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IBM ordered to ante up $3 million in Papermaster case

Friday, November 14, 2008 · 12:39 pm · 20 Comments

“IBM only had to pay a $350 filing fee to sue Mark Papermaster, the 25-year IBM veteran hired by Steve Jobs last month to run Apple’s iPod and iPhone division,” Philip Elmer-DeWitt reports for Fortune.

“Last Friday, U.S. District Judge Kenneth Karas granted Big Blue the preliminary injunction it sought — based on a noncompetition clause signed in 2006 — and ordered Papermaster to stop working for Apple immediatel,” Elmer-DeWitt reports.

“On Tuesday, the judge ordered IBM to put up a [$3,000,000] bond to cover any costs or damages Papermaster might suffer should it turn out that the injunction should not have been issued,” Elmer-DeWitt reports.

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Comment Feed

20 Comments

Driver

Friday, November 14, 2008 - 1:42 pm · Reply

I guess we’ll see how serious they really are now.
Grady

Friday, November 14, 2008 - 1:46 pm · Reply

This will be interesting to see unfold.
Dasgeek

Friday, November 14, 2008 - 1:48 pm · Reply

They will put up the bond without a second thought.
igads

Friday, November 14, 2008 - 1:56 pm · Reply

No way will IBM gamble on this case. $3 Mil is a lot of money to possibly lose in todays economy. I’m sure it’s going to be a tough sell to their stock holders as well. There will be several people at IBM that will also lose their jobs if they lose this case and the bond. If their attorneys advise them otherwise then the attorneys should be fired.
DLMeyer

Friday, November 14, 2008 - 1:57 pm · Reply

That is a lot of possible damages! What is his anticipated salary that not working for a year could generate that much?
OK. Yeah. I’m the guy who gets outraged when he hears either that an executive earns more than 100X the average of ALL his “reports” or that the same executive gets a huge “bonus” when his department/company suffers a loss and/or most of his reports get none. An executive should get no more than double the average of what his direct reports earn, no bonus if no profit, no bonus if his average report gets none. There is way too much greed out there, and it needs to be controlled, if not (hah!) eradicated.
IKON

Friday, November 14, 2008 - 2:55 pm · Reply

As an Apple shareholder I want 3 million too.

And I won’t differentiate between wining or losing. :-p
Shadowself

Friday, November 14, 2008 - 2:58 pm · Reply

@DLMeyer:
As I’ve posted here before, in general I agree with you about executive compensation (even though I fall into that category myself). I’ve even complained here about what I consider the cases of excessive compensation at Apple.

However, one possible explanation of the large bond *might* be if a treble damages situation exists. I don’t know the details of the law, but often cases where treble damages apply it is a method of making the cost of being wrong extremely painful to the offending party and has little to do with the actual loss. $1 million might not be excessive for total compensation over the next year — think salary, bonus(es), stock options, stock, etc., etc.
Jake

Friday, November 14, 2008 - 3:08 pm · Reply

What about damages to APPLE and APPLE SHAREHOLDERS if the injunction turns out to have been incorrect? IBM should put up a $100 million bond for damage to Apple.
MizuInOz

Friday, November 14, 2008 - 3:09 pm · Reply

@DL Meyer

I have a hypothetical question for you:

Let’s say that an individual develops a new technology and this technology actually boosts his/her (keeping it hypothetical) company’s earnings through the roof. I mean $150 – 200 million extra that year. And exponential growth through the life of the patent and modifications.

And part of his/her (see above) hire on agreement was to be compensated for any new developments that he/she adds to the marketing mix of the company. And that bonus is equal to an industry standard for a royalty stream for a new invention.

Should he/she get it? How much? Even though it would put his/her earnings out of sight of the other employees of the company?

Am I correct in my analysis of your commentary that is it better to share the wealth? (wink wink)

How would you encourage Intrepreneurship (entrepreneurship within a company so that you can keep your employees and reward them for excellence)?

I mean this is all hypothetical, so cogitate away.

By the way, do you feel there is a difference between greed and ambition? Greed and excellence?

Or does everyone just need to go back to pre-January 1984?

I await your wisdom.
Switcher X

Friday, November 14, 2008 - 4:12 pm · Reply

@MizuInOz

If your hypothetical intrepreneur ran down the sales leads, developed the business relationships, manufactured, shipped and installed the product. I would say yes. However, the $150-$200 million in increased sales didn’t come without hard work on everyone else’s part. There is no successful idea without a team of professionals to back it up. So, instead of absconding with a $3-$5 million dollar bonus, show your co-workers that you value them and ask that half of it be redistributed to the employees as a bonus.

