Why is HP suing Hurd?

By Felix Salmon
September 7, 2010
unedifying to date, and now it's certain to get much worse -- and to take place in open court, to boot. With a market capitalization of over $90 billion, suing its former CEO certainly isn't going to move the needle financially. And it's going to take up a large amount of the valuable time not only of HP's executives but of HP's board members too.

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What on earth is the point of Hewlett-Packard suing Mark Hurd? The mutual mudslinging has been decidedly unedifying to date, and now it’s certain to get much worse — and to take place in open court, to boot. With a market capitalization of over $90 billion, suing its former CEO certainly isn’t going to move the needle financially. And it’s going to take up a large amount of the valuable time not only of HP’s executives but of HP’s board members too.

I don’t know who made the decision to launch this lawsuit, but it looks very much like it was filed in a fit of passion after hearing that Hurd had signed on with Oracle. There’s no tactical or strategic rationale for this: it’s just petulance, really.

Does HP even have a chairman right now? It definitely needs one: a grown-up who can tell these people to put away their silly squabbles and concentrate on actually running their business. This lawsuit might be a distraction for Hurd, but it’s going to be much more of a distraction in HP’s executive suite. Basta. Please.

Update: The full suit (all 51 pages of it!) can be found here. On first glance, it’s pretty thin gruel. There’s nothing approaching a noncompete in Hurd’s separation agreement, and HP’s demands that HP be allowed to control all future actions of its ex-employee in perpetuity are simply laughable. It even wants a Special Master appointed “to provide a monthly verified statement of compliance that Defendents have not used or disclosed any of HP’s trade secrets and confidential information”. That kind of invasion, in the absence of any evidence that Hurd has actually done anything wrong, is downright unconstitutional, unless Hurd agreed to it as part of his separation agreement. Which he certainly did not.

Update 2: Slowlearner weighs in on the California jurisprudence, in the comments:

California courts have rejected the inevitable disclsoure doctrine. HP will need to show that there is an actual threat to disclose trade secrets, not just the inevitability of such disclosure by virtue of Hurd’s position.

Comments
12 comments so far

It depends on the severance agreement, how much they paid him, and how much that payment is tied to the conditions in the agreement. From what you say, that doesn’t seem to have been done. The board should have realized that there were only a handful of places Hurd could have gone (unless he did the decent thing and went into VC like most disgraced executives do). And didn’t the board hire an independent law firm to handle this? I would be asking for my money back about now.

But you’re right, they can’t prohibit him from continuing to earn a living, and California courts are known for tossing noncompetes in general. I’ll say what I said in your last HP post – this board is dangerous.

Posted by Curmudgeon | Report as abusive

I think it makes perfect sense for HP to sue Hurd and it will not be a distraction for HP in the least.

It’s only a proactive legal warning to keep Hurd in check from using his HP knowledge as a competitive edge against all future competition with Oracle contracts for some of both of their larger and more juicier customers.

That’s all it is.

Posted by Butch_from_PA | Report as abusive

Felix,

As a lawyer, let me help you with a few things I think you’ve misunderstood:

(1) There is a Non-Compete Agreement

There is a very explicit non-compete embedded in the non-disclosure agreement. See pp. 21-22. And it looks to me like a slam dunk that Hurd violated it – leaving aside whether its enforceable under California law, which I don’t know.

“I agree that for a period of twelve months following the termination of my employment with HP . . . I will not provide services to a competitor in any role or position . . . that would involve” potential conflicts. It defines those conflicts to include taking a similar position with a competitor, or taking a position involving an area Hurd received confidential information about in the two years before termination.

This is a very common arrangement, since there are a lot of jobs where it is very difficult not to use the protected information you know, and it would be very difficult to prove you used it.

(2) Perpetuity

I’m guessing you got the bit about wanting to control Hurd’s actions in perpetuity from their request for a “permanent injunction.” That’s simply a legal term of art that means an injunction entered after a full proceeding, as opposed to one issued to preserve the status quo while the court makes a decision (a “preliminary injunction”). I don’t think that HP was asking for the non-compete to be extended beyond its terms.

(3) Special Master and Verified Statements

A verified statement is simply a statement under oath. So they’re just asking for a monthly statement under oath that Hurd isn’t violating the NDA.

As for the special master independently verifying compliance with the injunctions, that wouldn’t be done “in the absence of any proof that Hurd has actually done anything wrong.” HP would have to convince the court that, at least more likely than not, Hurd is or will violate his agreement. And as I mentioned, he does seem to be in breach. And this is less drastic than the court’s other option – to enforce the agreement by not allowing Hurd to take the job at all.

I certainly don’t see the constitutional issue here.

