HBO's Silicon Valley: A Legal Critique - (Part One)

Silicon Valley, HBO’s sitcom about the travails of a tech startup, tosses out references to intellectual property and other aspects of media law in nearly every episode. And we’ve been asked more than once just how accurate the show’s portrayal of these issues is. The short answer is: very. Considering that these are complicated areas of law that are being played essentially for yuks, the scripts are surprisingly well-researched. There are probably dozens of legal plot points over the show’s four seasons that we could dig into, but we’re going to focus on two storylines in particular. In Part One, we look at Silicon Valley season two and how it deals with employer ownership of employee IP. In Part Two, we’ll skip to season four to talk about patent trolls and copyright infringement (with maybe a word or two about the Children’s Online Privacy Protection Act).

Hooli v. Hendricks The first episode of Silicon Valley’s second season concludes with a cliffhanger: our hero Richard Hendricks, founder of plucky startup Pied Piper, receives a text message from his lawyer that he is being sued by tech giant Hooli on the grounds that he “stole Pied Piper.” It’s a conflict that runs through the course of the next 10 episodes, concluding only in the season finale when the judge arbitrating the dispute concludes that Richard must indeed forfeit Pied Piper’s IP to Hooli under his employment contract with the series antagonist, only to rule moments later, in a last-minute deus ex juris, that the contract is void thanks to an illegal non-compete clause. What exactly is Hooli trying to own?

Throughout the season, the show never spells out exactly what intellectual property rights Hooli is asserting. “Pied Piper” presumably refers to Richard’s game-changing compression algorithm, allegedly developed during his time as a Hooli employee, rather than to the company itself or any of its more business-oriented assets (such as the trademark rights to the PIED PIPER name or its unintentionally phallic logo). But Hooli can’t be entitled to something that isn’t proprietary to begin with. Therefore, it’s worth thinking about the ways that IP law might plausibly protect something like the Pied Piper algorithm. (For more on the distinctions between categories of IP, check out our article Get Your IP Terminology Straight)

There is no indication that Richard ever filed a patent application in connection with the compression methods embodied in the algorithm. Under the first-inventor-to-file system introduced into U.S. patent law by the America Invents Act, once the invention is publicly used or disclosed, the inventor has a one-year grace period to apply for a patent. It’s not clear from the show’s chronology whether that ship’s sailed by the time of Hooli’s lawsuit.

It’s also not clear whether the compression technology would even be eligible for a patent. Given Pied Piper’s reception at TechCrunch in season one, Richard’s algorithm seems to be novel and non-obvious (two major preconditions to obtaining a patent). However, software-implemented business methods (such as a new way to store or transfer data more efficiently) have faced increased scrutiny in recent years due to a series of Supreme Court opinions suggesting that such innovations are often mere abstractions that fall outside the scope of patentable subject matter. If Richard has or could still get a patent in connection with the algorithm, Hooli could try to force him to assign it to the company. If the patent rights have already been blown due to public use or disclosure, however, Hooli might be able to press a breach-of-contract claim, on the basis that Richard didn’t disclose the technology in time for them to file their own patent. But the show implies that Hooli's lawsuit threatens to give the company exclusive rights to the compression method (“I’m about to get [Pied Piper] for nothing,” gloats CEO Gavin Belson), and to that extent they might be out of luck. Nevertheless, even if the compression technology per se has passed into the public domain, Richard (and by extension Hooli) might assert copyright in the particular code that he wrote to implement it. Depending on the time investment and expertise necessary to reverse engineer and rewrite the algorithm, that might amount to a de facto monopoly over the technology. Indeed, season one implies that Richard’s techniques are somehow too elegant for Hooli’s own engineers to effectively replicate. In addition, anything related to the algorithm that’s been kept confidential—any encrypted data or server-side code that’s not publicly accessible—would be protected by California trade secret law (the federal Defend Trade Secrets Act not having yet gone into effect when these episodes aired). If Hooli could demonstrate that the right to keep the compression algorithm secret belonged to the company by virtue of Richard’s employment contract, then Pied Piper’s use of the algorithm in connection with its own business might be actionable misappropriation. In addition, as long as the algorithm remained confidential, Hooli might be able to deny third parties access and thus monopolize the technology. Could Hooli own Richard’s algorithm?

Assuming, then, that there’s something proprietary about the Pied Piper algorithm, how strong are Hooli’s claims? At the opening of season two’s second episode, we find Richard in the office of Ron LaFlamme, a caricature of the sort of arrogant, studiously casual young attorney particular to California’s tech scene (one that frankly hits a little close to home). Despite his frat boy persona, LaFlamme immediately asks all the right questions about Richard’s creation of the algorithm: Was it related in any way to his job at Hooli? Did he ever work on it while he was on the clock? Did he use company resources to develop the idea? LaFlamme accepts Richard’s denials with a wink and a nod, but, later in the season, it’s revealed that Richard did in fact run a single test of the algorithm on a Hooli computer during a period when his personal laptop was being repaired. This transgression is treated as the smoking gun that proves Hooli’s case, one that is obscured only by the fact that Richard refers to his laptop as his “girlfriend” in the email correspondence that’s turned over to opposing counsel during discovery. When Hooli’s lawyers decrypt the “girlfriend” cipher during the parties’ binding arbitration, they are able to corner Richard into admitting limited use of Hooli property during Pied Piper’s development. The judge therefore concludes that the technology belongs to Hooli.

