| Competing with your Employer: Caught by His Own Trash Dresser-Rand supplies compressors and turbines for large industrial uses such as oil and gas operations. It also makes equipment that regulates the turbines, compressors and other machinery it sells. It had two types of control systems, one for the machinery and one for the rest of the equipment. Dresser-Rand decided to develop a new type of control system that would combine machinery and plant control functions. Dennis Mezzatesta signed on to lead the charge. Dresser-Rand was smart enough to have Mezzatesta sign a “confidentiality agreement” and a “code of conduct” that basically required Mezzatesta to protect the company’s confidential information and avoid conflicts of interest. Mezzatesta negotiated a supply and distribution contract with Apix, Inc., for Apix to create a hardware component meeting Dresser-Rand’s specs for their new, combined control. That contract protected Dresser-Rand’s information from competition with any other customers of Apix, by giving Dresser-Rand the exclusive right to sell the new Apix control system product. They gave this new product the very creative name “Trax.” Now here’s what caused the you-know-what to hit the fan. Mezzatesta formed a new company named Virtual Automation, with a guy named Chris Tsipouras. At least the name of the corporation is easy to pronounce. Tsipouras was not just “an” officer of Apix, he was “the” officer that signed the confidentiality agreements with Dresser-Rand. On the very same day that Dresser-Rand signed the contract with Apix for Apix to design this new control device, Apix also signed a contract with Virtual Automation to market a controls product that could simultaneously perform machinery and process controls. Testimony at the inevitable trial would show mere superficial differences between the Dresser-Rand product and the Apix/Virtual Automation product. So much for non-competition. And here’s where truth gets stranger than fiction. About a year and a half later, as development continued to move along, Mezzatesta’s supervisor at Dresser-Rand was walking through the company’s parking lot when he came upon a piece of trash. Having been duly influenced by the “Don’t Mess with Texas” campaign, he picked it up to properly dispose of it. But what he found was a Virtual Automation price list for what appeared to be Dresser-Rand’s Trax items. Under pressure and scrutiny, Mezzatesta then resigned from Dresser-Rand, taking with him electronic data relating to the Trax project. And he immediately began working for Virtual Automation. Dresser-Rand probably went from indignant to angry once they found out that the officer of Apix was also a shareholder and director of Virtual Automation. They figured that Apix was going to be able to bring its clone into the market about six to eight weeks before Dresser-Rand could with its product, pre-empting the success of its own system, so Dresser-Rand made the tough decision to abandon the Trax project. And then they sued. They sued Mezzatesta, Tsipouras, Virtual Automation, and Apix. The trial took three and a half weeks, after which the jury came back with some big numbers:
Here’s what Dresser-Rand had to prove to recover on its “unfair competition by misappropriation”:
Apix was somewhat stunned, because as of the date of the judgment, the Trax project had not been completed. There was no finished product to “misappropriate.” But the Court of Appeals held that this three point test protects labor–the “sweat equity”–that goes into creating a work. The Court also decided that Apix’s plan to use technology and features of the Trax system in its own control system products was enough to meet this three prong test. Then Apix got real technical and said “we never ‘used’ a product in competition with Dresser-Rand, and test no. 2 requires ‘use.’” The Court noted that on this point this was a case of first impression (meaning it couldn’t find any other court opinion on the issue). So it looked at how that term was defined under Texas’ common law definition of misappropriation. The Court found that “use” includes activities other than actually selling the product. For example, it includes attempts to market the product. The evidence in this case showed that Apix was already taking orders for sales of the “clone” product. ‘Nuff said, next case. So what are the lessons from this case? Employees are tremendously valuable assets of a business, as is the business’s intellectual property. If your business depends heavily on both, the problem is that the intellectual property is stored in the heads of your employees. In order to protect your business and its assets, your business needs written agreements with employees and suppliers to identify and protect confidential, proprietary information. If you end up with a “bad apple” employee, it will be costly no matter how much paper you have. But court decisions like this one, coupled with the right contracts between your business and your employees, may be powerful deterrents on “bad apple” behavior. Dresser-Rand Co. v. Virtual Automation, Inc., et al., Case No. 02-20834, 5th Circuit U. S. Court of Appeals, February 23, 2004. Close
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