In this case “sharing the wealth” can help build a sense of loyalty and accomplishment throughout an entire corporation. It can only make a company stronger, and I don’t see a problem with that.

On the other hand, your intrepreneur can just sit on his cash. Eventually, the amount of money that he gets paid will leak out to the rest of the company and foster plenty of ill will against him. Eventually, no one wants to work with him except for a bunch of toadies and he becomes ineffectual while the company begins to rot from the inside.

Moderation in everything will get you a very long way in this life.
MizuInOz

Friday, November 14, 2008 - 4:42 pm · Reply

@Switcher X

I did not say that the inventor was the only one compensated or “bonused” for the new product. I am asking specifically about the in-duh-vidual who actually came up with the idea.

Now the reason I ask – I have a small RD&D;company and we develop some pretty off the wall stuff and one of the products that has been developed will produce an additional $137 million a year for 13 years (at least) and if I license this technology out to some mfg co – we will be compensated 11 – 15% of the annual gross sales. And all we did was come up with a fairly revolutionary idea and spend our own funds (in the millions) to develop it from napkin notes to final commercially viable product.

We have then agreed to assist in the implementation of the completely new manufacturing process into facilities in seven countries. Average throughput per facility will be 1.5 million units per year.

So, what do I pay the guy who came up with the idea & the new manufacturing process?

Equal to the guy who pushes the broom because I don’t want to hurt any feelers?

“Moderation in everything” – is that the NEW battle cry?

I am paying the inventor 7% of the gross sales. I am compensating EVERYONE else in the company 4%.

And since we are a private company here in Australia, maybe I should invite all the folks on the dole to come get a bit, too. Aye?

What I have learned in the 38 years that I have been doing this – that when I reward the one who shines, the other team members bask in the light and bring out their own goodies.

As an example, in my fifth year in business in Switzerland – where I started the company – we netted $25 million US.

I shared it equally with all of the employees – as you have suggested – several quit – went and did their own thing and I was left holding the bag for the next year with incomplete teams.

We lost 50% of our client base.

So, I started looking at other business models. And W.L. Gore and Associates came up on the radar.

I learned how they run their company – implemented most of the Gore Philosophy into my company and have never looked back.

My employees do not take sick days unless they really are sick, they work with enthusiasm, they do what they say they will do (DWYSYWD & DWWSWWD) and we are growing rapidly in a downturn environment.

I have people coming to ask for positions almost every day.

I guess we are doing something right.

We also live by a success formula that I gleaned from a very famous mathematician:

Success = A + B + C; wherein, A = work hard; B = play hard and C = keep your phuquin mouth shut.

And they all do.

Cheers.
bizlaw

Friday, November 14, 2008 - 4:44 pm · Reply

The amount is not just for Papermaster’s salary, benefits, etc. It’s also to compensate Apple for work that he cannot perform depending on how long this case lasts, the injunction is in place, and the final ruling on the suit.

The bond is paid into the court, NOT to Apple. The court holds it until this matter is resolved.

Apple doesn’t get a dime of this money unless the judge rules in Papermaster/Apple’s favor AND finds damages were incurred.
....and the winner is....

Friday, November 14, 2008 - 6:52 pm · Reply

Papermaster. This guy can’t lose either way. Lucky bastard, I wish I had a noncompetition clause in my contract, I need an extended vacation and 3 millions dollars in spending money.
Small Numbers

Saturday, November 15, 2008 - 9:02 am · Reply

“No way will IBM gamble on this case. $3 Mil is a lot of money to possibly lose in todays economy”

Yes, this could cost each IBM shareholder as much as two tenths of a cent per share.

“IBM should put up a $100 million bond for damage to Apple.”

The funny thing is if Apple proves he was worth that much to them, they pretty much just made IBM’s case for them.

“Let’s say that an individual develops a new technology “

In DLMeyer’s world, no new technology gets developed. There was a place like DLMeyer’s world. It was called the USSR.
Bond is Not Payout

Saturday, November 15, 2008 - 9:05 am · Reply

“I need an extended vacation and 3 millions dollars in spending money.”

