(Warning: This blog post contains spoilers for the June 14 season finale of HBO’s “Silicon Valley”)
It’s a good thing Pied Piper, the fictional tech company at the center of HBO’s “Silicon Valley,” was founded in California and not Texas.
On Sunday night’s season finale, a judge ruled an entire employment agreement to be invalid because the agreement contained an unenforceable noncompete clause. Although it’s fiction, “Silicon Valley”’s end-of-season twist offers lessons for real-life technology executives in Texas.
Invention Assignment Agreement
For those of you who don’t watch the show, here’s a brief synopsis: Richard Hendricks, a geeky Silicon Valley coder, left Hooli (a fictional tech giant) to start his own company, Pied Piper. He also hired one of Hooli’s executives, Jared Dunn, to be the new company’s CFO. Hooli sued Pied Piper claiming that a) the company owns Richard’s technology since he signed an “invention assignment agreement” that gave Hooli ownership of technology developed on Hooli time or using Hooli resources and b) Pied Piper’s hiring of Jared was a violation of Jared’s non-compete. The case ended up in binding arbitration.
It turns out that although Richard tried to be scrupulous about never using Hooli resources or company time to develop his program, he once tested it on Hooli equipment when his computer was in the shop. So the arbitration judge ruled that, technically, Richard’s IP belonged to Hooli.
However, he said, Jared’s non-compete is unenforceable in California. And since Richard also signed the same employment agreement (which included both the inventions agreement and the non-compete), both agreements were invalid.
Noncompetes unenforceable in California
In his ruling, the judge relied on a 2008 California Supreme Court decision in Edwards v. Arthur Anderson that forbids non-competes. The unenforceable noncompete voided the entire agreement.
“So, effectively, Mr. Hendricks never had a valid employment agreement with Hooli,” the judge notes. “As a result, Hooli has no claim to ownership of Pied Piper’s underlying IP.”
Suffice it to say, that may not have been the decision in Texas (although it’s possible the judge would have found that Richard’s one-time lapse insufficient grounds to find for Hooli).
There’s a lot to love about Texas, but making it easy for highly skilled executives to change jobs isn’t necessarily one of them. Non-competes here have to meet certain requirements, but for the typical executive those requirements are easy to meet. For example, receiving confidential information is sufficient consideration for a noncompete and most executives get confidential information all the time. As a result, the main question is simply whether they are reasonable given the need to protect the employer’s legitimate business interests.
Different outcome in Texas
But here is what would be a lot worse for Richard in Texas: Texas has few qualms in enforcing an inventions agreement for technology that relates to that of an employer business, meaning Pied Piper’s revolutionary “lossless compression” technology would – if the case were in Texas – belong to the evil Gavin Belson, CEO of Hooli. And once it is deemed property of Hooli, Richard (and Pied Piper) have now stolen Hooli property.
Now, that’s not to say every aspiring technology entrepreneur should decamp for California. As I’ve written about before, just because California companies can’t rely on non-competes doesn’t mean they can’t find lots of ways to impede their mobility. One of those methods, as Richard Hendricks learned, is suing former employees for theft of intellectual property.
(If you’re looking to read about the IP law aspects of “Silicon Valley,” check out Law of the Level, an excellent blog written by Sheppard Mullin’s Tenaya Rodewald.)