No, you can't take it with you

EDA firms Magma Design Automation and Synopsys have been arguing over patents since July 2004 and have been in active litigation since September of that year. But in April 2005, details of the dispute became public. The case is one of the latest examples of the ongoing struggle in the electronics industry to define, capture and protect that most intangible and yet most valuable of assets: intellectual property (IP).

In May 1997, research scientist Dr. Lukas van Ginneken left Synopsys to work at Magma. Dr. van Ginneken had been at Synopsys for just shy of two years, after spending several years at IBM. After van Ginneken arrived at Magma, the company filed at least two patents that listed him as sole inventor; the patents were approved in 2002 and 2004 (see "A Lawsuit Unfolds," below). In July 2004, Magma sent a letter to Synopsys, warning that Synopsys products may have been infringing on those patents. Synopsys responded by filing a lawsuit, alleging that the patents contained concepts that van Ginneken had developed while he was working at Synopsys. Magma, not surprisingly, vigorously disagrees with Synopsys' version of events.



The stakes in this case are somewhat higher for Magma. It's the smaller of the two companies, reporting $145.9 million total FY05 revenue—just over half of the $244.3 million Synopsys reported for its most recent fiscal quarter (see "Magma versus Synopsys: Financial Comparison," below). Also, although Magma maintains that none of its products depend on the patents in question, it's reasonable to expect that losing access to them could cost the company time, money and perhaps a bit of the technological advantage that some industry observers believe it has.

But even for Synopsys, the litigation will be time-consuming, expensive and distracting, and it's worth asking how the situation could have been avoided. If you run a business in the electronics industry, some of your highly skilled workers will inevitably leave—some to work for your competitors. The trick is how to make sure your IP doesn't go with them.

Be specific, in writing: The first line of defense is typically a confidentiality agreement and disclosure dictating that the employee will protect the private information of the current employer and will not use confidential information from previous employers. This sort of agreement is practically a given at any business in an IP-dependent industry and is frequently part of the employment contract the employees sign when they walk in the door.

But confidentiality and disclosure agreements are only the first step, because they typically don't spell out in detail what information an employee is expected to keep secret. "From an IP standpoint, it would be great if people were like computer disks that could be erased as they moved from company to company," says Caroline Rockafellow, an IP lawyer who focuses on technology businesses at Daniels Daniels & Verdonik. "But the reality is that nobody is a clean slate." As employees change jobs, the ideas they develop become part of their general body of knowledge. "There's always a risk of misappropriation," says Rockafellow, but it's far more likely to be a result of misunderstanding than malice.

A LAWSUIT UNFOLDS June 1995 Dr. Lukas van Ginneken leaves IBM to become Synopsys employee May 1997 Van Ginneken leaves Synopsys to work for Magma December 1997 Magma files applications for the two disputed patents September 2002 U.S. Patent and Trademark Office issues first patent to Magma April 2004 U.S. Patent and Trademark Office issues second patent to Magma July 2004 Magma sends letter to Synopsys, warning of possible infringement September 2004 Synopsys files suit April 2005 Van Ginneken declaration published April 2006 Scheduled trial date SOURCE: COMPANY REPORTS; NEWS RELEASES

The best way to mitigate that risk is through documentation and communication. Detailed, accurate documentation establishes a clear record of what ideas an employee develops, what information those ideas are based on and when the invention occurred. That record gives the company a clear trail of invention that can be used to develop a patent or prove the company's ownership of a trade secret, but it also identifies the point at which an employee transforms ideas that are broadly known into original and potentially valuable IP.

Make exit interviews count: Solid documentation lays the foundation for the exit interview as well; companies that have IP to protect should take this step very seriously. Before an employee leaves, the company should make sure that the work that employee has done is fully written up, including any new ideas or concepts that may be under development. The company should outline in writing what information may be considered a trade secret and what the employee can or cannot do with that information. Finally, that document should be reviewed and signed by both the employee and a company representative.

THREE STEPS TO RETAINING IP WHEN EMPLOYEES LEAVE 1. Be specific, in writing: Clearly and regularly document IP. 2. Make exit interviews count: Discuss company property and appropriate behavior. 3. Do the right thing: Eliminate confusion and help ex-employees make the right decisions.

The process is time-consuming, and it can be difficult to justify the effort and expense, but departing workers will take their cues from the way their employer treats the ideas they've developed. Concepts from failed, shelved or canceled projects are particularly vulnerable, because it's not uncommon for employees to misinterpret corporate disinterest as carte blanche. Even senior, experienced staff members aren't infallible. "Just because something isn't being used doesn't mean former employees can take it with them, but we see it all the time, especially when companies go under," says Rockafellow.

