Pied Piper Is Like Empty Tables, and Empty Chairs (Silicon Valley – Episode 27)

by Sheppard Mullin Richter & Hampton LLP

“Not much to report this week, dear readers! Everything is perfectly fine.”  Or so says Jared.  But as Gilfoyle is quick to point out, “That’s a lie.”  The problem is that even though the Pied Piper product has incredible buzz, and celebrates half a million downloads, regular people can’t stand using it once they have it.  Pied Piper has a scant 19,000 daily active users, and the product is being savaged in focus groups.  Richard pours his efforts, and almost all of Pied Piper’s remaining funding, into trying to educate the public about what Pied Piper is and how to use it.  But all his efforts yield only one convert, Bernice… and “Pipey,” a horrifying animated flute that pops up to give tips on using the product.  In other words, Pied Piper is “fine” in the same way someone who lost their job and their dog in the same day is “fine”—they’re wretched and nearly broke.  In desperation, Jared goes rogue and secretly starts buying daily users from a “click farm” in Bangladesh.

Meanwhile, over at the competition…

Gavin Belson’s fortunes improve dramatically with the help of a two ex-Pied Piper employees.  First, one of Pied Piper’s customer support employees (Douglas) quits Pied Piper and goes looking for a job with Hooli.  During his interview he discloses Pied Piper’s abysmal daily active user numbers to Gavin.   Gavin realizes Pied Piper’s failure provides an opening for Hooli—not to challenge Pied Piper in the platform space but to sidle into the market for enterprise boxes!  Gavin hires “Action” Jack to build “Endframe Boxes” which Hooli sells to Maleant for enormous profits.

In the blighted world of episode 27, is there even a scrap of a law to protect Pied Piper from being kicked while it’s down by its ex-employees and competitor?  Not really; and not here in California!

Yeah, sure, Douglas likely did something wrong.  Pied Piper’s daily active user numbers are confidential.  For a long time, these numbers weren’t even disclosed to Pied Piper’s employees, and for good reason!  Knowledge of these numbers caused a mass exodus of employees and gave Pied Piper’s chief competitor the insight that if Pied Piper was failing in the consumer platform space, Hooli could easily take over the enterprise hardware space.  Douglas almost certainly breached his confidentiality agreement with Pied Piper when he disclosed this information to Hooli.  But the bad data was certain to leak out anyway, Douglas just happened to be the leak.

On the other hand, Action Jack likely stays on the right side of law.  First, it looks like Hooli put its own Endframe code into the new boxes, not Pied Piper’s code.  Of course, Hooli and Endframe obtained their code by slightly underhanded if not illegal methods.  In particular, Endframe obtained most of its technology by tricking Pied Piper into revealing the secret of its middle-out compression—possibly committing theft of trade secrets or maybe even fraud.  But that’s water under the bridge at this point.  It’s Hooli code in the Hooli boxes, so Action Jack is in the clear on that score.  Furthermore, the idea of building enterprise boxes wasn’t confidential or a trade secret.  When Action Jack was in charge of Pied Piper, he publicized the boxes on Pied Piper’s website, and Jared eloquently railed against them in his blog.  From that point on, anyone was free to run with the idea of building boxes, even Hooli and Action Jack!

Finally, California staunchly protects employees’ rights to compete with their former employers.  In many states, Pied Piper could have included “non-compete” clauses in its contracts with Douglas and Jack.  Non-compete clauses could have prohibited or restricted Douglas and Jack from going to work for Pied Piper’s competitors (like Hooli) for some period of time after leaving Pied Piper.  The law varies by state, but Pied Piper might have been able to subject Jack, Douglas, or both, to at least a one year ban on competing with Pied Piper.

Not so in California!  California law voids any contract that restrains someone from engaging in their profession or trade.  This means that “non-compete” clauses are void and unenforceable in California, (except in very limited circumstances that don’t apply to the typical case of an employee leaving or being fired). In addition, a California employer who includes a non-compete clause in a contract knowing the clause is invalid is committing a crime!  California law had a dramatic impact last season when Hooli lost its lawsuit against Richard because it included an invalid non-compete clause in Richard’s employment agreement.  The mere presence of this caused the arbitrator to invalidate the entire employment agreement.  Most courts might hesitate to invalidate an entire employment agreement just because it contains a non-compete clause, but the non-compete clause itself is definitely out.

Commentators and academics have credited California’s ban on non-compete clauses for helping to create Silicon Valley.  They argue that California’s law promotes the dissemination of ideas, attracts talented employees to California where they can escape the restraints of non-compete clauses, and permits employees to leave their employers to start new, competing businesses.  As just one example, under California law, Richard was free to start Pied Piper even though it would compete with his former employer Hooli.  All this employee freedom seemed great last season, but it may be a bitter pill to swallow now that Pied Piper is on the other side of the law.

Episode 27 brought Pied Piper back to familiar territory—the brink of disaster.  Jared’s ruse of purchasing daily active users from the Bangladeshi click farm might somehow pull Pied Piper back from the precipice, or it might end in tears.  Either way, next episode is certain to be exciting.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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