Questions:
Read the case study on pp. 320-321 of the textbook and answer the following questions:
In this case, the parties eventually settled, and Dr. Lee went on to run the Google China initiative. If you were running Microsoft, what would you have done differently in this situation?
Considering that this is a common scenario, how do you recommend companies to respond in the future?
Read the case study on pp. 345-346 of the textbook and answer the following questions:
Based on the standards articulated in the case summary, should the state be allowed to impose a use tax on Quill even though it does not have a physical presence in the state?
Is this the right decision? Should a state be able to impose income taxes on a company whether or not it has a physical presence, as the state supreme court held? Or was the U.S. Supreme Court correct?
GOOGLE v. MICROSOFT: 415 F. Supp. 2d 1018 (N.D. Cal. 2005)
FACTS
In 2000, Dr. Kai-Fu Lee began working as Microsoft’s VP for Research and Development. Lee’s employment agreement with Microsoft contains a limited covenant not to compete:
While employed at MICROSOFT and for a period of one year thereafter, I will not (a) accept employment or engage in activities competitive with products, services, or projects (including actual or demonstrably anticipated research or development) on which I worked or about which I learned confidential or proprietary information or trade secrets while employed at MICROSOFT: (b) render services in any capacity to any client or customer of MICROSOFT for which I performed services during the twelve months prior to leaving MICROSOFT’s employ[ment]: (c) induce, attempt to induce, or assist another to … terminate his employment with MICROSOFT or to work for me or for any other person or entity. If during or after my employment with MICROSOFT I seek work elsewhere, I will provide a copy of this Agreement to any persons or entities by whom I am seeking to be hired before accepting employment or engagement by them.
The agreement provides (1) that it shall be governed by the laws of the State of Washington and (2) that exclusive venue and exclusive personal jurisdiction for an action … shall lie in state or federal court in Washington. Finally, the agreement contains a non-disclosure agreement in which Lee agreed “not [to] disclose to anyone outside MICROSOFT nor use for any purpose other than my work for MICROSOFT any MICROSOFT confidential or proprietary information or trade secrets.
In May 2005, Lee approached Google about leaving Microsoft and coming to work for Google. In July 2005 Lee quit his job at Microsoft, and accepted a job at Google, a California company, but the job title was VP of Engineering at the planned R&D facility in China. Later that day, Microsoft file a complaint against Google and Lee in Washington state court, alleging (1) breach of the agreement not to compete; and (2) breach of the non-disclosure promises and misappropriation of trade secrets, and (3) tortious interference with contractual relations.
Three days later, Google and Lee filed their own lawsuit in a California state court, seeking a declaration that the Microsoft agreement/contract not to compete based on Washington state law is invalid and unenforceable under California law. Microsoft petitioned to remove Google’s lawsuit from the California state court in favor of a federal district court in California [this opinion is the federal district court’s decision].
Meanwhile, in the Washington state case, that court issued a Temporary Restraining Order [TRO] against Google and Lee, lasting 10 days until a full hearing could be held on the issues. During that subsequent hearing, the Washington state court issued a preliminary injunction prohibiting Lee from accepting employment with Google involving competitive activities—including but not limited to: computer search technologies, language or speech technologies, or participating in any set-up or budgeting discussion relating to the R&D facility in China.
The Declaratory Judgment Act provides that in a case of actual controversy within its jurisdiction, any court of the United States may declare the rights of any interested party. Federal courts therefore enjoy unique and substantial discretion in deciding whether to declare the rights of litigants. Microsoft urges this [federal court in California] to refuse jurisdiction in light of the pending Washington state proceeding. Other courts in this district have declined to issue declarations on the enforceability of covenants not to compete. [For example], in DeFeo v. Procter & Gamble, DeFeo worked for P&G in Ohio. His stock option plan included a covenant not to compete. When DeFeo quit his job and accepted a job with Clorox in California, P&G told DeFeo that it would sue him. DeFeo filed a suit in California state court seeking a declaration that the P&G covenant not to compete was unenforceable. One day later, P&G sought injunctive relief in Ohio state court. P&G removed the California case to federal court and the moved to dismiss it. The California court granted the motion to dismiss, reasoning that there was no need for two courts to address the same issue simultaneously, where the issue involves exclusively questions of state law.
