TABLE OF CONTENTS

Page

I. Introduction.......................................................................................................................1

II. Technology Companies – Who Are They and Why Are They Different?....................1

III. Legal and Practical Issues Confronting Technology Companies.................................2

A. Avoiding "Employment" – The Use of Independent Contractors..........................2

1. The differences between an "employee" and "independent contractor".......................2

2. Advantages to using independent contractors...............................................................3

3. Who qualifies as an independent contractor?................................................................5

4. Disadvantages to using independent contractors...........................................................9

B. Protecting Your Valuable Intellectual Property.....................................................12

1. California "trade secrets" protection............................................................................12

2. Using non-solicitation and non-disclosure agreements...............................................16

3. Obtain patent, patent and trademark protection..........................................................17

4. Enforcing the employee's "duty of loyalty".................................................................19

C. Hiring Your Competitors – So Enticing and So Very Risky.................................19

1. California favors employee mobility...........................................................................20

2. "Trade secrets" law sets the boundary.........................................................................20

3. Hiring without violating "trade secrets" laws..............................................................21

D. How New Sexual Harassment Laws Impact Technology Companies

and Their Employees.................................................................................................22

1. Employee personal liability.........................................................................................23

2. Protection for independent contractors........................................................................23

E. Wage/Hour Exemptions for Technology Employees..............................................24

1. The prior federal law...................................................................................................24

2. The prior state law – before AB60..............................................................................24

3. AB60............................................................................................................................24

4. AB60's impact on technology companies....................................................................25

5. The solution – SB88....................................................................................................25

F. Immigration Issues

© March 2001 Jeffrey S. Sloan

Special Employment-Law Issues Confronting Technology Companies

By: Jeffrey S. Sloan, Esq.Partner, Labor & Employment GroupChair, SF Technology Practice Group

Sheppard, Mullin, Richter & Hampton LLPFour Embarcadero Center, 17th FloorSan Francisco, California 94111-4106

(415) 434-9100jsloan@smrh.com

© March 2001 Jeffrey S. Sloan

I. Introduction

In many ways, technology companies face the identical employment law issues faced by any other employer: Can we conduct a pre-hiring background check? Should the new hire be "exempt" or "non-exempt?" Should we discipline him for that conduct? Can we terminate that employee? Is that sexual harassment? These are bread-and-butter issues confronted by every employer, including technology companies, almost every day.

While all employers must navigate the employment law maze, technology companies face a handful of unique and critical issues. These issues have been magnified for most of the past decade due to the explosive growth in the technology sector, the intense demand for its workers, and the overall better understanding of intellectual property rights. By the very nature of their business, technology companies will always have to confront new and special issues. The magnitude may change – for example, if the once white-hot economy starts to cool – but the unique issues facing technology companies will remain.

So, who are these technology employers that must manage these issues? What is meant by the term "technology company?" And, most importantly, what are some of the unique legal and practical problems that they face? This article will address these and other questions, and offer a glance into the world of employment law from the perspective of the technology employer.

II. Technology Companies – Who Are They and Why Are They Different?

Ask ten people what they mean by a "technology company" and you are almost certain to get ten different answers. A 55 year-old butcher from the midwest might tell you that a "technology company" is one that makes computers, like IBM, Dell or Apple. Ask a physician, however, and she will probably tell you that a "technology company" replicates DNA, develops new antibiotics or builds intricate medical testing devices. An investment banker would offer probably a different definition: a "technology company" is any company with a market capitalization of billions but with no profits in sight. Ask a computer programmer, however, and she will likely tell you that a "technology company" is one whose employees write source code, debug programs or create sophisticated graphics for videogames or movies. Incredibly different definitions, but they are all correct answers.

Whether focused on computer hardware, medical science, source code, telecommunications or the Internet, all "technology companies" share common traits. First, they share a common foundation in ingenuity and creativity. All technology companies are built upon an idea. Second, technology companies share a common purpose: to refine, develop, market and profit from their ideas. At their core, all technology companies exploit ideas and create "intellectual property." Third, most technology companies move quickly. It could only be days, after all, before someone else creates something better, quicker or cheaper. Finally, technology companies need the specialized skills of a relatively small universe of potential workers. The result is that the workforce of a technology company is generally smarter, more creative, more mobile and more opportunistic than your typical workforce. It is in all these ways that technology companies differ from more traditional companies. And it is for all these reasons that technology companies have different, and even unique, legal needs.

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III. Legal and Practical Issues Confronting Technology Companies

A. Avoiding "Employment" – The Use of Independent Contractors

1. The differences between an "employee" and "independent contractor"

A person who performs services in exchange for payment must be either an employee or an independent contractor. The employer controls the "means and methods" by which its employees work. See Santa Cruz Transp., Inc. v. Unemployment Ins. Appeals Bd., 235 Cal. App. 3d 1363 (1991). The employer sets the hours of employment, reviews the employees' performance, provides the space and resources to get the job done, and generally exercises much greater control and power over its employees. Id. The employee owes a "duty of loyalty" to its employer not to abuse her position or in any way harm her employer's business. See e.g., Stokes v. Dole Nut Co., 41 Cal. App. 4th 285 (1995). The formalization of that imbalanced structure can be found in the very presumption and definition of "at will" employment. Under California law, for example, an employee is presumptively "at will," which means that the employee serves at the will and pleasure of her employer and can be terminated at any time and for any reason, with or without notice and with or without cause. Cal. Lab. Code §2922; see e.g., Guz v. Bechtel Nat'l, Inc., 24 Cal. 4th 317 (2000).

In exchange for providing services under these circumstances, the employee is guaranteed certain rights, including a safe and healthful work environment, a "right of privacy" in employment documents and events, the right to be compensated at least a minimum wage, the right to a workplace free of discrimination, and the right to be paid promptly in full for the value of services rendered. See e.g., Aguilar v. Avis Rent A Car, Inc., 21 Cal.4th 121 (1999); Pettus v. Cole, 49 Cal. App. 4th 402 (1996), Cal. Const. Art I § I. The State of California, for example, has very specific rules about when, how and how much employers must pay their employees. Cal. Lab. Code Sections § § 1171 et seq. Under both California and federal law, an employee is guaranteed to participate in specific government-sponsored benefits (e.g., unemployment, disability and Social Security benefits). See Hunt Bldg. Corp. v. Bernick, 79 Cal. App. 4th 213 (2000). An employee is also guaranteed to participate in company-sponsored benefits that are made available to employees (e.g., health care, prescription drug service, stock options, pension plan or 401(k) participation). See, e.g., Probe v. State Teachers' Ret. Sys., 780 F.2d. 776 (9th Cir. 1986). All of these employee benefits – and responsibilities – flow directly from the classification of the worker as an "employee." The employer-employee relationship is a highly-regulated one that brings with it very real risks, costs and formalities.

The principal-independent contractor relationship is quite different. An independent contractor functions for a company much like a vendor, except that the independent contractor provides services rather than goods. Cal. Lab. Code § 3353. An independent contractor is generally an independent person or entity that possesses specialized skills and performs discreet, specific projects. See e.g., S.G. Borello & Sons, Inc. v. Department of Indus. Relations, 48 Cal. 3d 341 (1989); In re Brown, 743 F.2d 664 (1984). An independent contractor is generally paid upon the completion of a project rather than being guaranteed a wage. Id. Most importantly, an independent contractor has the right to control the means and methods of her work. Id. For example, an independent contractor generally sets her own hours, does not work WORD-SF\FSL\61250558.1 4030101

under direct supervision, provides her own tools and resources to complete the project, and, like the company itself, has a potential for profit and loss. Id. Whereas employees owe a duty of loyalty to their employer, independent contractors often work for multiple companies – even competitors – at the same time. See e.g., State Comp. Ins. Fund v. Brown, 32 Cal. App. 4th 188 (1995).

In exchange for these freedoms and rights, independent contractors generally give up the legal protections afforded employees. For example, independent contractors are not protected by the wage/hour laws. See generally Cal. Lab. Code § 200 et seq. and § 1171 et seq.; 29 U.S.C. § § 210-219. Independent contractors are generally not covered by state or federal anti-discrimination laws. Cal. Gov't. Code § 12940(a); 42 U.S.C. 2000(e); see also, Adock v. Chrysler Corp., 166 F.3d 1290 (9th Cir. 1999); Lumia v. Roper Pump Co., 724 F.Supp. 694 (ND Cal 1989). Although employers are legally required to indemnify their employees for their actions or omissions, independent contractors are guaranteed no such protection. Cal. Lab. Code § 2802. Independent contractors also have to pay their own "self-employment" taxes since there is technically no "employer" to pay that share. Cal. Unemp. Ins. Code § 601 et seq.; 26 U.S.C. § 3306(i); 26 U.S.C. § 3121 (d); Hunt Bldg. Corp. v. Bernick, 79 Cal. App. 4th 213 (2000). Finally, independent contractors are not guaranteed to participate in stock option plans, health plans, vacation time accrual and other standard "employee benefits." See e.g., Probe, 780 F.2d 776, supra.

2. Advantages to using independent contractors

Within these distinctions lie the reasons why technology companies make great use of independent contractors.

