By: Jeffrey G. Sheldon, Esq.

1aa1e6c6-eef7-41fd-ba53-afe39e8f3454Joint development projects among companies are vital for many businesses. Often times, companies take for granted the use of non-disclosure or confidentiality agreements and in some cases maybe do not even use them at all. The Ninth Circuit’s Appellate Court decision last month in Electronic Arts v. Direct Technology should serve as a stark reminder that companies should insist on written agreements with potential business partners.

Electronic Arts (EA) contracted with Direct Technology (DT) to produce a flash drive prototype of an icon from EA’s enormously popular computer game, The Sims. DT produced the prototype, EA approved it, and subsequently went to China to have it manufactured…at a cheaper price. Soon thereafter DT sued EA under the federal Copyright Act and the California Uniform Trade Secrets Act (CUTSA). EA promptly filed for summary judgment and was victorious for both claims. DT appealed.

The copyright claim survived the appeal process based on DT’s theory that it was a joint author in the “copyrighted work” in the flash drive.  Unlike the District Court, the Appeals Court held that it was possible that a jury could find the design of the flash drive eligible for protection under Copyright law as a derivative work.

Even though the Trade Secret claim did not hold up on appeal the Court entertained the possibility that even without a formal confidentiality agreement, the Ninth Circuit may find a confidential relationship.  DT had argued that it had relied on an implicit business expectation –specifically, that the prototype would be kept secret and not sent to a competitor to be manufactured. The Ninth Circuit concluded that a determination of confidentiality is a factually intensive determination, and suggested that such a conclusion can be implied. Pachmayr Gun Works, Inc. v. Olin Mathieson Chem. Corp. (1974) and Cloud v. Standard Packaging Corp. (1967).   The Court ultimately decided that the DT’s flash drive design did not derive independent economic value from not being generally known to the public, a requirement under the CUTSA.

TAKEAWAY: A well written agreement can not only define who owns the intellectual property in a joint venture but also the rights and obligations of each party regarding shared information.

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