After Deal Talks Falter, Companies Clash on Secrets

, The Recorder

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Sharon Flanagan, Sidley Austin

In Silicon Valley, companies that collaborate one day can become bitter rivals the next.

And two recent trade secrets disputes pitting small ventures against tech veterans Google and Intel highlight the potentially expensive consequences when a company spills its secrets — even under the protection of nondisclosure and confidentiality agreements.

In both cases, the smaller company is accusing the larger one of pretending to be interested in partnership, then ripping off their business plans.

There are risks on both sides of the deal table and no surefire way to prevent what seems at first to be a promising business opportunity from resulting in years of litigation, according to trade secrets lawyers.

"Emerging tech companies need to sell products and should be able to partner with larger companies without having the IP migrate to a competitor," said Spencer Hosie of Hosie Rice, who represents Zettaset Inc. in the suit against Intel.

Hosie complains that when smaller companies act to enforce the terms of a nondisclosure agreement or assert their patent they get "pilloried as a troll."

Paul Hastings partner Bradford Newman, who advises mostly established tech firms, says that accusations of theft are often a knee-jerk — and usually unfounded ­— reaction to a failed collaboration. Actual theft is far less common than startups allege, says Newman, because stealing is simply "bad business."

Companies like Google and Intel spend hundreds of millions of dollars on research and development, he said.

"To steal something rather than buy it — if in fact they did that — is bad business. It's saying, 'We're a huge enterprise with thousands of employees. We do $100 million in M&A every year. And then here comes some little company with this awesome idea. And we don't want to throw them $5 million or $10 million?'" he said. "So I'm skeptical."

In the early stages of a negotiation, both sides want to build trust and seem reasonable. Company executives may hesitate to hold back information or demand protections if they fear it will jinx a deal, lawyers said. But regrets often follow when discussions sour and airtight agreements weren't hashed out in advance.

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