Cheaper labor costs

Because the technology company is not employing the independent contractor, there is no need for the company to pay employment taxes on behalf of that worker. The company thus avoids having to pay state unemployment tax, federal unemployment tax, or social security tax on the independent contractor's earnings. For highly skilled and often highly paid independent contractors, this results in a substantial cost-savings.

Moreover, because the independent contractor is not entitled to participate in the company's employee benefits, the company saves those costs as well. For example, there is no requirement that the technology company make available to its independent contractors any medical or health insurance, stock options, pension plan or 401(k) access or matching contributions, vacation pay, sick leave or other similar benefits.

Fewer regulations and less administration

Moreover, wage/hour laws do not apply to independent contractors. Neither the Fair Labor Standards Act, nor its California equivalent, apply to independent contractors. Thus, there is no need for the technology employer to be concerned about overtime, minimum wages or wage deductions. The technology company who utilizes independent contractors can get workers performing immediately, without the need to set up complicated payroll, attendance tracking and other systems.

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Similarly, traditional labor laws do not apply to independent contractors. A technology employer using independent contractors need not be concerned about collective bargaining, union or other issues and requirements of the National Labor Relations Act. 29 U.S.C. § § 151-169. For technology companies, especially emerging growth or start-ups, the absence of employment law complications and costs is critical.

Minimized risk for wrongful termination, discrimination, unemployment, and employee benefits lawsuits.

The use of independent contractors lessens the potential for costly and distracting lawsuits since most employment laws cover employees only, and not independent contractors. For example, California's anti-discrimination law, the Fair Employment and Housing Act ("FEHA") prohibits discrimination in employment based on race, religion, color, national origin, ancestry, physical disability, mental disability, medical condition, marital status, sex or sexual orientation. Federal law similarly covers employees only. Moreover, technology companies are free to use independent contractors with less fear that, at the end of the relationship, the worker can bring claims for unemployment, wrongful termination or denial of benefits. See e.g., Sistare v. YMCA, 58 Cal. App. 4th 10 (1997); Lumia v. Roper Pump Co., 724 F. Supp. 694 (N.D. Cal. 1989). Most technology companies, like most employers, would be wise to avoid even a single such claim. Not only are the financial costs extraordinary, but the distraction, "downtime" and unwanted publicity caused by a lawsuit can devastate a technology company.

Greater flexibility for growth and expansion, especially in an uncertain or unstable market (which is one of the hallmarks of the technology market)

There is less risk involved with initiating an independent contractor relationship because the relationship is not considered by either party to be permanent. It is understood that the relationship can end at any time and that the independent contractor has given up certain legal protections in order to have greater flexibility and control over her work. Because companies can terminate a relationship with an independent contractor much easier and with more confidence than a traditional employer-employee relationship, there is less need to spend so much time and money recruiting and screening workers. A hiring "mistake" can be rectified more quickly and less expensively if the new worker is an independent contractor rather than an employee. For dynamic companies like technology companies, this flexibility is often critical.

Because bringing on new workers is easier, less expensive, less regulated and less risky, technology companies have greater flexibility. They can grow segments of their business quickly, without the risks and costs of massive new employee hiring. Moreover, technology companies have the freedom to venture into new markets or try new strategies with less costs and less risk if they decide to, eventually, scale back or change course. Such flexibility is key to dynamic companies, like technology companies, who are constantly exploring ideas and who are often functioning in an unstable and volatile market climate.

Greater access to necessary workers

Technology companies need access to highly-trained, highly-skilled, creative and entrepreneurial workers. Their business literally depends on having the smartest, most creative and most energetic workers in their workforce. The "bad" news, however, is that WORD-SF\FSL\61250558.1 6030101

these workers tend to be opportunistic and independent. Many do not want to be "tied down" to one place of employment, nor do they want to have their creativity in any way restricted or governed. Many such workers will work only as independent contractors because of the freedom that they perceive it brings. Technology companies can increase their access to these critical workers by being willing to designate them as independent contractors.

3. Who qualifies as an independent contractor?

(a) No single test and no "bright-line" rule

Although the question is a seemingly simple one, the answer is anything but. State agencies, state courts, federal agencies and federal courts all use different "tests" for determining whether someone is an independent contractor. Suffice to say that this is one of the most confusing, and indeed frustrating, aspects of employment law for most employers. There is not even a single test, let alone a black-and-white answer, to guide them. As one court noted,

[O]ne discovers the notable absence of comparable universal qualities that define and identify the status of "employee" so as to fit its meaning within all common law and statutory definitions . . . Even when the same person performs the same acts at the same time in the same place under the same conditions conceivably she could not be considered an employee under some common law standards and some federal statutory definitions while she nevertheless could be considered an employee under those of others. This absence of universality in qualities and definition unavoidably breeds ambiguity and confusion requiring courts to assess a broad spectrum of facts in their quest to clarify and determine who is and who is not an employee.

EEOC v. Sippo Mfg. Co., 713 F.2d 32, 35-6 (3rd Cir. 1983) (emphasis supplied).

(b) How the issue gets raised and investigated

It is beyond the scope of this article to delve into the various tests and the agencies or courts that apply them. For many companies, their first encounter with the independent contractor issue will be via a letter from the Employment Development Department ("EDD"). The EDD administers the state's personal income tax withholding function; as such, the EDD is responsible for determining whether a worker is an independent contractor for purposes of unemployment insurance and state disability insurance. Hunt Bldg. Corp., 74 Cal. App. 4th 213, supra. The EDD most often audits a company through (a) a truly random audit; (b) a "tip" from a hostile former employee or independent contractor who wants to cause problems for the company; or (c) an innocent call, from a supposed independent contractor, who inquires about her right to unemployment at the conclusion of a specific project, or disability insurance upon sustaining a work-related injury. Unfortunately, many technology companies, like many employers generally, will at some point face one, two or all three of those situations.

(c) Example: the "right to control" test

The EDD uses the California common law test, otherwise known as the "right to control" test. See e.g., Southwest Research Inst. v. Unemp. Ins. Appeals Bd., 81 Cal. App. 4th

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705 (2000). Under the "right to control" test, the EDD looks at the following factors to determine if a worker is an independent contractor or an employee:

Right to control

The right to control the manner and means of performance is the most important factor. If the worker has the right to control the manner and means of performance, that worker is more likely to be considered an independent contractor.

Right to terminate at will

The right to terminate at will, without notice or without cause, is a strong indicator that the worker is an employee. Remember, independent contractors generally perform projects. They generally work until the completion of the project. Moreover, as with most vendor contracts, independent contractor agreements generally require some advance notice from the terminating party.

Distinct occupation

If the worker has an occupation or profession distinct from the company, then that worker is more likely to be considered an independent contractor. If the success of a company depends on a worker's services (i.e., the company and the worker are not distinct), then the EDD is more likely to conclude that the worker is an employee.

Level of supervision

Independent contractors do not work under the direct or extensive supervision of the hiring company. Similarly, independent contractors are typically not trained by the company and do not receive performance evaluations.

Industry practice

If the kind of service being performed by the worker is usually performed in the industry by an independent contractor, the worker at issue is more likely to be an independent contractor. On the other hand, if companies in the industry often use employees to perform the same tasks, the worker is more likely to be an employee.

Own tools and resources

Independent contractors generally furnish their own tools and resources to get the project done. Independent contractors often provide their own employees as well.

Duration of service

The length of time that the independent contractor performs services should be short or based upon the completion of a discrete project. Long-term relationships, with undefined or evolving tasks, are generally employer-employee relationships.

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Working for more than one company

If the worker performs services for more than one company at a time, that worker is more likely to be an independent contractor. But this is not a bright-line rule. One person can be considered an employee of two companies at once.

Job location

Independent contractors are generally not required to perform work in a specific office or location. If there is a specific reason that a worker must perform the work on the company's premises, be extra careful! That person may be an employee.

Services do not have to be rendered personally

Independent contractors are hired to complete a project or task. Generally, it is not important who performs the services as long as the project or task is completed. Independent contractors have the right to hire and use employees to assist in their work.

Method of payment

Where the worker is paid by the project, that worker is more likely to be an independent contractor. On the other hand, if the worker is paid an hourly or wage rate, there is greater inference that the worker is an employee. This is often a major stumbling block for technology companies because they almost always hire their independent contractors on an hourly basis. Be careful here!

Realization of profit or loss

A worker who bears the risk of capital investment in her own business is almost always an independent contractor. Moreover, if the worker has the ability to realize profit or loss in connection with her efforts, that worker is more likely to be an independent contractor.

The intent of the parties

Although given only minimal weight, the intention of the parties is also a factor. Did the parties believe the worker was an independent contractor? Did they sign an independent contractor agreement?

No single factor is determinative. There is no magic number of factors. If one factor is very, very clearly in favor of independent contractor status, that factor could be determinative. On the other hand, if some factors lean one way and others lean the other way, the EDD will generally look to the "totality of the circumstances" to determine whether the worker is an independent contractor or an employee.

