Business Connections
A Business Law Update
7.15.2005
Protecting Company Ownership in Employee Developments
John C. Stevason
A company’s processes, methods, know-how and other trade secrets, inventions and works of
authorship, are important and valuable assets, and are often necessary to a company’s operations
and competitive advantage. These assets must be protected against misappropriation by others.
In addition, there should exist a clear record of the company’s ownership rights in these assets to
facilitate the sale or transfer of those assets or the business, to defend against infringement claims
by third parties, and to prosecute infringement claims against others.
Since these assets are commonly developed and used by the company’s own employees, the
company should take steps to ensure that intellectual property developed by its employees are
owned exclusively by the company and that its employees are obligated to protect the company’s
assets against unauthorized disclosure or use. This is often accomplished by entering into
written agreements with employees in the form of Inventions Agreements, Non-Compete
Agreements and Confidentiality Agreements.
A.
Initial Hiring Checklist.
The hiring process is the best time to establish the company’s ownership rights in intellectual
property created by its employees, and to protect the company’s intellectual property from
employee misuse. It is also much better to evaluate any limitations on employment and other
obligations to which an individual may be subject while that person is still an applicant, and not
an employee of the company.
The following is a checklist of issues a company should consider before making an offer to any
employee who will have access to and/or create confidential information or intellectual property:
1.
Prior to making an offer of employment, the company should consider asking the
applicant for copies of all agreements the applicant may have entered into with former
employers, not just the applicant’s most recent employer. Restrictions on former employees
often continue beyond the term of employment. Such agreements may include Inventions
Agreements, Non-Compete Agreements, Confidentiality Agreements and Non-Solicitation
Agreements.
2.
It is not uncommon, and good practice, for companies to check references by
contacting prior employers. With respect to any employee who the company itself would want
to enter into a written agreement, the company should consider also asking former employers if
there are any agreements or covenants which would limit or restrict the applicant’s work for the
company. This serves a two-fold purpose. It is a check of the applicant’s own disclosure of such
agreements, and it may also aid in the defense of a subsequent claim by a former employer who
did not inform the company of any restrictive covenants.
3.
Any agreements the applicant entered into with previous employers should be
analyzed to determine the risk of hiring the applicant. An informed decision can then be made
whether to: (a) not hire the applicant, (b) hire the applicant and assume the risks, (c) hire the
applicant but limit the employee’s duties to comply with the restrictions of the applicant’s prior
agreements, or (d) attempt to reach an agreement with the applicant’s former employer to waive
or accommodate some or all of the restrictions.
4.
The company should make sure that the applicant understands that he/she is not to
breach the intellectual property rights of others or violate any agreements with prior employers
while employed by the company. This is most effectively done by including this requirement in
any agreement entered into with the employee. This may offer some protection to the company
should a former employer assert claims against both the employee and company.
5.
The company should consider having the applicant sign one or more of the
agreements discussed below as a condition to an offer of employment with the company. (Note,
while the Inventions Agreement, Non-Compete Agreement and Confidentiality Agreement are
discussed separately below, they may be incorporated as separate provisions in one agreement.
In fact, if the agreements are prepared and executed separately, it is important that the
agreements acknowledge the existence of the other agreements so as not to inadvertently
supersede any prior agreement.)
B.
Inventions Agreements.
Generally, an employee who is expected to develop new ideas, processes or inventions,
or prepare written, artistic or creative works for the company, should be required to sign an
Inventions Agreement. An Inventions Agreement provides for company ownership of
developments and other works the employee may create during the employee’s term of
employment. Some of the important elements of an Inventions Agreement include the
following:
1.
Definition of “Developments”. The Inventions Agreement should include a
carefully drafted definition of what inventions, works of authorship, trade secrets and other
intellectual property (commonly called “Developments”) developed, created or conceived by the
employee during the employee’s term of employment, are to be owned exclusively by the
company. Over-broad provisions may be rendered unenforceable as unconscionable or against
public policy. Further, some creative and inventive applicants may not be willing to sign overly
broad agreements. Certainly, any development that results from the use of any equipment,
supplies or confidential information of the company, or which is created on company time, may
be fairly claimed by the company. Intellectual property created on the employee’s own time,
without using any company support or company information, may also be claimed by the
company under the terms of the agreement to the extent it relates to the company business,
research and development, or work performed by the employee.
Washington Employers: In Washington, Inventions Agreements must comply with the
specific requirements of RCW 49.44.140, which limit the extent to which a company can
claim the inventions of an employee, and which require that the company provide the
employee with written notification of the requirements of this statute.
2.
Assignment. While some rights to some forms of intellectual property may
belong to a company as a matter of law (e.g., copyright under the work for hire doctrine), this is
not true for all rights and all forms of intellectual property. The transfer of some rights requires a
written assignment. The Inventions Agreement, therefore, should specifically provide for the
broadest possible assignment of all rights, title and interests from the employee to the company
with respect to all developments covered by the agreement.
3.
Requirement of Cooperation. Sometimes it may be necessary for the employee
to execute certain documents in the future, either to perfect the company’s rights in the
intellectual property, or to satisfy the requirements of an asset purchaser or bank that wishes
additional assurances of the company’s rights and interests to particular intellectual property.
