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Final Exam 1
Prepared by Constance E. Bagley
EXAMINATION QUESTION
Please prepare a memorandum outlining the legal issues raised by the foregoing facts. Include ethical considerations and strategies for resolution. The purpose of this question is to spot the issues; knowing what is the issue is in some sense more important than knowing the answers. It is okay to say that the answer is not clear; in such a case, present both sides of the argument, then say which argument should prevail, and why. State any and all assumptions, but do not spend valuable space on non-issues or extreme tangents. If you need further factual information to assess fully the legal issues, note what additional facts you need to know and how those facts would affect the outcome. Ignore any applicable statutes of limitation. Be sure to explain the principles of law you are applying and your reasoning. Refer to cases (both legal and teaching cases) to the extent it’s helpful to do so. Please remember that your answer is limited to 1500 words, double-spaced, in 12-point font.
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Bette Bugatti graduated from the Stanford School of Engineering with a master’s degree in chemical engineering in 2010. Bette had a passion for fast cars tempered by real concern about climate change. She had worked in the Peace Corps between college and business school had seen first-hand the ravages of drought. Bette was convinced that these were harbingers of things to come if emissions of greenhouse gases were not reduced markedly.
Although Bettewas impressed with the performance of the Tesla electric car, she knew that its price was prohibitively expensive for most consumers. She dreamed of developing a new type of electric-vehicle battery that would be cheaper, lighter and faster charging than existing lead-acid batteries. Bette experimented with a variety of possibleliquid electrolytesfor such a batteryin the Stanford labs and thought she was on to something, but she graduated before she was able to build a prototype.
The reality of having to repay her student loans and care forher aging parents required Bette to put her electrolyte research on hold. Bette accepted an engineering job at DuPont’s research facility in Delaware where she worked on cleaning solvents. Although DuPont anticipated beginning research and development on new electrolytes for batteries for electric vehicles, they had not yet commenced work when Bette joined the company.
On July 1, 2010, Bette’s first day on the job at DuPont, she met with Sally Saleen, DuPont’s Human Resources representative, and signed a thick stack of forms, including her IRS tax withholding form and the designation of her life insurance beneficiary. Within the stack was a nondisclosure agreement, which included an assignment of all inventions related tochemicals and chemical compounds conceived of prior to or during the term of employment (except for those prior inventions the employee listed on “Exhibit A”), a two-year post-employment covenant not to compete, and a provision prohibiting the disclosure or use of any of DuPont’s confidential or proprietary information. When Bette asked Sally what all the legalese meant, Sally told her that it was standard boilerplate every company in the industry used. Bette signed it without reading it and left Exhibit A blank.
In the fall of 2010, Bette tried to persuade the head of R&D at DuPont to explore her idea for a new electrolyte for electric-vehicle batteries, but he dismissed it as impractical. Bette tested her ideas further while working after-hours in the DuPont labs and was delighted when she found a light-weight compound that worked. She called it “Liquid Lightning.”
Having tired of the cold New England winters, Bette returned to California in August 2011, where Allyson Aston introduced her to Marc Maybach at a party. Allyson had shared a house with Bette in Portola Valley while they both were students at Stanford, and Allyson had met Marc at a Charm Charging Corporation sales meeting. Charm was building electric-vehicle charging stations throughout the United States and Europe. Bette had chatted with Marc from time to time about the possibility that Charm might buyher rights to the Liquid Lightning technology, but Charm had baulked at her asking price.
Marc Maybachhad developed a novel charging technology capable of recharging the battery in an electric car in one-tenth the time it took to charge conventional batteries while a post-graduate student at the University of California at Los Angeles in 2006-2008.He called it “Kwik Sparkz” and trademarked the name. He and Paula Porsche, a recent graduate of the Anderson School of Business at UCLA, had spent about eight months after graduating from UCLA working on a business plan for a company to exploit the Kwik Sparkz technology, but they were unsuccessful in raising money. They had both maxed out their personal credit cards funding the building of a prototype, and Paula told Marcin May 2009 that she had to “get a real job” because the one-year grace period on the repayment of her business school loans ended that month. Marc hadn’tseen her since then.
On June 2, 2009,Marcmet Fredi Ferrari, a recent UCLA Law grad, who told Marc that she had just lost her job at a Century City law firm due to the financial crisis. Marctold Fredi and a couple of drinking buddies at the W Hotel in Westwood (including Jack Jaguar) about Kwik Sparkz and was delighted whenFrediagreed to draft a patent application for the technology in exchange for 40% of the equity of any company formed by Marc to exploit it. Marc’s buddyJack accepted a new job in London on June 15, 2009, and proceeded to file a patent application in the European Union on July 1, 2009, on the technology Marc had described over drinks at the W bar.
Fredi filed a U.S. preliminary patent application covering theKwik Sparkz technology on August 31, 2009.Marcwas listed as the sole inventor. Although Mark’s ex-girlfriend Toni Toyota had helped him work out some of the kinks in the technology, they had broken up in May 2008 after Marc came on to Toni’s sorority sister at a UCLA fraternity party.