4. Disadvantages to using independent contractors

(a) Penalties for mis-classification

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The consequences of mis-classifying a worker are severe. The penalties change depending on which court or agency has made the determination. Under the example above, if the EDD conducted an audit of a technology company and determined that one or more of its workers were mis-classified, the company could owe huge penalties for each mis-classified worker. Moreover, given that the statute of limitations is 3-, 4- or 8-years (depending on the circumstances), the audit could target dozens or even hundreds of employees. Masi v. Nagle, 5 Cal. App. 4th 608 (1992). Generally, the penalties imposed by the EDD for each mis-classified worker are:

● Payment of California income tax the employer should have withheld, estimated at 6% of the employee's total compensation. Cal. Unemp. Ins. Code § 13020; Rev & Tax. Code § 18663.

● Payment of state unemployment insurance contributions at a rate of up to 3.4 of the employee's compensation. Cal. Unemp. Ins. Code § 982.

● Payment on state disability insurance contributions the employer should have withheld, estimated at 1.3% of the employee's compensation. Cal. Unemp. Ins. Code § 984.

● Interest on all such contributions that should have been withheld. Cal. Unemp. Ins. Code § 1113; Rev. & Tax. § 19521.

● A failure-to-pay penalty of 10% of the total unpaid amount. Cal. Unemp. Ins. Code § 1112.

● An additional penalty of 10% of the total unpaid contributions for failure of the employer to file a return for the employee. If this failure was intentional, or designed to defraud the EDD, the penalty increases to 50%. Cal. Unemp. Ins. Code § § 1126, 1128.

● An additional penalty of up to $1,000 under the California Unemployment Insurance Code for filing a false return or statement. Cal. Unemp. Ins. Code § 2117.

● Potential criminal charges for failure to file a return or for filing a false return of up to $1,000 or one year in jail. Cal. Unemp. Ins. Code § 2117.

Obviously, given the higher federal tax brackets and the greater contributions required for federal Social Security and other programs, these penalties would be even higher if the Internal Revenue Service conducted the audit. The point is inescapable: even a single mis-classified worker can lead to a costly liability for an employer, especially an upstart technology or emerging growth company.

(b) ALERT -- New reporting requirements

Effective January 1, 2001, California companies who use independent contractors have to file a report with the EDD detailing the use of independent contractors who have earned $600 or more in any year. See Cal. Unemp. Ins. Code § 1088.8. Even if the independent contractor has not yet begun work, but the contract calls for the payment of at least $600, that independent contractor must be reported. Id. As a result, all qualifying employers must now report: (a) the full name, address and social security number of the independent contractor; (b) WORD-SF\FSL\61250558.1 10030101

the employer's full name, address, federal/state taxpayer ID numbers; (c) the date the contract was executed or the date the payments first exceeded $600; and (d) the total amount due on the contract. Id. The report must generally be filed with the EDD within twenty (20) days of either making payments totaling $600 or more or entering into the agreement, whichever is earlier. Id. Penalties are assessed for the failure to file timely reports. Id.

(c) ALERT – The "works made for hire" dilemma

In addition to the above disadvantages, there is one other little-known disadvantage of using independent contractors that applies almost exclusively to technology companies. Under Cal. Lab. Code § 3351.5(c), if an independent contractor agreement purports to vest all copyrights and other intellectual property rights in the hiring company on the grounds that all creative works are "works made for hire," then that worker is an employee for purposes of workers' compensation law. Moreover, under Cal. Ins. Code § 686, a relationship which vests intellectual property rights in a company on the basis of the "works made for hire" doctrine is a employer-employee relationship and not a principal-independent contractor relationship.

These statutes pose potentially major problems for technology companies. The technology company benefits from using independent contractors and they gain access to highly-skilled and creative workers by doing so. At the same time, however, the technology company insists on owning the intellectual property rights vested in all work-product created by their workers. Generally speaking, the best way to obtain those rights is through the "works made for hire" doctrine. See discussion in Part IIIB(3)(a), below. Yet, under the California Labor Code and California Insurance Code, technology companies can't classify such works from independent contractors as "works made for hire" without unwittingly changing the worker's status to that of an employee. What, then, is the solution for the technology company who wants to use independent contractors but also wants to protect its intellectual property rights?

Technology companies have only two real options here: (1) they can treat the worker as an employee and thereby obtain the intellectual property rights by virtue of the "works made for hire" doctrine; or (2) treat the worker as an independent contractor, but rely on something other than the "works made for hire" doctrine to protect the company's intellectual property rights. This is an important and often critical choice for most technology companies. If the company chooses option (1), the company has just created an employer/employee relationship. That might not be desirable for all the reasons discussed above. On the other hand, if the company chooses option (2), unfortunately the company may end up settling for less protection. Under option (2), the technology company utilizes an independent contractor agreement that requires that the independent contractor assign her full right, title and interest in copyright, and all other intellectual property rights, to the company. There should be no mention of the "works made for hire" doctrine.

The problem, however, is this: under federal copyright law, an assignment of copyright can be pulled back from the independent contractor within a 5-year window following the 35th anniversary of the date of the assignment. 17 U.S.C. § 203. The company's rights, therefore, are not perpetual. In contrast, if the technology company obtains copyright and other rights from an employee via the "works made for hire" doctrine, the copyright protection lasts for the full life of the copyright (which is currently 95 years from the year of its first publication or 120 years from the date of its creation, whichever expires first). 17 U.S.C. § 302(c).WORD-SF\FSL\61250558.1 11030101

Each employer should weigh this decision carefully. Is it better to call the person an employee in order to secure more lasting intellectual property rights? What is the likelihood that the employee will be creating potentially valuable copyrighted work? If it is great, strongly consider making that person an employee. On the other hand, what is the risk of being audited? Perhaps you still want to include a "works made for hire" clause in your independent contractor agreement, even if doing so comes with some risk? If there is not a great likelihood that the employee will be creating valuable copyrighted works, don't worry: just use your independent contractor agreement, do not include a "works made for hire" clause and, instead, require the employee to assign her copyright interest to the company.

(d) Other disadvantages

Especially for technology companies, there are other disadvantages to using independent contractors that must be weighed against their advantages. First, there is the loss of control over the independent contractor. The technology employer generally will not be able to prevent the independent contractor from working with other companies. Second, there is an impact on morale caused by the lack of continuity. Technology companies, especially younger start-up companies, pride themselves on the atmosphere of their workplace and the loyalty of their workers. Independent contractors undermine both because they are not viewed as permanent or loyal. Finally, there is the constant need to monitor the legality of the relationship. The company is liable in the event that the independent contractor fails to pay her income, Social Security, unemployment, disability, self-employment or other taxes. Moreover, the other penalties that apply in the event of mis-classification mean that all companies must constantly monitor the relationship so that they can defend their decision if necessary to the EDD, the IRS or in court.

B. Protecting Your Valuable Intellectual Property

1. California "trade secrets" protection

California adopted the "Uniform Trade Secrets Act" ("UTSA") effective January 1, 1985. Under California's UTSA, a "trade secret" is defined as:

[I]nformation, including a formula, pattern, compilation, program, device, method, technique or process that:(1) Derives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use; and(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Cal. Civ. Code § 3426.1(d).

California law holds that almost any information can be a "trade secret" provided that the above definition is met. See e.g., MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 520 (9th Cir. 1993) (holding that computer software and databases constitute "trade secrets" under CA law); Cinebase Software, Inc. v. Media Guar. Trust, Inc., [Cite] (ND Cal 1998) (holding that strategic business information such as cost information, supply information and

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marketing/business plans constitute "trade secrets" under CA law); Morlife, Inc. v. Perry, 56 Cal. App. 4th 1514 (1997) (holding that customer lists were "trade secrets" under CA law where the list contained names, addresses, contact persons, pricing information and information about the needs of the customers).

(a) "Misappropriation" of trade secrets

Under California's USTA, "misappropriation" means the improper acquisition, use or disclosure of a trade secret. Cal. Civ. Code § 3426.1(b). Not only is the person who "misappropriated" the trade secret liable, but so too is any new employer or other person or entity who benefited from the misappropriation. See e.g., GAB Bus. Servs., Inc. v. Lindsey & Newsom Claim Servs., Inc., 83 Cal. App. 4th 409 (2000) (new employer held liable for unfair competition when that employer cooperated with its new employee in breaching her fiduciary duties towards her former employer); PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368 (2000) (new employer was jointly and severally liable, along with recently hired employee, when that employee misappropriated her former employer's trade secrets).

(b) Remedies available for "misappropriation"

A plaintiff who believes that its "trade secrets" have been "misappropriated" can seek various sorts of relief:

Monetary damages

The aggrieved party is entitled to recover damages for the actual loss caused by the misappropriation. Cal. Civ. Code § 3426.3(a). Alternatively, the defendant can be forced to pay to plaintiff the amount by which the defendant was "unjustly enriched" as a result of the misappropriation. Id. Finally, if actual damages cannot be proven, the plaintiff may be entitled to a reasonable royalty for no longer than the period of time the use could have been prohibited. Id. at § 3426.3(b).

