San Jose, Calif. Do restrictive clauses in employment contracts stifle EDA innovation? Some fear that a case in California could set a precedent that does just that.
The debate over the impact of such clauses and even the extent to which they are enforceable under state law has bubbled up around Synopsys Inc.'s trade-secrets-theft suit against Nassda Corp. in the wake of a discovery-phase finding that Nassda's HSIM product includes code "derived" from Synopsys source code while the individual defendants were employed by Synopsys.
The use of "derived," which doesn't imply outright copying, was derided as a slippery slope by E-mail Synopsys Users Group site proprietor John Cooley and ESNUG readers. In postings on www.deepchip.com, they expressed concern that the case could make noncompete, confidentiality/nondisclosure and invention assignment agreements more enforceable under California law and thus stop employees from leaving big EDA vendors to create startups.
An attorney with experience in such litigation told EE Times that restrictive clauses in employment contracts, with the exception of general noncompetes, have been enforceable in California and various other states for years. But the effectiveness of such clauses as a barrier to competition may have little to do with whether they hold up in court: Cooley noted on ESNUG that employers can still bring suit against former employees, which would require the defendants to retain counsel and thus sustain legal fees they most likely couldn't afford. That prospect, they say, is deterrent enough.
The debate kicked off after the discovery referee overseeing the discovery phase of Synopsys v. Nassda found Nassda "copied or derived" 60,000 lines of code in its HSIM circuit simulator from Synopsys source code. " 'Derived' means that you take knowledge of our code and uses it to write other source code a lot more quickly, leveraging our work to produce a new product faster," Rex Jackson, Synopsys' general counsel, told EE Times (see June 21, page 26).
But the finding stuck in the craw of ESNUG's Cooley. "I know Synopsys and Cadence (and probably Mentor and Magma) like to force their workers to sign 'zombie/slave' contracts," Cooley wrote in the ESNUG column that set off the chain. "The zombie clause says, 'We own everything you ever think of.' The slave clause says, 'You can't work for any rival for X years.' "
Cooley asserted in his posting that the clauses are unenforceable under California law but noted that employers could still dangle the threat of costly litigation as a deterrent.
But the fact is that most restrictive clauses in employment contracts are already enforceable under California law, said Darin Snyder, head of the San Francisco office of the law firm O'Melveny & Myers LLP. Snyder has worked a number of high-profile EDA suits, including having represented Avanti in Cadence v. Avanti and Prolific in Prolific v. Magma.
Restrictive employment agreements are not exclusive to EDA, Snyder said: Almost every industry requires that employees agree to such strictures. He classifies the agreements into three categories: noncompete clauses, confidentiality and nondisclosure agreements and invention assignment agreements.
Noncompete agreements the ones Cooley calls slave clauses are generally unenforceable under California law but are enforceable to varying degrees in other states, Snyder said. Each state has its own standard for the scope, length and geography of the contract.
Synopsys and Mentor Graphics Corp. both told EE Times that, in general, they use the California noncompete rules as their standard. Cadence Design Systems declined to comment for this story.
"We don't require employees sign noncompetes," said Synopsys' Jackson. "The only place we seek noncompetes is a place where California says they are enforceable, and that's when we buy a business. We will always ask the key founders for a noncompete as part of the purchase, and a portion of the purchase price is allocated to those noncompetes. One of the assets we purchase is the security in knowing that the founders that started this business we acquired are not going to quit and start a competing business the next day."
Such agreements usually tie in founders for a period of two to four years, Jackson said.
Mentor, Synopsys and most other vendors require that users sign confidentiality and nondisclosure agreements the type referred to as zombie contracts in the ESNUG string which require that employees keep company secrets confidential even after they leave the employer.
"We ask every employee to agree to honor our confidential information both while at Synopsys and should they leave the company," said Jackson. "We recognize employees can and do go to startups or to competitors, but there are circumstances where an ex-employee can put himself or herself in a tough situation, such as leaving Synopsys while working on a specific sales engagement and then 'switching sides' by joining a competitor and working the opposite side of the exact same engagement.
"In cases like these, we will remind the ex-employee of his or her contractual commitment to protect our confidential information. But generally we would not take further defensive action unless we had reasonable evidence he or she had violated this commitment."
Jackson said that the contracts also try to prevent new employees from bringing other companies' confidential material to Synopsys. "Whatever you learned from your prior employer, that's theirs," said Jackson. "Your prior employer doesn't want you to bring it to us, and we certainly don't want it, because it taints us as well."
The contracts also state that in the event an employee does leave Synopsys, the new employer will have a similar employee contract. "Employees make commitments to us that if they were to leave Synopsys to go to another company, that company's nondisclosure agreement would say the same thing that ours says: 'Don't bring any [of the previous employer's] stuff to us.' "
A variation of the zombie contract is the invention assignment agreement, which states that anything an employee invents that's related to the employer's business is the property of that employer. This pact, too, is enforceable under California law.
Jackson noted that new employees are required to complete these agreements but can declare new inventions as their own, up-front, during the employment process. "They can claim their own inventions coming in, and we'll certify that,"he said.
Jackson and Dean Freed, Mentor's vice president and general counsel, noted that employees have an obligation to share new ideas with their employers. If the company doesn't want to pursue the idea, said Jackson, the employee should negotiate an arrangement to break off from the employers and start a new company based on the idea.
What is and is not a violation can get a bit fuzzy. For example, it is not a violation under California law for an employee to write a book, moonlight as an actor or pursue some other non-EDA vocation. Nor is it a violation if, for example, someone in the routing group at Synopsys develops a logic simulator as long as the work isn't done on Synopsys' time or with Synopsys know-how.
ESNUG readers asserted in the string, however, that employers use the contracts to intimidate employees and that the agreements, therefore, stifle in-novation.
"If someone wants to sue you, they can sue you," attorney Snyder acknowledged, but "a plaintiff is required to have a good-faith belief in the grounds for the lawsuit. And in the absence of good cause to bring a lawsuit, you may ultimately have grounds to countersue for malicious prosecution."
Most companies won't sue, he said, unless there is concrete evidence that someone has walked out the door with confidential and proprietary information. And there are ways for designers to protect themselves from losing a suit in the event they are sued by their previous employer (see story, page 37).
Indeed, the overriding message from EDA vendors is that these suits are not filed frivolously.
Jackson said that, off the top of his head, Synopsys has only gone after former employees in five instances during its history, adding that in each case the company had concrete proof that a violation had occurred.
Likewise, Freed said Mentor has only filed three such suits in the past 15 years, all of which were clarified or resolved before they became serious legal matters.
But does that mean violations occur irregularly or that the veiled threat of a suit is effective in stemming the tide of employees leaving to pursue competitive startups?
Industry watchers point out that there is no shortage of EDA startups or of instances where entrepreneurs have left a large EDA vendor and then sold technology back to that same vendor.
Ping Chao, currently a GM at Cadence, has sold two companies to Cadence: PiE Design and Silicon Perspective. Synthesis expert Ken McElvain left Mentor Graphics to start Synplicity. Mark Templeton left Mentor to start library vendor Artisan Components. Pravin Madhani sold floor-planning startup Everest design to Synopsys and recently started up physical-synthesis tool vendor Sierra Design Automation Inc.
But experts say entrepreneurs must be diligent in ensuring they are not taking code with them and must similarly screen their own hires.
Three years ago, for example, a competing company discovered that an employee who had previously worked for Synopsys had "10 Gbytes of Synopsys information on his workstation at work," Jackson said.
"They quarantined the information, and we perused it accordingly," said Jackson. "The idea that someone leaves to do a startup and we sue them as a matter of course is simply something we do not do."