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NDA  Experiment Set up by Mark Hurd.

Gregory Gromov


This is a continuation of a set of reports on the   decisive factor in the creation of Silicon Valley.  For a summary of the essence of this set of reports, see  A Legal Bridge Spanning 100 Years: From the Gold Mines of El Dorado to the “Golden” Startups of Silicon Valley
 

Let’s begin by explaining what exactly the “acute experiment” was that Hurd set up on himself.   Absolutely regardless of what Hurd actually intended to achieve the overall outcome does finally make abundantly clear to the entire  high-tech community the observed fact that not just the NCA (Non-Compete Agreement ), but the NDA (Non Disclosure Agreement) as well cannot interfere with any level of employee of any company in California at any time opting to leave his employer and go anywhere, even to his employer's direct competitor:


The experiment set up by Hurd thus again only illustrates the fact that even in those rare cases when the company employee signs an NDA in exchange for a persuasive large monetary reward  - even in  this case - an employer cannot, under the conditions of the state of California, create legal barriers to an employee leaving to work for his employer's competition. 

This fact itself was of course well-known before, but it was additionally proven by "Hurd’s experiment” that even extreme legal efforts on the part of one of the largest corporations in the world were not able to prevent an employee  from leaving   to work for a competitor, regardless of any papers that he had previously signed and any financial conditions in place just to prevent such actions.

During the entire time he worked at HP, Hurd signed over and over again, for a variety of reasons   NDA documents requiring him to strictly keep HP commercial  secrets, as well as other confidential company information, from being used by any of its competitors.  In just the last 3 years, he received, for his NDA obligations, about $100 million in various kinds of bonuses.

Finally, in the final settlement with his employer – under his final NDA obligations – Hurd received another about $36 million in cash and stocks in addition to what he had already received (under the same terms). 

It is clear that Hurd received all these bonuses during his employment at HP not just for his signature on the NDA.  The main reason for this generous compensation to him was the real progress that Hurd made while performing his duties as HP CEO.  Besides many other things, under his leadership at HP the company's market value doubled.  However, after Hurd went to work for HP's rival, the company    began to highlight the fact that the aforementioned bonuses Hurd received were usually accompanied by regular confirmation on his part whereby he assumed thus the obligations of strictly complying  with all the conditions of the NDAs he signed.

How it happened: long story short ...

Jodie Fisher, one of the HP employee that was  personally interviewed by Hurd in 2007 as a contractor of the marketing department, three years later  filed a complaint for “sexual harassment” against the HP CEO.  HP, placed in such a situation, conducted an investigation and found nothing ethically impeachable in any of the CEO’s actions at all, not to mention any of his non-statutory, with respect to the corporate code, relations with that woman.  The official verdict of this investigation - there was nothing of this kind.    Nevertheless, during an “audit” held for this reason found  some ethically impeachable expenditures totaling about $20 thousands: 
 

She said she met Hurd when she interviewed for a contractor position at the company in 2007. She worked as a marketing contractor there from 2007 to 2009.  The board concluded that Hurd did not violate the company's sexual harassment policies but that he falsified expense reports to conceal the nature of his relationship with Fisher.

http://www.washingtonpost.com/wp-dyn/content/article/2010/08/08/AR2010080800296.html
 

“Upset by his unfair treatment” – this was the most popular version of the events  - Hurd immediately after leaving HP headed to his long-term "tennis partner" Larry Ellison to work directly for him in the position of Oracle “co-President.”    In the statement issued by HP to the court of Santa Clara County it says inter alia that:
 

Despite being paid millions of dollars in cash, stock and stock options in exchange for Hurd’s agreements to protect HP’s trade secrets and confidential information during his employment and following his departure from his positions at HP as Chairman of the Board, Chief Executive Officer, and President, HP is informed and believes and thereon alleges that Hurd has put HP’s most valuable trade secrets and confidential information in peril. Hurd accepted positions with Oracle Corporation (“Oracle”), a competitor of HP, yesterday as its President and as a member of its Board of Directors. In his new positions, Hurd will be in a situation in which he cannot perform his duties for Oracle without necessarily using and disclosing HP’s trade secrets and confidential information to others.


In other words,   HP concluded that Hurd cannot work at Oracle without disclosing --  in the process of his daily activities in the post of President of this company -- the commercial secrets and other  confidential information of HP, which he pledged not to disclose to competitors by signing  the series of appropriate NDAs.

At this level of the analysis of the essence of charges made by HP, everything is clear.  Less clear for analysts at that moment was what did HP want to achieve by taking this matter to court?   In an official document submitted on September 7, 2010 to the Court of Santa Clara County, HP formulates as follows the results it expects of the judicial process:
 


Hurd Case PDF #1

Hurd PDF #2

Among the items cited above, it should probably be noted that HP is asking the court to prevent their former CEO, now working at Oracle, from performing his official duties, which would inevitably involve a violation of the NDAs signed by him earlier.  To this end, HP asks the court, according to the document cited above, to recognize as unacceptable for Hurd: 

- [B 1] to occupy the position at the rival company, during the performance of duties of which he will use the commercial secrets and confidential information of HP 

So that the aforementioned restriction may be effective, HP also asks the court the following: 

- [B 3] to appoint a special commissioner to regularly monitor Hurd’s compliance with the aforementioned demands and in addition to oblige him to write a monthly verified (apparently by the aforementioned commissioner) report stating that he has not disclosed during this time any HP secrets and confidential information. 