Injunctive relief

An aggrieved party is also allowed to seek a temporary and/or permanent injunction prohibiting the continued or future misappropriation. Cal. Civ. Code § 3426.2(a); see also Cal. Bus. & Prof. Code § 17203 (enjoining misappropriation of trade secrets as a form of unlawful competition). For example, an injunction under these circumstances can prevent a new hire from assuming job duties at her new firm. PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995). An injunction could also be issued to prohibit the new firm from doing business with any or all of the customers that were unlawfully solicited. Morlife, 56 Cal. App. 4th 1514, supra.

Punitive damages

If the misappropriation was intentional, malicious and oppressive, punitive damages can be awarded against the misappropriating party (limited to an amount not exceeding twice any award for actual damages). Cal. Civ. Code § 3426.3(c).

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Attorneys' fees

Attorneys fees can also be awarded to the owner of the trade secrets if the misappropriation was willful and malicious. See e.g., Vacco Indus., Inc. v. Van Den Berg, 5 Cal. App. 4th 34 (1992).

Criminal sanctions

In addition, criminal sanctions can be imposed under Cal. Penal Code § 499(c) for criminal misappropriation of trade secrets. The federal Economic Espionage Act of 1996 also prohibits the theft of trade secrets and provides severe penalties (up to $500,000) and jail time (up to 15 years in jail) for violations. 18 U.S.C. § 1831 et seq.

(c) Practical steps to protect your trade secrets

Identify your trade secrets and take reasonable steps to safeguard their secrecy

California law requires that, in order to qualify as a trade secret, the company must take "reasonable" efforts to maintain the secrecy of the information. Cal. Civ. Code § 3246.1. What is "reasonable" under the circumstances will vary from company to company and from case to case. The Ninth Circuit Court of Appeals recently held that, by requiring employees to sign confidentiality or trade secrets agreements, a company has taken "reasonable" steps to protect its trade secrets. MAI Sys. Corp., 991 F.2d 511, supra. Other "reasonable" steps include, for example, limiting access to the information only to persons with a legitimate "need to know" and/or being careful not to advertise or publicize the information. Self-Directed Placement Corp. v. Control Data Corp., 908 F.2d 462 (9th Cir. 1990); see also Legislative Committee Comment to California USTA.

Use an effective trade secrets agreement

Although your right to protect trade secrets exists whether or not you use a trade secrets agreement, Klamath-Orleans Lumber, Inc. v. Miller, 87 Cal. App. 3d 458 (1978), the agreement itself often serves as a useful reminder to employees of their secrecy obligations. Seeing the obligation in writing reminds the employee of the critical importance of the concept. Moreover, the fact that the employee knows she previously signed a trade secrets agreement will often serve to deter her from acting carelessly or otherwise misappropriating your secrets.

A good agreement typically (a) defines "trade secrets," (b) prohibits the use or disclosure of all "trade secrets" or other proprietary information, (c) requires the return of all such information upon the termination of the relationship, and (d) includes a non-disclosure and/or non-solicitation clause, as well as many other critical provisions. I generally recommend that technology companies include trade secrets coverage in a single, comprehensive agreement entitled, "Confidentiality, Non-Disclosure and Innovations Assignment Agreement." This agreement makes clear, among other things, that the employee is obligated, both during employment and forever thereafter, from using or disclosing your trade secrets for any reason whatsoever. See e.g., Muggill v. Reuben H. Donnelly Corp., 62 Cal. 2d 239 (1965) (enforcing a

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trade secrets agreement which contained a covenant not to use or disclose trade secrets); American Paper & Packaging Prods., Inc. v. Kirgan, 183 Cal. App. 3d 1318 (1986) (same). A sample form agreement is included at the end of this article.

Conduct "exit interviews"

Exit interviews serve several useful functions, one of which is to remind employees (again) of their post-termination obligation to protect and safeguard your trade secrets. During the interview, be sure to ask the employee if she is taking any documents, computer data, rolodexes, "contacts" databases, or any other information with her. The answer will generally be "no," but asking the question makes your point regardless of the answer. In addition, be sure to get the name of the departing employee's new employer so that you can send a letter to the new employer informing them of their soon-to-be new employee's obligations to you. Be careful: you must get the employee's consent prior to sending such a letter! Generally, the "Confidentiality, Non-Disclosure and Innovations Assignment Agreement" sought and obtained the employee's consent before she was hired. In addition, have the employee sign the "Termination Checklist" authorized by that agreement.

Demand the return of all company property prior to departing (and search the departed employee's workspace to confirm compliance)

During the exit interview, or some other time prior to separation, make a formal (but polite) demand that the employee return all confidential, proprietary or "trade secrets" documents, data, files and other information. In addition, if you have any concerns whatsoever, search the former employee's workstation to determine if any sensitive information was tampered with or is missing.

Notify the departing employee's new employer

As discussed above, assuming you have the employee's consent, notify her new employer that she previously executed a trade secrets agreement with your company, and that her obligations under that agreement continue in perpetuity.

Use separation agreements to control departing employees

If you plan to pay the departing employee any separation or severance payments, consider paying those payments over time (e.g., on the company's usual payroll dates until the full severance or separation payment is made). That gives the departing employee more "incentive" to behave appropriately in the future.

2. Using non-solicitation and non-disclosure agreements

(a) What is "solicitation"?

Generally, it is not illegal for a departing employee to simply announce her departure and/or the identity of her new employer. See e.g., Aetna Bldg. Maint. Co., Inc. v. West, 39 Cal. 2d 198 (1957); Hill v. Robb, 33 Cal. App. 4th 1812 (1995); American Credit WORD-SF\FSL\61250558.1 15030101

Indem. Co. v. Sacks, 213 Cal. App. 3d 622 (1989); Rigging Int'l Maint. Co. v. Gwin, 128 Cal. App. 3d 594 (1982). Moreover, a former employee may passively accept business from a former customer, provided that she did not actively solicit that business or otherwise entice or petition it. See e.g., Golden State Linen Serv., Inc. v. Vidalin, 69 Cal. App. 3d 1 (1977).

To be actionable "solicitation," the conduct or speech at issue must be more active and direct. According to the California Supreme Court, to "solicit" means "to ask for with earnestness, to make petition to, to endeavor to obtain, to awake or excite to action, to appeal to, or to invite . . . It implies personal petition and importunity addressed to a particular person for a particular thing." Aetna Bldg. Maint. Co., 39 Cal. 2d 198, supra.

(b) Enforceability of anti-solicitation covenants

Employee agreements not to solicit other employees or customers both during employment and post-termination are also valid under California law. See e.g., Moss, Adams & Co. v. Schilling, 179 Cal App. 3d 124 (1986); Gordon v. Landau, 49 Cal. 2d 690 (1958); Gordon Terminate Control v. Terrones, 84 Cal. App. 3d 176 (1978); Morlife, Inc., 56 Cal. App. 4th 1514, supra. Several cases have even suggested that such non-solicitation clauses are valid even in the absence of any underlying "trade secret." See e.g., Golden State Linen Service, 69 Cal. App. 3d 1, supra, (concluding that the non-solicitation clause was valid without addressing the trade secrets issue); Loral Corp. v. Moyes, 174 Cal. App. 3d 268 (1985) (even in the absence of trade secret misappropriation, a covenant not to interfere with an employer's workforce is enforceable if it meets the "rule of reason"); John F. Matull & Assoc. v. Cloutier, 194 Cal. App. 3d 1049 (1987) (enforcing covenant not to solicit that was not tied to any claim of trade secrets).

(c) Remedies for breach

The remedies available for the breach of a contractual covenant are generally the same as for a traditional breach of contract. Cal. Civ. Code § 3300. These remedies include: monetary damages (based on actual damages, lost profits or restitution); liquidated damages (based on a valid and enforceable liquidated damages provision); and injunctive relief (to return information or prevent future breaches).

3. Obtain copyright, patent and trademark protection

Federal copyright, patent and trademark laws also offer protection for the "intellectual property" owned by technology companies. What follows is a brief outline of the major protections available to certain intellectual property (in very simplified terms):

(a) Copyright protection

Under the Copyright Act of 1976, all "original works of authorship" can be copyrighted. 17 U.S.C. § 102(a). To be eligible for protection, the original work must be "fixed in a tangible medium of expression." Id. In other words, the work must be reduced to writing, stored on a magnetic tape, painted on a canvas, designed into a brochure or somehow reduced to a form that can be seen, heard, touched or experienced. It follows, therefore, that ideas alone are not subject to copyright protection. Id. at § 102(b). The expression of an idea (i.e., the fixation of an idea into a "tangible medium of expression"), however, is protectable. Id. at § § 101, WORD-SF\FSL\61250558.1 16030101

102(a). Copyright law will protect derivative works and compilations of works under certain circumstances. Id. at § 103(a).

Holders of copyrights are entitled to the exclusive rights of reproduction, adaptation, publication, performance and display of the protected work. 17 U.S.C. § 106. Unlike trade secret protection, which potentially lasts forever, copyright protection will generally last 75 years beyond the date of first publication, or 100 years from the date of first creation, whichever expires first. Id. § 302(c).

Copyright vests immediately when an authored work is fixed in a tangible medium of expression. Id. at § 102(a). There is no requirement that the work contain a copyright notice (©) or that the copyright be registered with the Copyright Office. Id. § 106. However, if the copyright was previously registered with the Copyright Office, the aggrieved party is also entitled to monetary damages and attorneys' fees if they succeed on a claim for infringement. Id. at §§  504, 505.