Therefore, the company should consider including in the Inventions Agreement a provision
requiring the employee to cooperate and execute such documents that the company may
reasonably request in the future, or in the absence of such cooperation by the employee,
authorizing the company to act in the employee’s name in executing such documents.
4.
Record of Employee’s Intellectual Property. To avoid disputes as to what
intellectual property was created during the term of the agreement, it may be prudent to require
the employee to list all inventions and other intellectual property that the employee claims to
have invented, discovered, produced or conceived up to the time of the agreement. If there is no
such intellectual property, the agreement should note this fact. This may help defend against
claims by employees that a particular invention was developed prior to employment with the
company.
C.
Non-Compete Agreements.
A Non-Compete Agreement is designed to prevent an employer from competing against the
company using information, know how, training and experience gained at the company’s
expense. Significant remedies are available to the company, including an injunction preventing
the former employee from working for a competitor or from operating his/her own business in
competition. Non-Compete Agreements must be reasonably limited in duration and geographic
scope. While reasonableness depends on the circumstances, courts in Oregon and Washington
have generally approved restrictions limited to two years or less, and to the geographic area
where the company presently is doing or planning to do business. The scope of the non-compete
covenant may also be limited in ways other than, or in addition to, geographic limitations, such
as limitations by specific customers or industries.
Oregon Employers: In Oregon, a Non-Compete Agreement is not enforceable unless
entered into upon initial employment or a bona fide promotion. An increase in pay or
change in job title is not a bona fide promotion, absent a significant change in job duties
and responsibilities.
Washington Employers: In Washington, a Non-Compete Agreement entered into after
initial employment must be supported by some consideration in addition to continued atwill employment.
The requirements of Oregon law and the risk that an employer in Washington will neglect to
provide additional compensation rendering the Non-Compete Agreement unenforceable,
reinforce the recommendation that the best time to address both ownership issues and the
protection of company intellectual property is at the time of the initial hiring process.
D.
Confidentiality Agreements.
When a Non-Compete Agreement is not appropriate or cannot be obtained, employees with
access to important company information, including information which may have been
developed by them, should sign a Confidentiality Agreement. Such an agreement provides the
company considerably more protection than simply having a policy regarding confidential
information. Unlike a policy, an agreement is enforceable in court. Such agreement also serves
the practical purpose of clearly articulating for the employee his or her responsibilities in
protecting and using confidential information, and emphasizing the seriousness and possible
consequences to the employee for violating those responsibilities. Some of the important
elements of a Confidentiality Agreement include the following:
(1)
Definition of “Confidential Information”. A Confidentiality Agreement should
include a carefully drafted definition of “Confidential Information.” The definition may be
broader than the statutory definition of trade secrets, thereby affording protection to company
information which may not otherwise be protected under the trade secret laws. The definition
should not be so broad as to include public information that is widely known. The definition
should include information which is intangible as well as tangible form, to cover, for example,
Confidential Information which resides in the employee’s memory. It is sometimes useful to be
as specific as possible in the definition without actually revealing any Confidential Information.
Doing this alerts the employee as to the confidential nature of the information, and also helps
overcome possible claims by a breaching employee that he/she did not know the information was
confidential.
2.
Nondisclosure, Limits on Use and Protection of Information. It is not
sufficient simply to prohibit an employee from the unauthorized disclosure of Confidential
Information. Since it is possible to profitably use the Confidential Information of the company
without “disclosing it,” the agreement should also specifically prohibit the use by the employee
of such information for the employee’s own benefit or the benefit of anyone else. The agreement
should also impose upon the employee an obligation to affirmatively protect and safeguard the
Confidential Information to raise the employee’s awareness of his/her duty, to protect the
information, and to lessen the likelihood of “accidental” disclosure.
3.
Duration. The obligations regarding disclosure, use, and protection of
Confidential Information should continue for so long as the information remains confidential
(i.e., is not generally known to the public). The Confidentiality Agreement, therefore, should
continue in effect after the employee’s employment with the company is terminated.
4.
Return of Information. The agreement should also require that upon
termination of employment, or sooner if requested by the company, the employee must return all
company property, including all Confidential Information and all copies of such information, and
destroy or return all documents that contain any Confidential Information.
E.
At-Will Employment.
Washington and Oregon allow for at-will employment. At-will employment means the company
or the employee can terminate employment at any time for any lawful reason or for no reason at
all, without prior notice. This is an important benefit for employers, and can make it easier for
the company to defend against claims raised by terminated employees. Many companies,
therefore, go to great lengths to preserve this at-will relationship. Written agreements such as
those described above are not necessarily inconsistent with the at-will employment relationship.
The at-will nature of the employment, however, should be set forth specifically in any written
agreement.
The author of this article, John C. Stevason, served as chair of Lane Powell's Intellectual
Property and Internet Group. John practices in the areas of Internet and computer issues,
licensing and product distribution, and employment law issues related to electronic
communications. He is past chair of the Oregon State Bar's section on Computer and Internet
Law. He was Co-Editor-in-Chief and an author of Computer Law, a two-volume treatise on
computer and Internet law for attorneys, published by the Oregon State Bar. John can be
reached at stevasonj@lanepowell.com or (503) 778-2144
For more information on these or other business issues, please contact our Business Lawyers at:
Lane Powell PC
(503) 778-2100 Portland
(206) 223-7000 Seattle
businesslaw@lanepowell.com
or visit our website at http://www.lanepowell.com
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