PaperMaster only gets 3 milllion if he can show IBM cost him 3 million. Otherwise he’ll get the lower amount he can show that he’s lost. So in essence his position hasn’t changed.
@MizuInOz

Saturday, November 15, 2008 - 9:10 am · Reply

I once put together a company that I sold for a billion trillion dollars. Now I come to Mac news forums an argue with teenagers. And I really like it when other people keep their stupid mouths shut.
...and the winner is...

Sunday, November 16, 2008 - 1:18 am · Reply

Bond is not payout, wrote, “PaperMaster only gets 3 milllion if he can show IBM cost him 3 million.”

The court has already determined that Papermaster’s expected financial loss in not taking the position at Apple is $3,000,000 – not a penny less nor a penny more.

“Otherwise he’ll get the lower amount he can show that he’s lost.”

What lower amount? Who’s to say what precisely what future earnings less than $3,000,000 or more than $3,000,000 Papermaster might accrue? See above.

“So in essence his position hasn’t changed.”

Nonsensical statement, needs further development, lacks sufficient substance, requires additional explanation.

If IBM prevents Papermaster from working with Apple Papermaster gets $3,000,000 and a year’s vacation by judicial edict. If IBM relents, Papermaster gets exactly what he bargained for. Either way he wins.

I seriously doubt that Papermaster will not find meaningful and rewarding employment even if he is not ultimately hired by Apple. Personally, I think that IBM will relent and Papermaster will get business cards with a silhouette of a famous fruit – just as he and Apple intended and agreed.
Bond is Not Payout

Sunday, November 16, 2008 - 9:11 am · Reply

“The court has already determined that Papermaster’s expected financial loss in not taking the position at Apple is $3,000,000 – not a penny less nor a penny more.”

They’ve done nothing of the sort. They’ve required IBM to post $3 million in trust with the court as an amount from which they would decide how much, if anything to give Papermaster and then only if he wins. This is not a judgment for Papermaster for 3 million. If it were, the court case would be over.

“Nonsensical statement, needs further development, lacks sufficient substance, requires additional explanation. “

Quite simply, you get damages awarded to the extent of your loss. If IBM were simply harassing Papermaster, punative damages might be awarded but it seems that there is a real difference of opinion here. If Papermaster prevails, he will be compensated for what a court thinks IBMs moves have cost him, nothing more, nothing less. So, that’s why my legally naive friend, his situation has not changed.

“If IBM prevents Papermaster from working with Apple Papermaster gets $3,000,000 and a year’s vacation by judicial edict”

Not so, if IBM prevails that, it will only be because the court decides Papermaster was not entitled to work for Apple because of an agreement he entered into and Papermaster will get nothing.

It’s only if IBM loses that the judge will decide what damages to award Papermaster and disperse that amount from the 3 million IBM has to post. If they think he’s been hurt to more than the tune of 3 million, IBM will have to pay more. If they think he’s been hurt less, the remaining money will go back to IBM.

But in any case, if Papermaster loses, IBM gets their bond back.
...and the winner is...

Sunday, November 16, 2008 - 1:37 pm · Reply

Bond is not a payout, wrote, “They’ve required IBM to post $3 million in trust with the court as an amount from which they would decide how much, if anything to give Papermaster and then only if he wins.”

The court did not pull the $3,000,000 out of thin air. This number is based on Papermaster’s expected immediate and future earnings in both salary and stock options as an Apple employee. It’s not like Papermaster’s income is based solely on his hourly wage. Did you ever think why the bond was not set at $300,000 or $30,000,000? If so explain.

“This is not a judgment for Papermaster for 3 million. If it were, the court case would be over.”

The case isn’t over, hmm, that’s obvious.

(i) IBM still has the capacity to relent and give Papermaster their farewell blessing and keep the $3,000,000. Papermaster moves into his office at One Infinite Loop and balance is restored in the universe.

(ii) IBM presses forward and loses, Papermaster moves to Cupertino, IBM keeps $3,000,000.

(iii) IBM presses forward and wins, Papermaster moves somewhere, the IBM deposits $3,000,000 into Papermaster’s account.

“Quite simply, you get damages awarded to the extent of your loss.”

Exactly, and what formula for predicting financial income and financial loss will the court employ? Whose side will the court err, IBM or Papermaster?

“… if IBM prevails that, it will only be because the court decides Papermaster was not entitled to work for Apple because of an agreement he entered into and Papermaster will get nothing.”