Posted by AnonymousChef | Report as abusive

To add to AnonymousChef’s comment, while CA law places limits on non-compete agreements that restrict where a former employee can work, it often doesn’t apply to people who get paid lots of money, like Hurd was at HP. Also, the law would be irrelevant in this case, as Hurd settled with HP, and received a severance he wasn’t automatically entitiled to, and in exchange for this severance, he agreed not to work for a direct competitor, which Oracle (via its Sun division) is.

Hurd got a lot of money to leave HP and not sue them, and apparently one of the conditions was that he doesn’t go to a competitor and take his knowledge of HPs plans with him. This is an entirely reasonable request, and they should sue him for immediately breaching the agreement, if not for crippling the future of the company by drastically reducing spending on R&D and impelementing salary freezes and layoffs to puff up short term profits and his bonuses.

Ellison likes to play tennis with Hurd, we’ll see how much he likes him when Hurd cuts Oracle’s engineering so much he has to rely on onerous maintenance agreements to offset declining product sales that will be sure to follow.

Ellison also talks about poisoning relationships with partners who sue them, maybe he should re-think his lawsuit against Google for Android, which is farcical (ok, Google probably isn’t much of a partner of Oracle, but a lot of google’s customers and users are).

Posted by OnTheTimes | Report as abusive

Through Scribd, I got a look at the actual Complaint and its exhibits filed by H-P against Hurd, seeking an injunction against Hurd working for Oracle and seeking damages against Hurd.

The H-P v. Hurd lawsuit Complaint is long and rambling, not necessary in California courts, but in the style commonly used in a defamation campaign by big money players who know the press will get a hold of it. The Complaint looks to me like a lot of it was drafted before Oracle’s press release about Hurd. Had H-P heard, ahead of time, that Hurd was going to Oracle? Or was the long Complaint just a cut, paste and edit of a Complaint previously filed against someone else?

My take on the Complaint is that it is long on generic whining and short on pleading of real facts which are necessary for H-P to bear the factual burdens of proof necessary to get an injunction against Hurd going to work for Oracle, let alone enough real facts to obtain a money judgment against Hurd after trial.

In addition, despite the Complaint having two high powered law firms listed on its first page, it also lists a solo practitioner Allen Ruby as one of H-P’s lawyers. Allen Ruby supposedly signed the Complaint against Hurd, but as shown on its signature page, it was actually signed by somebody else, perhaps Ruby’s secretary. Very weird.

Unfortunately, for all of H-P’s big money legal talent, in its General Counsel’s office and in outside law firms, “someone” screwed up in relying on the non-compete agreement contained in H-P’s standard forms signed by Hurd, and then simply incorporating them into Hurd’s termination of employment agreement. Those agreements are attached as exhibits to the Complaint.

The agreements say they are to be enforced under California law. The covenant not to compete, as written, is simply unenforceable under California Business & Professions Code Section 16600:

“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.”

There’s nothing in the statutory exceptions even remotely close to Hurd’s situation.

Similarly, the contracts’ description of where Hurd is not to compete utterly fails to follow what the State Bar of California’s “Continuing Education of the Bar” books on employment related contracts say are even remotely permissible. There is supposed to be a county-by-county list of where Hurd cannot work, but the draftsman of the non-complete clause (written well before Hurd was terminated) essentially says ‘the entire universe of where H-P does business’.

Dumb, dumb, dumb lawyering. You’d at least think somebody at H-P or its outside counsel would have gone and found the California State Bar book on employment related agreements in California and read it prior to writing Hurd’s termination agreement.

No wonder Oracle feels comfortable hiring Hurd.

I can’t wait to see what the judge assigned to the case does, in terms of granting or denying a preliminary injunction against Hurd working for Oracle.

H-P may have made a very stupid move in suing Hurd, since both H-P and Hurd are located in California. As a result of the publicity about the case, H-P’s legion of present and former important employees in California may learn that the non-compete paragraph in the “Confidentiality Agreement” they signed with H-Pis unenforceable.

Posted by Vania | Report as abusive

Looks like HP wants to fire Hurd and punish him too which is probably what Hurd wants it to look like. HP might win but it looks like they are backing up a stupid move with with the lead stupid department – the lawyers. They need to stick to building computers or at least focus on that and quit being distracted by stupid people ..

Posted by Woltmann | Report as abusive

Chef, that clause was (a) signed in 2008, and (b) makes an explicit exception so long as Hurd stays in California. I still think it’s very thin gruel.

Posted by FelixSalmon | Report as abusive

Did anybody here actually read the documents?

The Complaint is only 17 pages, not 51. The rest comprises the various exhibits documenting Hurd’s confidentiality and non-compete obligations. The Complaint is not long and rambling; to anybody who is familiar with these sorts of civil complaints, it seems entirely unremarkable. (Those are A-List law firms on the caption, after all.)

Three separate confidentiality and non-compete agreements were signed by Hurd, one each in 2008, 2009, and 2010. In any case, the signature date is irrelevant to the non-compete obligations, since those take effect on the date of Hurd’s termination. Moreover, Hurd’s separation agreement, in addition to re-affirming his non-compete obligations, extended the non-compete period from 12 months to 24 months.

