In Episode 17, Hooli’s lawsuit appears to be nearing its end – with Hooli poised as the apparent victor.  In Episodes 9 and 10 the show had positioned the case so we thought Pied Piper was sure to win.  What happened?  The impact of a rogue witness should not be underestimated.

As the episode opens, the Hooli brogrammers leave a Hooli Nucleus phone in a bar, and Big Head gives it to Richard.  Richard realizes that Nucleus is truly awful.  He calls Hooli and threatens speculates that the phone might end up in the hands of tech bloggers who might publish scathing reviews of it and tank Hooli’s stock (but that this won’t happen if Hooli drops its suit against Pied Piper).  Gavin Belson (Hooli’s CEO) ridicules Richard’s threat speculation, claiming that tech journalists aren’t “real journalists” and would never protect Richard as their source.  After a short stalemate, the lawyers get involved and Pied Piper and Hooli agree to binding arbitration to resolve Hooli’s lawsuit.  As expected, at the arbitration Hooli relies on its manufactured story that Big Head is really an understated genius who was instrumental in developing Pied Piper as part of his brilliant career at Hooli.  After the arbitrator appears to buy this story, Pied Piper puts Erlich on the stand to show that Big Head can’t be genius because Erlich thought Big Head was awesome but Erlich is always wrong.  The strategy works like a charm – until it doesn’t.  Erlich lets slip that Big Head’s terrible app crashed Richard’s laptop and put it in the shop for three days.  When Richard takes the stand he cannot help but be honest and admit that one of the days his laptop was in the shop, he ran a few tests of Pied Piper and made a few tweaks to it using a Hooli computer.  The episode ends with everyone convinced that Pied Pieper has lost the case.

But, does Hooli really own Pied Piper’s technology just because Richard ran a test or two on a Hooli computer?  As I explained in a previous post, California law provides that an employer can require employees to assign their inventions to the company.  However, under California law, an employer is not allowed to claim ownership of inventions that the employee develops entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information, and provided it did not relate at the time of conception to the employer’s business, or actual or demonstrably anticipated research or development of the employer.  Now everyone is sure that Richard lost the case because he used Hooli’s computer to test and tweak one component of Pied Piper.

First, a background point.  California law limits how far an employer can go in claiming ownership of employee inventions.  However, to obtain most such rights in the first place, the employer needs to have the employee sign an agreement that clearly assigns ownership of employee’s inventions to the company.  Employers can make their biggest mistakes, and can end up losing these types of cases, because they have poorly drafted invention assignment agreements (known as “PIIAs”).  Therefore, the first thing Richard’s team should do is read the agreement he signed with Hooli really carefully, because any holes in that agreement might save his case!

Assuming Hooli’s employment agreement with Richard is air-tight, Richard still owns inventions he “developed” without using Hooli’s equipment, so the question is whether running a few tests on one component counts as “developing” Pied Piper on Hooli’s computer.  Interestingly, there haven’t been enough cases interpreting the statute to know exactly how a court might answer that question.  On the one hand, the cases indicate that courts are pretty strict in enforcing the law.  For example, an employee might lose the right to his or her invention by using a company laptop to do development work, even if the employer allows employees to use company laptops for ‘personal purposes.’  On the other hand, based on hints in some of the cases, Richard might prevail by arguing that Pied Piper had been “developed” before he ever “tested” it on Hooli’s computer (after all, the tests worked!).  He might also argue that the test (and tinkering) was to a non-essential component of Pied Piper, and therefore he didn’t use Hooli’s computer to “develop” the specific invention that Hooli wants to own.

Given the facts we have, Richard’s case might not be as doomed as everyone thinks.  Of course, it would have been sooo much better if he had never used Hooli’s computer for anything related to Pied Piper!

What is more confusing to me is why we care about the Hooli lawsuit so much.  As I recall the last episode of Season 1 (the TechCrunch disrupt final), Richard invented a much better and totally different technology—the middle-out technology—at TechCrunch, well after he stopped working at Hooli.  As long as Pied Piper isn’t using the old technology any more (or can design around it) then it might not matter at all if Hooli wins ownership of the old tech.

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As a media lawyer, I also feel obliged to point out an important legal point that Gavin Belson got wrong:  his claim that tech bloggers aren’t “real journalists” and can’t protect their sources.  It is true that when a prototype iPhone was lost in a bar in 2010, the employee who lost the phone and the person who turned it over to the tech blog were both exposed.  It is also true that the lost phone scenario can get complicated, because the phone might be considered “stolen” property.  (In California, someone can be guilty of theft if they have knowledge of or means to inquire as to the true owner of lost property, and they take possession of the property without first “making reasonable and just efforts” to find the owner and to restore the property to him.)

However, the Valley’s tech bloggers are “real journalists” and can protect their sources just like any other journalists if they choose to do so.  California’s press shield law—enshrined in California’s Constitution—provides journalists with absolute protection from being forced to reveal their sources or any unpublished information in a civil lawsuit.  (A criminal defendant might be able to force a journalist to disclose a source.)  California and federal law also say that law enforcement normally shouldn’t be able to use a search warrant to get unpublished information or sources.  In a case in 2006, some tech bloggers went to the mat to protect the identities of their sources, and the court held that the tech bloggers were protected by California’s press shield law and the First Amendment—just like “real journalists.”  The key question was whether the tech bloggers were engaged in gathering and disseminating news to the public.  Because they were, they were protected by the shield law and could not be forced to reveal their sources.

Let’s see how the arbitrator decides…