(i) "Works made for hire"

Under the Copyright Act, all works created by an employee for her employer are "works made for hire." 17 U.S.C. § 201. In the absence of an agreement to the contrary, the employer owns the copyright in all such works. Id.

(ii) Caveat: independent contractors

As discussed above, be careful before including a "works made for hire" clause in your independent contractor agreements! You might want, instead, to include an assignment clause. There are advantages and disadvantages to both strategies, so consider your options carefully. See Part IIIA4(c) above.

(b) Patent protection

Whereas copyright generally protects the expression of ideas, patents protect the ideas themselves. In order to be eligible to obtain a patent from the U.S. Patent and Trademark Office, the idea must be useful and must fit into one of the following categories: process, machine, manufacture, composition of matter, ornamental design or biological plant. 35 U.S.C. § 101 et seq. The idea must also be novel; that is, it must not already be commonly known or in public use. Id. at § 102(a). Moreover, the idea must be non-obvious to a person with ordinary knowledge and skill. Id. at § 103.

Obtaining a patent prohibits all others from using, making or selling the patented invention for 20 years from the date of issuance of the patent. 35 U.S.C. § 154(a). Attempting to qualify the invention as a trade secret would provide unlimited and perpetual protection, whereas patent protection is limited. Id. The U.S. Patent and Trademark Office requires that substantial information be disclosed during the process of obtaining a patent. Id. at § 122. This could result in a loss of competitive advantage, even assuming that a patent is ultimately issued.

Obtaining patent protection is beyond the scope of this article, and you should consult experienced patent counsel to fully understand this very complicated area of the law.WORD-SF\FSL\61250558.1 17030101

(c) Trademark protection

One of the key goals of trademark law is to help the consumer identify a specific product as originating from a particular seller (trademark) or service provider (service mark). A trademark or servicemark is an indicator of the source of origin of a particular product or service. The trademark helps consumers recall the products they have used that were helpful in the past and to reject those that were not. In a sense, a trademark is a recognition of the goodwill that a particular product or seller has built up. Whereas copyright and patent protection generally seeks to protect the rights of the creator (and thereby to create incentives for more creation), trademark law seeks to protect and assist the consumer. This is a critical distinction.

Only distinguishing marks are enforceable. In other words, it must generally be obvious that the designation is being used by the seller to distinguish its product and indicate its origin. Generic marks are not enforceable. If there is only one word or name used to describe all sellers' versions of that item, one particular seller cannot monopolize the use of that word or name.

Generally speaking, trademarks are given legal protection against infringement upon their adoption, use in commerce, and "affixation." The first to use a mark in the sale of goods or services is the "owner" of the mark. "Affixation" occurs when the mark is placed on the goods, on the containers for the goods, on displays associated with the goods, on tags or labels associated with the goods or, if the foregoing are not feasible, on documents associated with the goods. The "owner" of a mark can sue for trademark infringement to prevent such unlawful activities as "palming off," counterfeiting, false advertising or unauthorized use.

Generally speaking, the employer is the manufacturer of the goods or the provider of the service. Moreover, the employer typically places the goods or services "in commerce." Thus, the employer typically "owns" the trademark or servicemark. See e.g., Scranton Plastic Laminating, Inc. v. Mason, 187 U.S.P.Q. 335 (1975).

4. Enforcing the employee's "duty of loyalty"

Under California law, every employee owes a common law duty of loyalty to her employer which precludes the employee from competing with the employer in any way and/or soliciting the employer's customers or employees for her own (or another's) benefit. See e.g., Bancroft-Whitney v. Glen, 64 Cal. 2d 327 (1966); Fowler v. Varian Assoc., Inc., 196 Cal. App. 3d 34 (1987).

C. Hiring Your Competitors – So Enticing and So Very Risky

Technology companies, like many traditional companies, often seek to hire their competitors' employees. There is a sense that the competitors' employees come with critical information, skills and experience that allow the employee to contribute immediately and substantially from the first day of employment. The employee understands the new employer's business, the traits and skills that will be helpful and, potentially, the relevant supplier and customer bases simply because of her former experience. To many technology companies – especially growing ones – those are traits too good to pass up.WORD-SF\FSL\61250558.1 18030101

1. California favors employee mobility

In one very real sense, California law allows technology companies great freedom to hire whomever they wish. Cal. Bus. & Prof. Code § 16600 codifies the state's fundamental public policy against post-termination covenants which attempt to prevent an employee from working with her next employer-of-choice. According to Section 16600,

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.

Although there are a few very limited exceptions, California courts generally refuse to enforce non-compete clauses in employment or other agreements. See e.g., Scott v. Snelling & Snelling, 732 F. Supp. 1034 (ND Cal. 1990). In addition, California courts generally refuse to enforce non-compete clauses that are contained in contracts that purport to be governed by the other state's laws. See e.g., Hollingsworth Solderless Terminal Co. v. Turley, 622 F.2d 1324 (9th Cir. 1980) (refusing to enforce a covenant not to compete which purported to be governed by Pennsylvania law, where it was legal, on the grounds that it was against the "strong" public policy of the state to do so); Application Group, Inc. v. The Hutner Group, Inc., 61 Cal. App. 4th 881 (1998) (court determined that a covenant to compete was illegal based on Bus. & Prof. Code § 16600).

Without a valid, enforceable covenant not to compete, a technology company's employee can quite her job and join any other company, including a competitor. Moreover, the competitor can then begin to solicit other employees from the technology company in order to get their talent. The solicited employees are all free to leave and work for the competitor, provided they use their general skill and knowledge in performing their services for their new employer. Under such circumstances, generally nothing illegal has occurred. See e.g., Diodes, Inc. v. Franzen, 260 Cal. App. 2d 244 (1968) (holding that "no actionable wrong is committed by a competitor who solicits her competitor's employees . . . so long as the inducement to leave is not accompanied by unlawful action").

2. "Trade secrets" law sets the boundary

However, and this is a crucial limitation: it is not okay for the departing employees to use or disclose their former employer's "trade secrets" or other proprietary information either (a) in obtaining a new position, (b) in performing employment services once hired, or (c) at any time thereafter. See e.g., Bayer Corp. V. Roche Molecular Sys., 72 F. Supp. 2d 1111 (N.D. Cal. 1999); Morlife, 56 Cal. App. 4th 1514, supra; Courtesy Temp. Serv., Inc. v. Camacho, 222 Cal. App. 3d 1278 (1990). It is here that California law places a very real limit on an employee's mobility and right to work. Technology companies who hire the competitors' employees must be careful to ensure that doing so does not violate California's trade secrets law.

3. Hiring without violating "trade secrets" laws

Generally speaking, hiring an "at will" employee from a competitor does not, without more, constitute misappropriation of a trade secret. See e.g., Metro Traffic Control, Inc. v. Shadow Traffic Network, 22 Cal. App. 4th 853 (1994). The reasoning is that the competitor's

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"stable of trained employees" does not constitute that competitor's "trade secret." Id. at 862; see also Diodes, 260 Cal. App. 2d 244, supra. A competitor is generally allowed to hire those competing employees, and the employees are not required to "wipe clean the slate of their memories." Moss, Adams & Co., 179 Cal. App. 3d at 129, supra.

In other words, not only can the competitors' employees be hired, but they are free to bring with them the general knowledge, skills and experience from their prior job. On the other hand, however, if the new employee subsequently uses or discloses trade secrets learned during her prior employment, that employee and her "new" employer will be liable for misappropriation.

Technology companies can run into problems, however, if they fail to proceed very, very carefully in this area. The following suggestions are helpful:

Conduct a pre-hire investigation into the employee's confidentiality, non-disclosure and non-solicitation obligations

Some courts have held that the "new" employer has an affirmative duty to investigate and determine if hiring the employee places the employee in a position to disclose trade secrets. See e.g., PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1369 (2000); Imax Corp. v. Cinema Tech., Inc., 152 F.3d 1161 (9th Cir. 1998). As a result, technology employers should specifically inquire if the potential employee has signed any confidentiality, proprietary information or other type of non-disclosure or non-solicitation agreement with any former employers. If so, the technology company should request copies of those agreements and then examine them carefully. Even if a customer's identity is not a "trade secret," the former employer can seek to enforce a non-solicitation covenant previously executed by your newly-hired employee. See e.g., Loral Corp., 174 Cal. App. 3d 268, supra; Gordon, 49 Cal. 2d 690, supra; Morlife, 56 Cal. App. 4th 1514, supra. Ask yourself: Can the employee really be of benefit to you given the terms of these prior agreements?

Analyze your competitor's business, and their creative works, for the existence of "trade secrets"

Analyze the extent to which your competitor made efforts to keep its customers' identities secret. Did they list their customers on their web page or in marketing materials? If so, the identities of its customers are probably not "trade secrets." Cf., Moss, Adams, 179 Cal. App. 3d at 128-30. Your new employee is therefore more likely to be able to call upon those former customers once she joins your new company. Do the same for other issues: to what extent is your competitor's business model secret? What about its marketing strategy? Does your competitor utilize a relatively secret or unique method, formulae or strategy that you are hoping the employee might bring with him? If so, you might want to reconsider.