Do the right thing: Part of the problem is that in the end, companies must rely on the ability of employees to finely judge the value, uniqueness and provenance of knowledge acquired over the course of thousands of hours of work. "There's a tremendous burden on the employee," says Rod Berman, a partner at law firm Jeffer Mangels Butler & Marmaro. Berman chairs the IP department at JMBM and regularly gives lectures to both technical and marketing employees at IT companies about protecting IP. "They don't teach this stuff in engineering school," says Berman.

Some companies have been able to take more-forceful steps to prevent an ex-employee from working at a competitor and thus disclosing valuable IP. The laws regarding noncompete agreements vary from state to state—it's especially difficult in California to restrict where a person works—but it is possible to construct short-term noncompete clauses. Also, according to Berman, there have been cases in which a company has been able to obtain an injunction that prevented an ex-employee from working on a very narrow area of technology while employed by a competitor.

However, these are extreme measures and appropriate only under specific circumstances. For most situations, companies can do a great deal of good by doing nothing more than setting clear expectations. "There are unscrupulous people in the world, but they are rare," says Berman. Most folks just want to do the right thing—it's in your best interests to help them figure out what that is.

SO FAR, SO GOOD If it weren't for the little matter of the patent infringement litigation with Synopsys, one could argue that Magma Design Automation is having a reasonably good year. In February 2005, the company announced that Texas Instruments and Sun Microsystems would use Magma tools to help design the next-generation UltraSPARC chip. In early April 2005, NEC agreed to expand its licensing deal with Magma. Finally, at the quarterly earnings call at the end of April, Magma announced FY05 revenue of $145.9 million—up 28 percent from the previous year. But like the optimist pleased with his progress as he passes floors during a 30-story fall, the story isn't finished yet. Magma's stock has not fared well as a result of the litigation. Synopsys is accusing Magma of using Synopsys' trade secrets to develop two patents that cover timing closure, and of outright infringement on a Synopsys patent covering circuit placement. After Synopsys filed the suit in September 2004, Magma's stock price took a quick hit and then continued to drift downward, from roughly $17 per share at the beginning of September 2004 to just under $12 per share in late March 2005. But in early April 2005, Dr. Lukas van Ginneken, whom Synopsys accused of taking trade secrets to Magma, signed a declaration that appeared to confirm many of Synopsys' allegations. In exchange, Synopsys agreed to release van Ginneken from the $100 million lawsuit. Synopsys published the declaration, and the public effect was immediate: Investors hammered Magma's stock, dropping it under $6 per share in just a few days. Magma responded by announcing that it would buy back roughly 5 percent (2 million shares) of its outstanding stock. Van Ginneken no longer works for either Magma or Synopsys, but he remains a major figure in the dispute. He has been deposed by both companies and successfully filed a motion to have those depositions made public, claiming that the declaration published by Synopsys focused on facts favorable to Synopsys, was ambiguous about facts that were unfavorable to the company and implied information that was not true. So far, the lawsuit seems to have had little effect on Magma's day-to-day business. "The litigation is not limiting our ability to penetrate the market and continue to take market share," says Magma president and COO Roy Jewell, pointing to the fact that Magma registered more bookings in the fourth quarter FY05 than in any previous quarter in the company's history. "I haven't heard anything definitive about customers delaying orders," says Garo Toomajanian, research analyst for RBC Capital Markets. The future is harder to predict. The company's BlastFusion tools are based on Magma's FixedTiming technology, which relies on timing closure. Magma claims to have patented parts of its timing-closure technology. Magma actually started the patent fight by sending a letter to Synopsys in July 2004, asserting that Synopsys was infringing on the two patents currently under dispute. And, shortly after Synopsys filed suit, published reports quoted Magma chairman and CEO Rajeev Madhavan vigorously defending Magma's ownership of the patents. Since then, Magma has become significantly more circumspect, saying only that it has not incorporated any Synopsys inventions in its products and refusing to comment on which products depend on the disputed patents; during an analyst conference call in April 2005, Madhavan ducked questions about Magma's use of the patents, citing the ongoing lawsuit. As a result, it's difficult to gauge how great a risk the lawsuit presents to Magma's existing or future products. If nothing else, the lawsuit will be expensive. Magma has set aside $8.5 million to $9 million for litigation expenses in FY06. The trial is expected to begin in April 2006. Rod Berman, partner and chair of the IP department at law firm Jeffer Mangels Butler & Marmaro, believes that the amount of money that Magma has reserved indicates that the company believes it's in for a long, tough fight. "Ordinarily, with two patents, you'd be putting aside half of that," says Berman.—C.C.