In the following paragraphs C and D, HP lays out its requests to the court obligating Hurd to pay HP  compensation for the list of losses caused by Hurd’s violation of the NDAs signed by him. 

Meanwhile paragraphs A and B of HP's lawsuit represent a clear and blatant attempt by HP to use the NDA to circumvent the California Law of 1872 that defends the freedom of a worker to choose his employer. This law was initially ratified as part of California’s Civil Code, and is now found under California Code - Section 16600, also known as CAL. BPC. CODE § 16600 and reads:

 Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

  Therefore, cited below, in the context being discussed, are some examples of interpretation of the “front-page headlines” of leading media on the document submitted by HP to the court.    Let’s start with Reuters agency, which disseminated around the world, in the news format below in an editorial for India, the following report about this:
 


HP sues to stop ex-CEO Hurd joining Oracle
 

If we turn to the Valley now, the San Francisco Chronicle characterizes the discussed HP document already in somewhat more general context than the world news agency Reuters: :
 


HP sues Mark Hurd to protect trade secrets

Underlying the lawsuit is the growing competition between HP and Oracle in the lucrative market for business servers and data storage. Under Hurd, HP began to focus on that market, while Oracle's $7 billion acquisition of Sun Microsystems put the two companies in direct competition.
 

This newspaper, published inside the “fortress walls” of Silicon Valley better understands that there can be no question that this is not about "not allowing" anyone to move to another company. For obvious reasons, apparently, the local Valley newspaper preferred at this point not to comment on whether there is in general at least some real chance for HP to win the ongoing process, if it can be assumed that it will take place. 

On the other hand, columnists of newspapers outside the Valley addressed clearly and more freely the legal aspects of the current chapter of the "Hurd Saga".  Below is a typical quote from the NY Times in this context: 
 


H.P. Sues Its Ex-Chief in New Job

Lawyers said that California law did not appear to favor H.P. in the case against Mr. Hurd. He does not have a noncompete agreement with H.P., the company said, and in any event, California shies away from noncompete agreements. And so H.P. is left with pursuing trade secret disclosure claims against him.

“H.P. is taking the position that there is going to be the inevitable disclosure of secrets by virtue of the position that Mark Hurd has at Oracle,” said Larry C. Drapkin, a partner at Mitchell Silberberg & Knupp, who handles trade secret cases.

“The difficulty here is that California has not embraced the so-called inevitable disclosure doctrine,” ... meaning that the state courts would be hesitant to rule on whether Mr. Hurd was likely to disclose trade secrets.
 

As I previously attempted to explain this:


In any place outside of California, the very fact that a person left to go to work for a competitor, or immediately after leaving work founded his own company, competing with his former employer, almost automatically places the employee in a “guilty” position if he had previously signed an NCA.  

Furthermore, in such a situation the court can only learn the details of the NDA in order to clarify what such an employee can be charged with in addition to the already established violation by him of the NCA. 

If the NCA is not actually effective, as is the case in California, then the difficult task falls to the plaintiff in general to first prove that the company has a really good reason to demand that a case be filed against their employee for alleged violation by him of any of the points of the NDA.

Main Difference of the Legal Framework of Silicon Valley
 

The court follows particularly closely to ensure that charges of a violation of the NDA are not used in such cases as  transformation of the NDA into the NCA.   For this reason  the doctrine of "inevitable disclosure," very popular in similar situations outside of this state, does not work in California,  because it would allow the employer  to overcome the restrictions of the Law of 1872,  just pulling out for this the evidence base of the NDA, for example, as follows:  we cannot provide examples to the court of disclosure by our formed employee of company secrets, but for this situation there is every reason to believe that he cannot work for our competitor without disclosing them…
 


Lawsuits like this one face tough going in California because the state specifically does not want companies turning confidentiality agreements into after-the-fact noncompete agreements

http://news.cnet.com/8301-31021_3-20015713-260.html#ixzz12go6cPgy
 

Meanwhile, HP’s lawsuit was designed exactly that way – entirely and completely based on the aforementioned doctrine of “inevitable disclosure” in order to use NDA  as NCA.   Respectively, three  business days  days after filing suit in a court HP drops fight to block Hurd's Oracle hire:

 HP reached a settlement Monday with its former CEO that requires him to relinquish about $14 million in stock in exchange for the all-clear to work for rival Oracle.  The truce ends two weeks of uncertainty over whether HP, the world's biggest technology company, would drag out its lawsuit against Mark Hurd and try to cripple him in his new job leading Oracle's fight against HP. The deal lets HP save face over the handling of Hurd's ouster. It also removes the specter of a long court battle over whether Hurd, with his trove of secrets about HP, could be barred from working at Oracle as a co-president, reporting to Oracle's CEO Larry Ellison.

http://www.usatoday.com/tech/news/2010-09-21-hp-hurd_N.htm


"
The deal lets HP save face over the handling of Hurd's ouster" - that was a real goal of the  HP's lawsuit. Merely this and nothing more.