Warn the new hire not to take any documents, computer files or other information with her when she leaves and not to bring any such information with her into your place of employment

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As discussed above, some courts have held that the "new" employer is jointly and severally liable, along with the new employee, for the misappropriation of her former employer's "trade secrets." PMC, 78 Cal. App. 4th 1369, supra. It is therefore imperative that the technology company who hires a competitor's employee(s) make clear that she is not to bring any documents, files, computer diskettes, marketing plans, pricelists, source code or other information of any kind from her former employer without clearing every such piece of information with you first.

Include appropriate trade secrets warnings in offer letters, employment agreements and other documents

Given the nature of the technology company's business, and the types of employees it hires, the company should be aggressive about monitoring, educating and warning employees about trade secrets issues.

Avoid focused hiring. Hire based on what skills the candidate can bring, not what information she knows

Avoid hiring which targets specific positions or employees within your competitor's company. Such "focused hiring" gives the appearance that you are attempting to obtain information rather than general personal skills. Ask yourself: are we hiring this person because of what she knows or because of what she can do?

D. How New Sexual Harassment Laws Impact Technology Companies and Their Employees

Of course, what constitutes "sexual harassment" is the same from case to case and company to company. There is a legal definition of sexual harassment that applies to technology companies just as it does to more traditional companies. However, there have been a few recent amendments to California's sexual harassment laws that are having a unique impact on technology companies.

1. Employee personal liability

California's sexual harassment laws are codified in FEHA. Cal. Gov't Code § 12940 et seq. Under one new amendment to FEHA, which took effect January 1, 2001, any employee who engages in unlawful harassment is personally liable to the plaintiff for damages and attorneys' fees. Id. at § 12940(j)(3). This amendment modified previous California law which held that, although the employer was always liable, co-workers could not be held personally liable for their own acts of harassment. Carrisales v. Dept. of Corrections, 21 Cal. 4th 1132 (1999) (overturned by AB 1856, which became § 12940(j)(3)).

The recent economic surge in technology, internet, and e-commerce companies has created millions of wealthy, young employees. Primarily through stock options, employees at many technology companies have seen their net worth skyrocket in recent years. If an accused harasser has valuable stock options or is perceived as being wealthy, a lawsuit is almost sure to follow the allegations. Moreover, as a result of this new amendment to FEHA, the alleged

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victim is likely to sue not only the company but also the individual harasser. Employees at successful technology companies may very well become frequent targets for sexual harassment plaintiffs.

2. Protection for independent contractors

Under previous California law, independent contractors were not offered legal protection from sexual harassment. See e.g., Fisher v. San Pedro Peninsula Hospital, 214 Cal. App. 3d 590 (1989). Effective January 1, 2001, however, independent contractors are now entitled to sue for damages for sexual harassment which violates FEHA. Cal. Gov't Code § 12940(j). To be entitled to FEHA protection, the independent contractor must meet all of the following criteria: (i) the independent contractor has the right to control the performance of the contract for services and discretion as to the manner of performance; (ii) the independent contractor is customarily engaged in an independently established business; and (iii) the independent contractor has control over the time and place the work is performed, supplies the tools and instruments used in the work, and performs work that requires a particular skill not ordinarily used in the course of the employer's work. Id.

As discussed above, one of the attractions to using independent contractors is that they are afforded less legal protection under employment laws. That has changed, somewhat, with the passage of this new amendment. Independent contractors now can bring sexual harassment suits. This is a risk and "cost" that may lessen the attractiveness of the independent contractor option for some technology companies.

E. Wage/Hour Exemptions for Technology Employees

Over the past year, many technology and other companies became quite familiar with the "Eight-Hour-Day Restoration and Workplace Flexibility Act of 1999." This law is also known as "AB60" (its California Assembly Bill number). While a thorough analysis of AB60 is beyond the scope of this article, certain parts of AB60 dramatically impacted technology companies.

1. The prior federal law

Beginning January 1, 1991, a federal law allowed computer-consultant and other technology companies to pay their computer specialists on an hourly (i.e, not salary) basis while still allowing them to qualify as "exempt" employees. Pub. L. No. 101-583 (Nov. 15, 1990). As much as anything, the passage of this law helped to create the explosion of computer consulting companies. Employers "outsourced" their computer and networking needs to these companies.

2. The prior state law – before AB60

Effective January 1, 1998, then-Governor Pete Wilson repealed California's daily overtime law and replaced it, instead, with a federal-style weekly overtime law. Under Governor Wilson's new law, employers were required to pay overtime wages for hours worked by non-exempt employees in excess of 40 per week. Daily overtime was a thing of the past.

3. AB60WORD-SF\FSL\61250558.1 22030101

Organized labor was furious about Governor Wilson's repeal of daily overtime, and they launched an aggressive grass-roots effort to repeal the new law. They succeeded in June 1998 with the passage of AB60. See generally Cal. Labor Code § § 500, 510-517, 554, 556, 558 and 11821 (codifying relevant parts of AB60).

Generally speaking, as a result of AB60, an employer became obligated again to pay overtime to an employee in California if that employee worked in excess of 8 hours in a day or 40 hours in a week, unless that employee qualified as an "exempt" employee. (Stats 1999, Ch 134). Under California law, to be "exempt," an employee had to be paid a minimum monthly salary and had to fit into either the (a) "executive" exemption, (b) "administrative" exemption, or (c) "professional" exemption. 29 C.F.R. § § 541.1, 541.119 (executive); 29 C.F.R. § § 541.2, 541.201-541.215 (administrative); 29 C.F.R. § 541.301-541.315 (professional).

4. AB60's impact on technology companies

Computer companies, and technology companies that employed computer workers, quickly saw the effects of AB60. For almost a decade, these companies had been treating their hourly computer employees as "exempt" professionals. No more under AB60. To be considered for an exemption under AB60, there was an initial requirement that the employee receive a salary. That automatically excluded many computer professionals and other technology employees who were paid hourly.

Moreover, computer workers rarely if ever work an 8 hour day. It is not uncommon, for example, during deadlines for a computer programmer to work for two or even three straight days with only minimal naps. AB60, in effect, told these computer workers that they had to confine their efforts to an 8 hour day. Moreover, AB60 told employers that their already highly-paid computer workers would now be getting overtime. AB60 was creating a serious problem for technology and computer companies.

5. The solution – SB88

Adopted as "emergency" legislation, SB88 reinstated certain highly-compensated computer professionals to their "exempt" status, regardless of whether these workers were paid a salary or on an hourly basis. Cal. Lab. Code § § 512, 515 and 516. Accordingly, employers are no longer required to pay overtime to these specific computer professionals no matter how much they work. Id.

To be an "exempt" computer professional under SB88, the employee must be:

primarily engaged in work that is "intellectual" or "creative" and that requires "the exercise of discretion and independent judgment";

"highly skilled" and proficient in the theoretical and practical application of highly specialized information to computer systems analysis, programming and software engineering;

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paid at least $41 per hour (which shall be adjusted annually for inflation on the 1st of October of every year); and

"primarily engaged" in one of the following duties:

(a) The application of application of systems analysis techniques and procedures, including consulting with users, to determine hardware, software or system functional specifications;

(b) The design, development documentation, analysis, creation, testing or modification of computer systems or programs, including prototypes, based on and related to user or system design specification; or

(c) The documentation, testing, creation or modification of computer programs related to the design of software or hardware for computer operating systems.

Regardless of the above, the exemption will not apply to the following types of computer workers: (a) entry-level employees who have not yet attained sufficient skill to work independently; (b) an employee who is engaged in the operation of computers or in the manufacture, repair or maintenance of computer hardware or related equipment; (c) an employee who is an engineer, drafter, machinist, or other professional who is highly dependent on or who uses computers in her or her work, or who is skilled in computer-aided design software, but who is not in a computer systems analysis or programming occupation; (d) an employee who is a technical writer or who writes content intended to be read by customers, subscribers, or visitors to computer media such as the Web or CD's; and (e) an employee who creates imagery for special effects used in motion pictures, television or the theatre industry.

Technology and other companies who employ computer professionals and wish to avoid paying costly overtime should review the job descriptions for all computer workers and, if necessary, update them to be consistent with AB88.

F. Immigration Issues

For years, technology companies have faced a shortage of highly-skilled workers. In 1998, for example, the New York Times reported that the Commerce Department predicted that the United States would need more than 1.3 million new information technology workers -- an average of 138,000 per year -- in the next ten years. In March 2000, the Wall Street Journal reported that high-tech companies were claiming a shortage of 269,000 workers. There were simply not enough American engineering graduates to fill the exploding demand, and technology companies began looking overseas for additional employees.

Historically, in their efforts to recruit foreign nationals, technology companies have used H-1B visas. These visas allow skilled foreign workers – often engineers and others with high-tech backgrounds – to come to the United States to fill specific positions. Employers file for the visas by claiming that a specific position, most generally in information technology, cannot be filled by the available U.S. employee pool. Previously, the available number of aliens who could receive H-1B visas was 115,000 per fiscal year.