Under U.S. copyright law, works of authorship that are created as part of the author’s employment are considered Works Made for Hire and owned by the employer. There’s no analogous “invention made for hire” in patent law, though employers may have a right to a royalty-free license to patents arising from employee efforts under a common-law doctrine called “shop rights.” In addition, many employment agreements, particularly in the technology sector, will contain provisions related to ownership of intellectual property. These will typically require employees to disclose to the company any inventions and assign any patent rights arising from their employment, as well as assign the copyright to any works created within the scope of their employment (to the extent they’re not already owned by the employer as works made for hire). Employment agreements will also usually contain non-disclosure obligations, either within the intellectual property paragraphs or separately or both, that will ensure that the employee must keep confidential any trade secrets arising out of the employment, including information created or discovered by the employee. It’s not unheard of for employment agreements to incorporate IP sections that require employees to assign the rights to wholly personal creative projects, but most are explicitly limited to IP that arises within the scope of employment. In fact, California and many other states have laws that prohibit overly broad assignment provisions that purport to do otherwise.

Therefore, Silicon Valley correctly frames the central issue in Hooli v. Hendricks, which is the extent to which the Pied Piper compression technology was related to Richard’s work at Hooli. Richard describes his job as “quality assurance for mobile messaging.” That sounds pretty unrelated, though maybe not to such an indisputable degree as to make Hooli’s lawsuit frivolous on its face. Yet, because Richard used an employer computer on a single occasion to test his algorithm (which was presumably already substantially developed by that point), he loses. It seems a little unlikely that an entire case would turn on such a superficial fact. It almost certainly wouldn’t be enough to establish that Richard’s code was a Work Made for Hire or that the program was otherwise within the scope of his employment. However, we don’t know the exact language used in Hooli’s employment contract, and it’s not completely implausible that a court might focus on the use of company property to justify enforcement of a broad IP assignment that would otherwise be invalid under California law. What about that non-competition clause that saves the day? Among the secondary non-IP claims that LaFlamme dismisses as “boilerplate nonsense” (a category into which he also lumps Hooli’s breach of contract claim, which actually seems pretty central to the case) is Hooli’s claim that ex-employee Donald “Jared” Dunn (“aka O.J. apparently” as the judge notes) violated the non-compete provisions of his employment contract by going to work for Pied Piper. This seemingly trivial fact, planted in the season’s second episode, returns in dramatic fashion in the finale. Call it Chekhov’s restrictive covenant.

Moments after ruling that Hooli’s employment contracts somehow give it legitimate ownership over any employee IP that happens to pass through company hardware, the arbitrator negates this victory by finding those very contracts void due to the presence of the non-compete clause they had accused Jared of violating. Because such agreements are illegal in California, says the arbitrator, it was as if Jared and Richard had never been employed by Hooli in the first place. The corporation is undone by its own over-aggressive litigiousness. Denouements don’t get more satisfying than that. But is it realistic? Well, sort of. Silicon Valley deserves major credit for building a key plot twist around a very real and somewhat obscure aspect of California labor law. Section 16600 of the Business and Professions Code does indeed void “any contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind,” which has been interpreted to include both non-competition and non-solicitation agreements restricting a former employee’s subsequent employment. (For more about 16600 and restrictive covenants, check out our article Just Say Non)

The show’s fictional arbitrator is also correct that, under Section 16600, overbroad non-compete agreements aren’t merely unenforceable. Recognizing the chilling effect of employers continuing to insert such provisions in their employment contracts, California courts usually declare them void in their entirety rather than reinterpreting them in light of 16600 or enforcing them within the limitations of the statute. That said, it’s quite a stretch to imagine a judge finding that a company never had any kind of employment agreement with its employee just because their contract contained an illegal non-competition clause. As a rule of contract interpretation, courts will “sever” an unenforceable section of a contract while enforcing the other sections when it makes sense and is fair to do so. In addition, most contracts will explicitly include a “Severance” paragraph (look for it amid the boilerplate at the very end) that further encourages courts to do just that. Only where the illegal terms undermine the overall premise of the parties’ agreement will courts void the entire contract. Given what we know about the facts of Hooli v. Hendricks, the judicial twist that concludes Silicon Valley Season 2 seems pretty unlikely. Then again, as we often counsel clients, litigation is an unpredictable enterprise. Perhaps the arbitrator, who in an earlier episode expresses distaste for the tech industry’s sense of entitlement, is swayed by an underlying animus towards evil Hooli titan Gavin Belson or by sympathy towards Pied Piper’s ragtag gang of nerds. It wouldn’t be the first time an emotional response to the litigants drove a questionable interpretation of law. “Justice, baby,” whispers Pied Piper’s lawyer as the judgment is announced. Overall, despite some dramatic license, the fingerprints of Silicon Valley’s legal consultants are all over season 2. If you want to learn about intellectual property and other legal issues that tech companies face, you could do worse than tune in. Check back with the Knowmad Law Blog next week, when we’ll jump to the most recent season of Silicon Valley and use the show to discuss patent trolls, the Children’s Online Privacy Protection Act, and copyright infringement for musical compositions.