According to your logic, Papermaster can be released from IBM and denied employment and suffer significant financial losses because IBM says so. Of course, Papermaster will insist that his work at IBM has absolutely no influence or significance related to his employment with Apple.

How does IBM convince the court that Papermaster’s position at Apple is damaging to their interests other than from a purely hypothetical perspective?

What other employment is Papermaster entitled to if not IBM subordinate?

If IBM can exaggerate their claims of damage, Papermaster can exaggerate his claims of financial loss. The court has determined that $3,000,000 is a reasonable estimate.

“But in any case, if Papermaster loses, IBM gets their bond back.”

How does Papermaster lose? If the court decides that there is no loss of competitive advantage for IBM, Papermaster gets to work with Apple – this was his first choice. If the court decides that Papermaster’s employment with Apple is a significant blow to IBM’s future then Papermaster receives millions in financial compensation for resigning from IBM.

I think that IBM is caught between a rock and a hard place. If IBM does not have to compensate Papermaster this would indicate that his worth to IBM was nil. If Papermaster’s worth to the IBM is nil, how could Papermaster pose any significant competitive advantage to Apple? If IBM claims that Papermaster is worth millions to IBM the questions worth asking are,

(i) Why is Papermaster desiring to leave IBM?
(ii) Was IBM stingy in its salary and benefits package?
(iii) Is $3,000,000 enough?

Bottom line, a noncompetitive agreement is just that. IBM has no authority to prevent Papermaster’s work for Apple. Papermaster has to agree that, during a limited time at Apple, he is not to engage in any activity related to his work with IBM. All Apple has to do is provide a job description that is significantly different from IBM’s. Case closed.

If IBM thought that Papermaster’s integrity was adequate while working for IBM why wouldn’t they think that Papermaster would adhere to his noncompetitive clause even when working for another company? I think that IBM would have a better case if they could prove Papermaster colluded with Apple in the future by presenting evidence of industrial espionage than presenting the court with collection of unsubstantiated and murky hypotheses. In fact, if IBM could prove that Papermaster violated his contract then IBM has a good chance to sue Apple as well, reap hundreds of millions of dollars, and send Papermaster to BOP. Wouldn’t that be worth all the trouble?
Bond is Not Payout

Sunday, November 16, 2008 - 6:35 pm · Reply

“(iii) IBM presses forward and wins, Papermaster moves somewhere, the IBM deposits $3,000,000 into Papermaster’s account.”

Under what possible scenario do you think IBM wins AND has to pay damages.

Learn something about how court cases and damages in general work before posting. The bond is there in case IBM loses, not in case they win.

“According to your logic, Papermaster can be released from IBM and denied employment and suffer significant financial losses because IBM says so”

Firstly he voluntarily signed the agreement with IBM, so this is happening because something Papermaster and IBM voluntarily agreed that Papermaster now wants out of.

Second IBM have agreed to pay him for that year, so he has no loss.

Third IBM is not preventing Papermaster working for any company which does not compete with IBM.

Is the word “Noncompete” in the “noncompete agreement” confusing you? Or is it the word “Agreement”?

“If the court decides that Papermaster’s employment with Apple is a significant blow to IBM’s future then Papermaster receives millions in financial compensation for resigning from IBM.”

You are completely mistaken. If the court decides the IBM agreement is enforceable Papermaster gets nothing and does not get to work for Apple until it runs out, if they still want him.

“why wouldn’t they think that Papermaster would adhere to his noncompetitive clause even when working for another company? “

Because by working for a competing company Papermaster breaches the agreement. He can’t work for a competing company under any terms. That’s the whole point of a noncompete.

So this turns first on whether the court believes IBM competes with Apple (that should be a slam dunk for IBM) and second on whether the terms of the noncompete are reasonable. That’s Papermaster’s only possibility for success.

You seem to be confusing two concepts. Even if he does go to Apple, Papermaster (and any other person) is still constrained from taking his other company’s trade secrets and other proprietary information and using them. There IBM would usually have to show that he’d done that and could seek damages from Papermaster and Apple.

But when it comes to an agreement not to go and work for a competitor, all IBM needs to do is show that Apple is a competitor and the Papermaster is working for them.

To get the agreement overturned, Papermaster needs to show that IBM is not a competitor of Apple or that the restraint on trade is unreasonable.

He may succeed in that, he may not, but if he loses, he DOES NOT get the 3 million.