Just as [in that case] the court declined to grant declaratory relief because doing so would reward forum shopping, this court elects to stay [stop] this action [in California] by Google and Lee, which they admit they filed to try to secure a California forum. The Washington state court has already held hearings on this case and set a trial date. However, Google and Lee correctly note that in DeFeo and the other cases there is a presumption resting upon the premise that the same issues are pending in both courts. Google and Lee contend that this is not true here.
Google and Lee argue that the Washington state court will apply Washington law on all questions, and that that this distinction is crucial—because California and Washington view covenants not to compete differently. While California law considers covenants not to compete to be void, Washington upholds such covenants. Thus Google and Lee contend that the Washington state court forum … is inadequate to protect their rights under California law.
The flaw in this argument is that Google and Lee fail to explain why they cannot ask the Washington state court to apply California law. Both states adhere to the [the same rules regarding conflicts of laws] in determining whether forum selection and choice-of-law clauses are valid. As these clauses were generated in arm’s length transactions, they are to be construed as reasonable, and thus valid. Courts are permitted to strike down these clauses when application of the law of the chosen state [here—Washington law] would be contrary to the fundamental policy of a state which has a materially greater interest than the chosen state, and if that state would be the place where the contract is to be performed. Therefore a Washington state court could apply California law, if California has a materially greater interest than Washington in the validity of the covenant not to compete, and California would be the place of performance of the contract. This [federal court in California] court hereby stays the case until completion of the Washington state proceedings.
QUILL CORP. V. NORTH DAKOTA: 504 U.S. 298 (1992)
FACTS
Plaintiff in this case, the state of North Dakota, filed an action in state court to require Quill Corporation (Quill), an out-of-state mail order house, to collect and pay a use tax on goods purchased for use in the state. The trial court determined that a seller whose only connection with the customers in the state was by common carrier or the mail lacked the requisite minimum contacts with the state. The state supreme court reversed, holding that the Commerce and Due Process Clauses did not any longer require a physical presence in the state in order for the state to exercise its power over a company. Despite the fact that Quill, a Delaware corporation, had no employees living or working in North Dakota, the court held that advancements in technology and the mail order business as a whole rendered obsolete the law that required a physical presence in the state.
JUDICIAL OPINION (JUSTICE STEVENS)
The Supreme Court of the United States described North Dakota’s tax in the following way:
North Dakota imposes a use tax upon property purchased for storage, use, or consumption within the State. North Dakota requires every “retailer maintaining a place of business in” the State to collect the tax from the consumer and remit it to the State. 23
The state included in the meaning of a retailer, a person who engages in regular or in systematic solicitation of a consumer market in North Dakota. The Supreme Court analyzed the Due Process Clause and the Commerce Clause separately in evaluating the state supreme court’s decision.
“The Due Process Clause ‘requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’”24 This standard has been construed in the past to mean that any company that purposefully avails itself of the benefits of an economic market is considered to have a minimum contact with the state. As long as the tax is related to that benefit, the tax would be proper under the Due Process Clause.
The Commerce Clause, observed the Court,
expressly authorizes Congress to “regulate Commerce with foreign Nations, and among the several States.” It says nothing about the protection of interstate commerce in the absence of any action by Congress. Nevertheless, … the Commerce Clause is more than an affirmative grant of power; it has a negative sweep as well The Clause… “by its own force” prohibits certain state actions that interfere with interstate commerce. 25
One of the instances in which the Commerce Clause would prohibit state actions would be when the state taxes someone who does not have a substantial nexus with the taxing state. The state supreme court reasoned that when one has minimum contacts with the state, the substantial nexus test for Commerce Clause purposes would also be fulfilled. But the U.S. Supreme Court ruled that it is possible to have minimum contacts for purposes of the Due Process Clause, and still not have a substantial nexus for purposes of the Commerce Clause. The history of the Commerce Clause dictates that in order to have a substantial nexus with a state, one must have a physical presence there.