The critical issue is whether Hurd’s employment at Oracle will violate those non-compete obligations. While the obligations are less restrictive for employment in California, they still limit his ability to work for an HP competitor. The most relevant provision – section 7(a)- would restrict Hurd, for a period of 2 years, of providing services to an HP competitor in any role that would involve Conflicting Business Activities (broadly definied in the agreement) that result in unauthorized use or disclosure of HP’s Confidential Information (again broadly defined).

The key factual question is thus whether Hurd’s employment at Oracle will result in the use or disclosure of HP’s Confidential Information. I don’t see why that allegation is so implausible. I would expect that Hurd was virtually swimming in confidential information while he worked at HP; I would also expect that much of that information would be very helpful in leading the business lines in which Oracle competes with HP.

I doubt that the lawsuit was filed lightly, in a fit of pique or petulance. High-powered law firms like Gibson Dunn and successful companies like HP tend not to operate that way, especially with a case in the limelight like this one. Their reputations are on the line. But even throwing aside the issue of motives, I don’t see how anyone can judge the merits of the suit on the face of the complaint. The complaint barely skims the surface, and any supporting facts will come out in due course.

Posted by slowlearner | Report as abusive

The enforceability of the non-compete is a different matter. I think that Vania is right to believe that HP will have a difficult time overcoming B&P Section 16600. HP tries to get around that statute by casting its claims as preventing the inevitable disclosure of trade secrets rather than enforcing a non-compete, but I am not sure that is going to work. Although the California trade secret statute authorizes threatened misappropropriate of trade secrets, California courts have rejected the inevitable disclsoure doctrine. HP will need to show that there is an actual threat to disclose trade secrets, not just the inevitability of such disclosure by virtue of Hurd’s position.

Posted by slowlearner | Report as abusive

Felix,

As slowlearner pointed out, the signature date doesn’t matter. NDAs wouldn’t be very useful if a two year old signature couldn’t bind you. The 12 months (as SL pointed out, actually 24) is the period from the date of termination to when the covenants fall off. And while the restrictions under California law are less restrictive than under the law of other states, they don’t go away.

Also, Felix, keep in mind when you speak of thin gruel that a complaint doesn’t need to – and often won’t – plead all the supporting evidence. Its only purposes are to (1) allege that you can prove every element of the tort, and (2) apprise the defendant of the claim you’re bringing against him. You don’t want to get super-specific, only to have Hurd tailor his testimony to the weaknesses in your evidence, or to be stuck alleging something that turns out to be wrong once discovery happens.

California employment law is notoriously pro-employee, so I wouldn’t be surprised if its ultimately unenforceable.

I’m not a California lawyer, so I don’t want to quibble too much with slowlearner, but I don’t think HP is relying on the doctrine of inevitable disclosure – they’re relying on a contract where Hurd admits that he will inevitably disclose if he takes a job like the one at Oracle, and that constitutes threatened disclosure.

IIRC, the California appellate court that dinged the doctrine of inevitable disclosure (I don’t think it was the Cali Supremes) did so because they felt to do so would amend the employment agreement ex post facto. That wouldn’t apply here.

This isn’t airtight – it might be seen as a run around of 16600 – but its something.

Posted by AnonymousChef | Report as abusive

Felix, I agree 100% for once. This is a petulant gesture that serves no rational corporate strategy. HP should be focusing on who they can promote or bring in to build out their future management, not litigating against past management.

As to the length of the complaint, complaints are always long. It takes a number of pages to convey what the parties agreed to, what actions a party took that violated the agreement, and what law governs these agreements and actions (at least in skeleton form).

Slowlearner, if you think that Gibson Dunn cares about what effect filing a litigation that HP wants filed will have on Gibson Dunn’s reputation, you have not spent enough time around lawyers. Lawyers serve clients, and as long as the client isn’t asking them to break the law and can pay the bills, no one much cares how great the legal theories are. Filing this case bolsters the only reputation Gibson Dunn or any other big firm cares about, which is a reputation as a law firm that handles big cases for big companies and gets paid a lot of money for doing so as well as possible under the circumstances. HP would have to be a lot further out of line before GD would say “Actually, why don’t you call up one of our competitors and pay them a few million dollars for filing papers? We’re pretty busy pondering whether the BigLaw model is economically sustainable in this continuing weak economy and whether the practice of law is actually the best use of the talents of the many intelligent people inside our firm.”

Posted by najdorf | Report as abusive

Detailed answers to all questions concerning the Hurd’s Saga: “NDA Experiment Set up by Mark Hurd”

http://www.netvalley.com/silicon_valley/ Hurd_NDA_HP.htm

Posted by Silval | Report as abusive
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