’re talking about a sea change. The General Assembly writes that it believes restrictive covenants in agreements “serve the legitimate purpose of protecting legitimate business interests” and “creating an environment that is favorable” to attracting and keeping Georgia businesses. “Favorable” is perhaps an understatement. Compared to the current state of the law, this bill could not be any more protective of business interests.
Right now, Georgia and California are two of the most pro-employee states in the sense that courts are hesitant to enforce all but the most limited non-competes and non-solicits.
The principle is written into our state constitution: any restraint on trade – and these kinds of contracts are considered restraints – are against our public policy. Taking this pro-competition public policy as a point of departure, Georgia’s courts crafted a vast and sometimes challenging to reconcile body of cases about what is and is not enforceable. Frequently, what companies thought were carefully drafted agreements come before trial courts on motions to enjoin employees and are then struck down as unenforceable.
HB 173 is a broadside on all of that law. My read is that it is designed to make sure that a company that wants to restrict an employee (or a seller of business, or franchisee, or independent contractor, for that matter) from competing for a period of time, can do so without concern that a court will invalidate it. The statue, in fact, reads a lot like an instruction manual for the courts, which is a bit unusual: it creates time periods and kinds of restrictions that should be “presumed” reasonable, it specifies burdens of proof and the definitions of key terms from case law, and it instructs courts to do whatever they need to do to make even a poorly drafted contract enforceable.
Some of the remarkable changes we would see if HB 173 becomes effective, and withstands challenge in the courts:
Allowing and requiring the courts to “blue pencil,” or rewrite restrictive covenants to make them enforceable, and considering each restrictive covenant on its own terms (not letting non-solicit and non-competes “rise and fall” with one another)
Allowing restrictions on not just soliciting customer, but accepting business from customers, post-employment
Opening up competitive restrictions against owners or sellers of not shares or LLC member interests
Letting the enforcing party, by sending a written clarification, unilaterally rewrite and narrow the contract terms
Instead of case-by-case determination, presumptions that two-, three- and up to five-year restrictions are reasonable for different classes of contract parties (e.g., employees, franchisees or distributors, or the seller of business assets)
Eliminating the requirements of narrowly drawn scope and description of prohibited activities and geographic area, and of predictability of the covered geographic area
Careful planning is going to be the order of the day. We have a major statute crashing head on into a detailed, if not completely static, set of cases and legal principles. With some major “if’s,” though – whether the referendum passes and what it looks like, and then what our appellate courts say about how this new statute squares with existing law and the state’s constitution – HB 173 presents Georgia businesses with some major competitive opportunities. We’ll keep track of the bill, and provide more detailed analysis of its individual provisions, as its effective date becomes imminent.
-Andrew Flake
andrew.flake@agg.com
Saturday, June 20, 2009
Competing Trial Themes Shape Up in Parallel Cases Against Stanford
Allen Stanford, as of Friday, is a criminal and a civil defendant. An indictment unsealed against him reveals further allegations of a financial cabal inside Stanford Financial Group, with Allen Stanford using a controlled-access "black box" to make decisions. What will trial look like? There's a lot of evidence yet to be produced, but the SEC's investigators obviously believe strongly that the profits generated by investors weren't real -- that Stanford ran a Ponzi scheme. When you contrast the $80 billion in assets that Stanford reflected on its books, with the now-missing billions and the lavish lifestyle Allen Stanford afforded himself, the government's themes emerge pretty clearly: incredible greed, protected by deceptive bookkeeping and propped up by hard-sell tactics and big commissions to brokers.
But a good trial, with good lawyers on both sides, is going to mean a battle of message and theme. Stanford's lawyer has set up their own theme: a heavy-handed government investigation has crippled the Stanford Group with negative publicity and innuendo. "The present insolvency of the Stanford Companies," according to Stanford's lawyer, "was caused by the SEC's heavy-handed actions, which have destroyed and continue to destroy much of the value of the Stanford Companies and consequently, the interests of investors."
In this economic climate, who will win the thematic exchange? An average juror will be more apt to view the government as a protective agent, and bulwark against Madoff-style greed and deception, than as an irrational destroyer of corporate value.
But a good trial, with good lawyers on both sides, is going to mean a battle of message and theme. Stanford's lawyer has set up their own theme: a heavy-handed government investigation has crippled the Stanford Group with negative publicity and innuendo. "The present insolvency of the Stanford Companies," according to Stanford's lawyer, "was caused by the SEC's heavy-handed actions, which have destroyed and continue to destroy much of the value of the Stanford Companies and consequently, the interests of investors."
In this economic climate, who will win the thematic exchange? An average juror will be more apt to view the government as a protective agent, and bulwark against Madoff-style greed and deception, than as an irrational destroyer of corporate value.
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