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In October 2000, in the face of tremendous pressure from the high-tech industry, Congress enacted the "American Competitiveness in the 21st Century Act" (the "Act"). The President signed the bill on October 17, 2000. Silicon Valley cheered the action, claiming that the Act's increase in H-1B visa allotments would give technology companies access to the skilled workers they needed.

In a nutshell, the Act raised the limit on H-1B visas from 115,000 per year to 195,000 per year (through the end of fiscal year 2002). In addition, the Act exempts colleges, universities, non-profit research organizations, and government research organizations from the visa "cap." The Act also increases the portability of the H-1B visa holder by allowing any current H-1B visa holder to accept and begin employment with a new employer upon the filing of a new H-1B petition by that new employer. Finally, the Act allows an employer to file for extensions of the employee H-1B status in 1-year increments, beyond the current 6-year maximum, provided that certain conditions are met. The Act raised the filing fee for an H-1B visa from $610 to $1,110. Certain employers are exempt from this fee.

If your company believes that it might want to pursue overseas workers, consult with an experienced immigration attorney. Consider using employment agreements that contain "liquidated damages" provisions in the event the employee breaches her agreement. Develop a thorough and on-going immigration compliance program which monitors I-9 documentation throughout the workforce.

CONFIDENTIALITY, NON-DISCLOSURE ANDINNOVATIONS ASSIGNMENT AGREEMENT

As a condition of Employee's employment or continued employment with _______________ ("Company"), a California corporation, and in consideration of the compensation now and hereafter paid to Employee by Company, Employee agrees as follows:

IV.Purpose . Employee understands and acknowledges that: (a) Company operates in a competitive environment and that it enhances its opportunities to succeed by

establishing certain policies, including those reflected in this Confidentiality, Non-Disclosure and Innovations Assignment Agreement ("Agreement"); (b) Company

possesses, and will continue to develop and acquire, proprietary and/or confidential information of a substantial commercial value, which Company is entitled to protect; (c) by reason of Employee's employment with Company, it will likely

divulge to Employee certain of that proprietary and/or confidential information, and Employee will develop, acquire and handle such proprietary and/or confidential WORD-SF\FSL\61250558.1 25030101

information during [his/her] employment; (d) as a result of Company's employment of Employee, Company and Employee have a relationship of trust and confidence

between them; and (e) the value of Company's proprietary and/or confidential information depends on it remaining confidential and private, such that Company

has a compelling interest in protecting its proprietary and/or confidential information.

V.At-Will Employment . Employee understands and acknowledges that [his/her] employment with Company is on at "at-will" basis, and is governed more

particularly by the terms and conditions outlined in Employee's Offer Letter from Company. Nothing contained in this Agreement shall in any way change, alter or

modify the at-will nature of Employee's employment.

VI.Former Employer Information . Employee warrants and represents that [he/she] is not under any contractual or other obligation with any former employer that

might prohibit or in any way circumscribe [his/her] employment with Company. In addition, Employee agrees that [he/she] will not, during [his/her] employment with Company, improperly use or disclose any proprietary information or trade secrets of any former employer or other person or entity, and that Employee will not bring

onto Company's premises any unpublished documents or other proprietary information belonging to any such employer, person or entity unless requested to do

so in writing by Company and consented to by such former employer, person or entity.

VII.Third Party Information . Employee recognizes that Company has received and in the future will receive from third parties, including but not limited to patients, their

confidential or proprietary information subject to a duty on Company's part to maintain its secrecy. Employee agrees to hold all such proprietary and/or

confidential information in the strictest confidence and not to use it or disclose it to any person, firm or corporation except as necessary to carry out Employee's

obligations under [his/her] Offer Letter.

VIII.Proprietary and/or Confidential Information . Employee's employment creates a relationship of confidence and trust between Employee and Company with respect

to any information:

A. applicable to or about the business of Company; or

B. applicable to or about the business of any client or customer of Company, which may be made known to Employee by Company or by any client of Company, or learned by Employee in such context during the period of [his/her] employment.

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All such information has substantial commercial value to Company, is not generally known to the public, and is hereinafter called "Proprietary Information." By way of illustration, but not limitation, Proprietary Information includes any and all technical and non-technical information including patent, copyright, trade secret, and proprietary information, techniques, sketches, drawings, models, innovations, know-how, processes, apparatus, equipment, algorithms, software programs, software source documents, and formulae related to the current, future and proposed products and services of Company, and includes, without limitation, respective information concerning research, experimental work, development, design details and specifications, engineering, financial information, salary information, market research and data, procurement requirements, purchasing, manufacturing, customer lists, business forecasts, sales and merchandising and marketing plans and information. As discussed above, Proprietary Information also includes proprietary or confidential information of any third party who may disclose such information to Company or to Employee in the course of Company's business. Proprietary Information does not include any items or information that has become generally known and made available to the public through no wrongful actions of Employee or others.

IX.Ownership and Non-disclosure of Proprietary Information . All Proprietary Information is the sole property of Company and Company shall be the sole and exclusive owner of all patents, copyrights, moral rights, trade secrets, trademarks and other rights in the Proprietary Information. Employee hereby does and will

assign to Company all rights, title and interest [he/she] may have or acquire in the Proprietary Information. At all times, both during Employee's employment by

Company and after termination of such employment, Employee will hold in strictest confidence and trust all Proprietary Information, and Employee will not use or

disclose any Proprietary Information, or anything directly relating to Proprietary Information, for any purpose whatsoever without the written consent of Company,

except as may be necessary in the ordinary course of performing Employee's employment duties.

X.Return of Company Materials and Proprietary Information . All materials (including, without limitation, documents, files, drawings, models, apparatus, sketches, designs, patient lists, computers, dictation equipment, and all other property) furnished to Employee by Company shall remain the property of

Company. Upon termination of Employee's employment, or at any time upon the request of Company before termination, Employee will destroy or deliver to

Company at Company's option, and within five (5) days of Company's request: (a) all materials furnished to[him/her] by Company; (b) all documents, files, diskettes,

computer hard drives or writings of any kind which are in my possession and which incorporate any Proprietary Information or otherwise relate to Company's business; and (c) written certification of [his/her] compliance with [his/her]

obligations under this section. In the event Employee's employment with Company is terminated for any reason, Employee agrees to sign and deliver to Company the

"Termination Certification" attached hereto as Exhibit A.

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XI.Innovations . As used in this Agreement, the term "Innovations" means: (a) all innovations, processes, original works of authorship, developments, improvements,

machines, compositions of matter, works of authorship, information fixed in any tangible medium of expression, moral rights, mask works, trademarks, trade names,

trade dress, trade secrets, know-how and ideas, whether or not protectable under copyright, patent, trademark, trade secrets or other laws; and (a) all other subject

matter protectable under copyright, patent, trademark, trade secrets or other laws. Innovations includes without limitation all new or useful art, combinations,

discoveries, formulae, manufacturing or surgical techniques, technical developments, discoveries, artwork, software and designs.

XII.Disclosure of Prior Innovations . Employee has identified on Exhibit B attached hereto all Innovations applicable to the business of Company, or relating in any way

to Company' business or demonstrably anticipated research and development or business, which were conceived, reduced to practice, authored, created, derived, developed, or made by Employee prior to [his/her]] employment with Company

(collectively, the "Prior Innovations"), and Employee represents and warrants that such list is accurate and complete. Employee further represents and warrants that [he/she] has no rights to, title or interest in any such Innovations other than those

Prior Innovations specified in Exhibit B. If there is no such list on Exhibit B, Employee represents that [he/she] has neither conceived, reduced to practice,

authored, created, derived, developed nor made any such Prior Innovations at the time of signing this Agreement. If in the course of Employee's employment with Company, Employee incorporates a Prior Innovation owned by [him/her] into a

Company product, process, machine or other Innovation, Company is hereby granted a non-exclusive, royalty-free, irrevocable, perpetual and worldwide license

to make, have made, modify, use and sell such Prior Innovation as part of or in connection with such product, process, machine or Innovation.

XIII.Assignment of Innovations . Employee hereby agrees promptly to disclose to Company, and to assign to Company or its designee, Employee's entire right, title,

and interest in and to each of the Innovations, and any associated intellectual property rights, which Employee may solely or jointly conceive, reduce to practice, author, create, derive, develop or make during the period of [his/her] employment

with Company. I further acknowledge that all Innovations, original works of authorship, concepts, developments, charts, know-how, improvements, trade

secrets, and Proprietary Information which are authored, conceived or made by Employee, solely or jointly with others, within the scope of and during Employee's employment with the Company, are "Works Made for Hire" to the greatest extent

permitted by applicable law. To the extent any of the rights, title and interest in and to Company innovations cannot be assigned by Employee to Company, Employee hereby grants to Company an exclusive, royalty-free, irrevocable, perpetual and

worldwide license (with rights to sublicense through multiple tiers of sublicensees) to practice such non-assignable rights, title and interest. To the extent any of the

WORD-SF\FSL\61250558.1 28030101

rights, title and interest in and to Company Innovations can be neither assigned nor licensed by Employee to Company, Employee hereby irrevocably waives and agrees

never to assert such non-assignable and non-licensable rights, title and interest against Company or any of Company's successors in interest to such non-assignable

and non-licensable rights.

