Let's say you provide web-based software in a SaaS
subscription model. What if your reseller or strategic business
partner works against you to redesign and reverse engineer your
software so they can launch a competing product?
This is what happened to Warehouse Solutions (WSI) in the recent
U.S. case Warehouse Solutions, Inc. v. Integrated
Logistics, LLC (May 8, 2015, Fed. CA 11th Cir.). WSI
developed and sold a web-based software product known as
"Intelligent Audit" which interfaced with UPS and FedEx
tracking systems to allow companies to track and manage packages.
Integrated acted as a reseller of "Intelligent Audit",
but was also a competitor to WSI, in the sense that Integrated sold
its own package-tracking software. The reseller relationship
between WSI and Integrated, however, was never documented in a
written agreement. The parties had verbal discussions
about the confidential and proprietary nature of the
"Intelligent Audit" software.
Although Integrated never had access to the source code for
"Intelligent Audit", it had high level administrator
access rights to the software, and therefore had much broader
insight into the features, functionality and structure of the
software, compared to the typical end-user.
On the side, unknown to WSI, Integrated developed its own
web-based package-tracking software product that was visually and
functionally similar to "Intelligent Audit". Integrated
even went so far as to give its own software developer access to
"Intelligent Audit". Eventually, Integrated dropped
"Intelligent Audit" and began selling its own competing
product under the ShipLink brand name.
WSI then sued Integrated for reverse engineering and copying its
software, and through various court proceedings, the claims came
down to the issue of trade secrets. The court drew a distinction
between a software program's underlying source code, which may
be a trade secret, and the program's "look and feel"
and "functionality," which cannot be protected as a trade
secret, since these features are readily apparent to any user.
Since WSI did not enter into a written confidentiality agreement
with Integrated, the trade secret claim failed, and WSI's claim
Lessons for business?
It's worth noting that this case turns largely on U.S.
concepts of "trade secret" protection under the Trade
Secrets Act, and there is no equivalent legislation in Canada.
Canadian software vendors are frequently bound by local U.S. laws
in their dealings with American customers, resellers and strategic
partners, so this case is an important one for Canadian SaaS
providers, even though it involves U.S. law.
There are situations - such as in AirWatch, LLC v. Mobile
Iron, Inc., (Unpublished) No. 1:12-cv-3571 (N.D. Ga. Sept. 4,
2013) - where a software licensor can protect its software
as a trade secret, where it uses written agreements to clearly
preserve the secrecy of the program's functions and
Overall, the message for software vendors and SaaS providers is
that clear written agreements will always be preferable to
handshake deals and verbal warnings about confidentiality.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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