Fredi also promised to raise $1.1 million from the UCLA Law alumni network to start a company based on Kwik Sparkz. To that end, she sent out an email to the 100,000-member list serve and was delighted when 47 alums agreed to buy 1.1 million shares of Series A preferred stock for $1.00 per share. The Series A was convertible into common stock at a rate of one-to-one at the election of the Series A holders with mandatory conversion in the event of a sale of the company with net proceeds to the company of at least $100 million. As a condition to funding the Series A round, Marc agreed to vest half of his common stock in the yet-to-be formed company over a three-year period, with cliff vesting for the first year and monthly vesting thereafter. Fredi incorporated the new company with the name “Quark Inc.”in Californiaon October 20, 2009, butFredi and Marc never got around to forming a board of directors until January 2010. On October 31,2009, Quark issued 1.1 million of Series A stock to the UCLA alums for $1.1 million, one million shares of common stock to Marcat $.01 per sharein exchange for an assignment of all rights to the Kwik Sparkz technology to Quark and a nonrecourse note for $1,000, and 400,000 shares to Fredi in exchange for services rendered in the past and to be rendered in the future.
In March 2010, Quark merged intoCharm Charging Corporation in a stock-for-stock merger. In the merger agreement, Quark and all its stockholders represented and warranted that Quark owned all rights to the Kwik Sparkz technology and did not infringe the rights of others.
The Charm stations were fully automated and built along existing roads so users could pull up to the curb, swipe a credit or debit card, then plug in their vehicle for charging. Charmhad initially sold the individual stations to investors for a fixed fee but also offered an optional operating agreement. Because it wasn’t economical to operate just one station, most purchasers signed on for the operating agreement as well. Once the stations were retrofitted with the Kwik Sparkz technology, Charm’s sales of electricity and charging stations soared. A small investment bank in Florida had taken Charm public at $5 per share in May of 2010.
AllysonAston had accepted a job asthe exclusive sales rep for Charm in Arizona on July 1, 2010. Charm paid her a commission equal to 10% of sales in her region. Allyson also received incentive stock options for 10,000 shares of Charm Common Stock exercisable for $4 per share, which she exercised in June 2011. The stock was trading at $3.50 per share on the date the options were granted and $7.50 per share on the exercise date.
Although Charm’s sales were brisk in Phoenix, they languished in Tucson. Allyson successfully boosted sales by offering Chris Chevy, the purchasing agent for the University of Arizona, a personal “referral fee” equal to 2% of the money charged on the University of Arizona credit cards for electricity purchased at the Charm charging stations. She told Chris that she would pay the 2% out of her commissions. Because all the competitors were part of an industry group that regularly shared prices and shunned members who charged more than the “going rate,” Charm’s rates were the same as its competitors. As a result, the University was not paying any more than it would have otherwise by using the Charm stations.Chris agreed it was a “win-win,” and he sent out a memo to all University credit card holders instructing them to use only the Charm stations.
On October 3, 2011,Fredi (who had recently been promoted to general counsel of Charm) called Larry Lamborghini, chair of Charm’s board of directors,and she told him that she had “some good news and some bad news.” First, the good news: “The U.S. Patent and Trademark office has granted our patent on the Kwik Sparkz technology.” The bad news: “We had to fire Marc because he was harassing the lab techs. We had warned himseveral times, but he kept making crude jokes and displaying pornographic pictures on his desktop computer in his office.” The Charm stock dropped $.50 to $8 per share on heavy trading after both events were announced the next day.
Just when Charm’s management thought things couldn’t get any worse, Fredi got a call from a prominent plaintiff’s lawyer on October 6, 2011, notifyingher that he was bringing a class action on behalf of hundreds of thousands of users who claimed that the retrofitted charging modules in many of Charm’s stationshad damaged their clients’ car batteries.They were suing not only Charm but also all the former shareholders of Quark.
Charm’ssales had been growingin Europe but, also on October 6, Charmreceived a demand letter from a London firm, stating that the Kwik Sparkz technology violated a newly issued EU patent that showed Jack Jaguar as the inventor. The patent holder was demanding that Charm cease and desist using the Kwik Sparkz technology in the EU or pay hundreds of millions of dollars in royalties. Fredi wanted to announce the product liability lawsuit and patent demand letter right away, but Larry persuaded her to wait until Charm could announce its hoped-foragreement toacquire the Liquid Lightning technology. “We should have a deal any day now on the Liquid Lightning acquisition,” he said. “Let’s announce it all at once. That way, at worst, the three events should cancel each other out.” He continued, “Selling electricity at our charging stations has become a commodity. We’ll make far more money licensing Bette’s Liquid Lightning technology to the big electric vehicle manufacturers.”
After Charm agreed to substantially raise its price for Liquid Lightning, the parties signed an agreement in principle late at night on October 10, 2011.Bette Bugatti agreed to sell all her rights to the Liquid Lightning technology to Charm in exchange for 1% of Charm’s common stock.A press release went out before trading commenced on October 11, 2011, announcing the agreement in principle for the acquisition, the lawsuit, and the patent demand letter.It stated that consummation of the Liquid Lightning acquisition was contingent on regulatory approvals, shareholder approval, and execution of definitive documents.
Copyright © 2012 by Constance E. Bagley. All Rights Reserved. License is hereby given for instructors who have adopted Constance E. Bagley, Managers and the Legal Environment: Strategies for the 21st Century (7th ed. 2013), as a course text to use all or part of this sample final exam question as an exam in the course for which said text is required reading. Any other use or publication of this material is strictly prohibited.