XIV.Innovations Assigned to the United States . Employee agrees to assign to the United States government all [his/her] right, title and interest in and to any and all

innovations whenever such full title is required to be in the United States by a contract between Company and the United States or any of its agencies.

XV.Nonassignable Innovations . This Agreement does not apply to an Innovation which qualifies fully as a nonassignable Innovation under the provisions of Section

2870 of the California Labor Code. Employee has reviewed the notification in Exhibit   C and agrees that [his/her] signature acknowledges receipt of the

notification. Employee agrees to advise Company promptly in writing of any Innovations that [he/she] believes meet the criteria in Section 2870 of the California Labor Code and that are not already disclosed as a Prior Innovation on Exhibit B.

XVI.Cooperation in Perfecting Rights to Proprietary Information and Innovations . Employee agrees to perform, during and after [his/her] employment, all acts

deemed necessary or desirable by Company to permit and assist Company, at Company's expense, in obtaining and enforcing the full benefits, enjoyment, rights

and title throughout the world in the Proprietary Information and Innovations assigned or licensed to, or whose rights are irrevocably waived and shall not be

asserted against, Company under this Agreement. Such acts may include, but are not limited to, execution of documents and assistance or cooperation (i) in the filing,

prosecution, registration and memorialization of assignment of any applicable patents, copyrights, mask works, trademarks or other applications, (ii) in the enforcement of any applicable patents, copyrights, mask work, moral rights,

trademark trade secrets, or other proprietary rights, and (iii) in any legal proceedings related to the Proprietary Information or Innovations.

In the event that Company is unable for any reason to secure Employee's signature to any document required to file, prosecute, register, or memorialize the assignment of any patent, copyright, mask work or other applications or to enforce any patent, copyright, mask work, moral right, trade secret or other proprietary right under any Proprietary Information (including improvements thereof) or any Innovations (including derivative works, improvements, renewals, extensions, continuations, divisionals, continuations in part, continuing patent applications, reissues, and reexaminations thereof), Employee hereby irrevocably designates and appoints Company and Company's duly authorized officers and agents as Employee's agents and attorneys-in-fact to act for and on [his/her] behalf: (i) to execute, file, prosecute, register and memorialize the assignment of any such application; (ii) to execute and file any

WORD-SF\FSL\61250558.1 29030101

documentation required for such enforcement; and (iii) to do all other lawfully permitted acts to further the filing, prosecution, registration, memorialization of assignment, issuance, and enforcement of patents, copyrights, mask works, moral rights, trade secrets or other rights under the Proprietary Information, or Innovations, all with the same legal force and effect as if executed by Employee.

XVII.Notification to New Employer . In the event that Employee's employment with Company is terminated for any reason, Employee hereby grants consent to

Company to notify Employee's succeeding employer, contracting party or business partner(s), as applicable, about Employee's rights and obligations under this

Agreement.

XVIII.Non-Solicitation . During the term of Employee's employment with Company, and for a period of two (2) years thereafter, Employee will not directly or indirectly solicit, encourage, recruit or induce, or cause others to solicit, encourage, recruit or

induce, any employees, contractors or clients of Company to terminate their employment, business or other contractual relationship with Company.

XIX.Injunctive Relief . A breach of any of the provisions contained in this Agreement will result in irreparable and continuing damage to Company for which there will

be no adequate remedy at law, and Company shall therefore be entitled to injunctive relief and/or a decree for specific performance, and such other relief as may be proper (including monetary damages if appropriate). Employee further

agrees that no bond or other security shall be required to obtain such equitable or injunctive relief.

17. Notices. Any notice required or permitted by this Agreement shall be in writing and shall be delivered as follows, with notice deemed given as indicated: (a) by personal delivery, when delivered personally; (b) by overnight courier, upon written verification of receipt; (c) by telecopy or facsimile transmission, upon acknowledgment of receipt of electronic transmission; or (d) by certified or registered mail, return receipt requested, upon verification of receipt. Notices shall be sent as follows:

[Company [Employee] __________________________

[Address __________________________________________________________________________________________________________________

XX.Governing Law . This Agreement shall be governed in all respects by the laws of the State of California, without regard to its conflicts of law principles. Each of the parties irrevocably consents to the exclusive personal jurisdiction of the federal and

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state courts located in California, as applicable, for any matter arising out of or relating to this Agreement, except that in actions seeking to enforce any order or any judgment of such federal or state courts located in California, such personal

jurisdiction shall be nonexclusive.

XXI.Severability . If any provision of this Agreement is held by a court of law to be illegal, invalid or unenforceable, (i) that provision shall be deemed amended to

achieve as nearly as possible the same economic effect as the original provision, and (ii) the legality, validity and enforceability of the remaining provisions of this

Agreement shall not be affected or impaired thereby.

XXII.Waiver; Amendment; Modification . The waiver by Company of a term or provision of this Agreement, or of a breach of any provision of this Agreement by

Employee, shall not be effective unless such waiver is in writing signed by a member of the Executive Committee of Company who is specifically authorized to do so. No

waiver by Company of, or consent by Company to, a breach by Employee will constitute a waiver of, consent to or excuse of any other or subsequent breach by Employee. This Agreement may be amended or modified only with the written

consent of both Employee and Company, and only by a duly executed writing signed by both Employee and the President of the Company. No oral waiver, amendment

or modification shall be effective under any circumstances whatsoever.

XXIII.Entire Agreement . This Agreement represents Employee's entire understanding with Company with respect to the subject matter of this Agreement and supersedes

all previous understandings, written or oral. By signing below, Employee understands and agrees that [he/she] is not relying on any statements, comments or

promises not contained in this Agreement. The rights of Company under this Agreement shall be in addition to the rights of Company under the Offer Letter.

XXIV.Joint Drafting . Employee agrees that this Agreement reflects the joint drafting efforts of the parties. In the event any dispute, disagreement or controversy arises

regarding this Agreement, Employee and Company shall be considered joint authors and no provision shall be interpreted against any party because of

authorship. Employee also agrees that [he/she] is fully informed as to the meaning and intent of this Agreement and has had the opportunity to consult counsel in that

regard. This Agreement is executed voluntarily by each of the parties hereto without any duress or undue influence on the part of any of them.

XXV.Attorneys’ Fees . If any action is brought to enforce any of the provisions of this Agreement, the prevailing party shall be entitled to recover from the other party the

reasonable fees and expenses incurred in connection with such action.

XXVI.Survival . This Agreement (a) shall survive Employee's employment with Company; (b) does not in any way restrict Employee's right or the right of

Company to terminate Employee's employment at any time, for any reason or for WORD-SF\FSL\61250558.1 31030101

no reason, with or without cause; (c) inures to the benefit of successors and assigns of Company; and (d) is binding upon Employee's heirs and legal representatives.

Employee certifies and acknowledges that [he/she] has carefully read and understood all of the provisions of this Agreement, and that [he/she] will fully and faithfully comply with such provisions.

EMPLOYEE:

__________________________________Signature

Name: ____________________________

Dated: ____________________________

WORD-SF\FSL\61250558.1 32030101

EXHIBIT A

[Company]

TERMINATION CERTIFICATION

This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, materials, equipment, patient documents or property, or other Proprietary Information belonging to Gravity Technologies, its subsidiaries, affiliates, successors or assigns (together, “Company”).

I further certify that I have complied with all the terms of Company’s Confidentiality, Non-Disclosure and Innovations Assignment Agreement signed by me, including the reporting of any Innovations (as defined therein), conceived or made by me (solely or jointly with others) covered by that agreement.

I further agree that, in compliance with the Confidentiality, Non-Disclosure and Innovations Assignment Agreement, I will preserve as confidential all trade secrets, confidential knowledge, data or other Proprietary Information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of Company or any of its patients, consultants or licensees.

I further agree that for two (2) years from this date, I will not directly or indirectly solicit, encourage, recruit or induce, or cause others to solicit, encourage, recruit or induce, any employees, contractors or clients to terminate their employment or other contractual relationship with Company.

Date: ___________________

_____________________________Employee’s Signature

_____________________________Name of Employee (typed or printed)

WORD-SF\FSL\61250558.1 A-1030101

EXHIBIT B

LIST OF PRIOR INNOVATIONSAND ORIGINAL WORKS OF AUTHORSHIP

Title Date Identifying Number or Brief Description_______

__ No innovations or improvements

__ Additional sheets Attached

Signature of Employee: _____________________________

Print Name of Employee: _____________________________

Date: ____________________________

WORD-SF\FSL\61250558.1 B-2030101

EXHIBIT C

CALIFORNIA LABOR CODE SECTION 2870EMPLOYMENT AGREEMENTS; ASSIGNMENT OF RIGHTS

“(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of [his/her] rights in an invention to [his/her] employer shall not apply to an innovation that the employee developed entirely on [his/her] own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those innovations that either:

(1) Relate at the time of conception or reduction to practice of the innovation to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

(2) Result from any work performed by the employee for the employer.

(b) To the extent a provision in an employment agreement purports to require an employee to assign an innovation otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

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