The company employee most knowledgeable about all HP secrets  leaves to work for its competitor, and as it turns out once again, nobody was able to prevent him from doing this, and even more - he was even generously rewarded   with a severance payment totaling about $20 million (he received upon signing another NDA when departing HP about $36 million, and then  returned to HP about $15 of these $36 million).

In other words, the “Hurd Saga"  was another convincing illustration that it is almost impossible in California, even by relying on the NDA, to legally prevent the transition of a Silicon Valley employee to any lawful  job, including even a job for a direct competitor of his former employer.

The experiment set up by Hurd additionally showed that this fully applies also to the higher-ranking employee, most knowledgeable of the secrets of the company at which he works.
__________

P.S. The experience of debates that have already taken place in various forums – on the subjects of this set of reports – shows that it would be useful to put some references (accompanied by quotes, making it clear what they relate to) on the table for discussion before its start because they, thus, remove many questions before the discussion arose.  Below, therefore I provide at least some of them.

For example, it is sometimes asked how the exact portion of the earlier received bonuses (totaling under $150 million) Hurd returned became known if his "amicable agreement" with HP remained undisclosed?
 

The SEC filing notes that Hurd waived his rights to 346,030 restricted stock units, some of them performance-related, others time-based, granted to him in January 2008 and December 2009.

The deal was put into motion when Oracle CEO Larry Ellison approached one of HP's board members, Marc Andreessen, according to a person familiar with the situation.

Legal experts noted at the time that the tone of HP's suit suggested what the company really was after in suing Hurd was the handsome compensation package he received when he left, rather than actually trying to keep him from going to work.

Hurd walked away from HP with a package reportedly worth up to $40 million.

He joined Oracle as co-president in early September and was sued by HP the following day for breach of contract and "threatened misappropriation of trade secrets." In other words, HP contended that by the nature of Hurd's work at Oracle, he would invariably leak the company's trade secrets, which he had promised to protect in a confidentiality agreement with his former employer.

Hurd went ahead and took the job anyway, appearing last week on Oracle's first quarter 2011 earnings call, and on stage this morning at the company's OpenWorld tech conference in San Francisco.

http://news.cnet.com/8301-31021_3-20016963-260.html
 

It is interesting also in this case to compare some of data published in the media on various pages of the "NDA experiment, which was set up by Hurd"


Hewlett-Packard Co sued former Chief Executive Mark Hurd and asked a court to block him from joining Oracle Corp, saying his hiring by the rival technology firm puts HP's trade secrets "in peril." Oracle, the world's third-largest software maker, named Hurd co-president and director on Monday, a month after he resigned from HP over expense account irregularities related to a female contractor.

Hurd's separation agreement from HP did not include a non-compete provision, which is generally unenforceable in California. But it did include a two-year confidentiality pact... "Despite being paid millions of dollars in cash, stock and stock options in exchange for Hurd's agreements to protect HP's trade secrets and confidential information during his employment ... " HP's complaint said.

Hurd's compensation from HP was valued at nearly $100 million over the three years prior to his resignation, and his exit package was worth an estimated $34.6 million.


http://in.reuters.com/article/idINIndia-51343620100907
 


And finally, information about the same thing, but from a “local" Valley newspaper - the “San Francisco Chronicle:” 
 


... News of Hurd joining Oracle gave a major boost to the company's value. Oracle stock rose as much as $1.77 per share during the day, adding nearly $8 billion in market value....

Under Hurd, HP began to focus on that market, while Oracle's $7 billion acquisition of Sun Microsystems put the two companies in direct competition. Shortly after Oracle's announcement on Monday, analyst Tim Bajarin of Creative Strategies Inc. of Campbell suggested HP might try to block Hurd's move to Oracle because he could provide a scouting report on HP's customer base and current strategies. "HP had a fiduciary responsibility to sue Hurd to make sure he doesn't poach any HP customers," Bajarin said Tuesday. "This is a normal business practice in cases like this" ...

" The suit claims Hurd signed numerous nondisclosure agreements since he was hired in 2005 to replace Carly Fiorina and reaffirmed those contracts in a separation agreement he signed when he left HP. The fact that Hurd did not tell HP that he was accepting the Oracle job offer "gives rise to a reasonable inference that he is violating his trade secret protection agreements with HP," the suit said.

Also, Hurd said in an Oracle news release that he was excited about the company's Exadata server and new systems to be announced at the Oracle OpenWorld conference this month. "What Hurd and everyone else also knows is that the Exadata server mentioned in his quote is a direct competitive product to HP's Proliant Server," the suit said.

http://articles.sfgate.com/2010-09-08/business/23994503_1_hp-claims-hp-customers-mark-hurd
 

 


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