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ACQUIRING OWNERSHIP OF EMPLOYEE TRADE SECRETSThe most prudent means of guaranteeing your company's ownership of a trade secret developed by your employees is to use a written legal agreement. (It's possible, under certain circumstances, for an employer to acquire rights to an employee-created trade secret without a written agreement under legal rules known as "employed to invent" and "work made for hire" laws. Two types of agreements work: an agreement signed before the employee begins working for you, or one signed after work has started, called an assignment. An agreement signed during or after employment requires additional payment.
Agreements with Employees Most employers don't use written employment agreements,
which are a traditional place to put language giving the company ownership
of employee creations. If you don't use employment agreements, your
ownership of employee-created trade secrets can be established in the
employee's NDA. The terms of ownership are in the Sample Employer Ownership
Provisions, below, and can be added to the employee NDA in Chapter 4. This language states that you own any intellectual
property created by your employee. If the employee disregards the agreement
and attempts to disclose, use, sell or license a trade secret created after
signing the agreement, you will be able to sue for breach of the NDA, among
other things. You could also sue for violation of state trade secret laws
(see Appendix A) and if the trade secret is also subject to patent or
copyright protection, for infringement.
Explanation for OWNERSHIP OF EMPLOYEE TRADE SECRET PROVISIONS Below we provide an explanation for each of the provisions in the Employee Non Disclosure Agreement. Assignment of Intellectual
Property This essential section guarantees you ownership of trade
secrets, patents or copyrights created by your employee. You are claiming
ownership only of work performed with company resources or on company time.
Some employers go further and demand ownership of all innovations created
during the employment period. We do not recommend this approach. If it were
challenged in a court, a judge might consider it too broad or in violation
of state laws (see, "Limitations on Employment Agreements," below), and
declare the agreement invalid. Power of Attorney This provision allows you to exercise ownership rights
without the employee and, if required for copyright, patent or other forms
of protection, to register them with the government. Duty to Disclose This provision requires that the employee report any new
discoveries to the company. This applies to any trade secrets or other
innovations made by the employee that relate to your business, result from
tasks assigned by the company, or are created using the company's resources.
The purpose of the provision is to allow you to evaluate these
employee-created properties and determine if the company has any rights. If
intellectual property is created with an employee's own resources and is
outside the scope of your business, the employee will not need to disclose
it. EXAMPLE 1: Jessica works at an Internet search
engine company and has signed an agreement requiring disclosure of all
innovations that relate to her employment. At home, she conceives of a new
method to sort search engine results. She must disclose the innovation to
her employer. EXAMPLE 2: At home, Jessica also comes up with a
device for measuring blood pressure in lab animals. She is not obligated to
disclose the innovation to her employer. Prior Inventions Many employers also require that an employee disclose
(and include as an exhibit to the agreement) any inventions, improvements or
developments created by or owned by the employee. These inventions are then
excluded from employer ownership under the agreement. You probably will not
need to include this for most employees. However, if you are hiring a
scientist, engineer or tech person with a history of creative developments,
you may want to document who owns what. To include this, add the following
language at the end of the "Duty to Disclose" section and attach a list
(labeled "Exhibit A") of the employee's innovations. Employee has created, co-created or claims an ownership
interest in the inventions, discoveries or trade secrets (whether or not
patentable or registrable under copyright or similar statutes) listed in
Exhibit A, attached to this agreement and incorporated by reference. State Law Limitations on
These Agreements Seven states (California, Delaware, Illinois, Kansas,
Minnesota, North Carolina, and Washington) have laws that prohibit companies
from attempting to acquire ownership of all employee inventions, regardless
of where or how they are created. These laws prevent you from claiming
ownership of an innovation or confidential information as part of an
agreement if the material:
The Sample Employer Ownership Provisions, above, do not
conflict with these laws. If you operate in one of these seven states and
require an employer to sign an agreement violating the law, the agreement
would be invalid. Pre-Invention
Assignment Statutes
*The California statute also requires an employer to
inform employees about the law. Adding a statement to the employment
agreement usually does this: Innovations that qualify fully under the provisions of
California Labor Code 2870 and following shall not be subject to this
provision. If You Don't Have a Written Ownership Agreement
With Your Employee Even without a written agreement, state and federal laws
guarantee you ownership of most trade secrets created by your employees in
the course of employment. As a result, your NDA covering those secrets
should be valid and enforceable. And even if you do not own an
employee-created trade secret innovation, you may still have a nonexclusive
right to use it. Trade Secrets If you hire someone to create a trade secret-for
example, a process, formula, software program, method of doing business or
mechanical invention-then the secrets the employee comes up with belong to
the company even if you don't have an agreement that says so specifically.
The rule is called the "employed to invent" doctrine, which was established
by the U.S. Supreme Court more than a century ago. The court ruled, "That
which [an employee] has been employed and paid to accomplish becomes, when
accomplished, the property of his employer. Whatever rights as an individual
he may have had in and to his inventive powers, and that which they are able
to accomplish, he has sold in advance to his employer." Solomons v.
United States, 137 U.S. 342 (1890). How does this rule apply? If you hire someone because of
his or her inventing or designing skills, or to create a specific
innovation, you would own all rights to the employee's subsequent creation. EXAMPLE: An engineer had no written employment
agreement with his employer. He was assigned as the chief engineer on a
project to devise a method of welding a "leading edge" for turbine engines.
The engineer spent at least 70% of his time on the project. He developed a
hot forming process (HFP) for welding a leading edge and perfected the
process on his employer's time and using his employer's employees, tools and
materials. The engineer claimed that he was the sole owner. A court held that the company owned the rights to the
HFP process because the engineer was hired for the express purpose of
creating it. That fact, combined with the use of the employer's supplies,
payment for the work and the payment by the employer for the patent
registration, demonstrated that there was an implied contract to assign the
rights to the employer. Teets v. Chromalloy Gas Turbine Corp., 83
F.3d 403 (CAFC 1996). Despite this rule, we recommend that you always use a
written agreement that clarifies ownership of all trade secrets. Signed
agreements are more reliable and easier to enforce than an implied agreement
and they ensure that your employees don't mistakenly believe they own trade
secrets developed while working for you. Shop Rights An employer who does not own a trade secret under a
written agreement or under "employed to invent" principles may still acquire
a limited right to use the trade secret. This is called a shop right. The
employee owns the trade secret, and is not bound to secrecy by the NDA, but
the employer has a right to use the information without paying the creator.
The shop right principle is derived from state laws and court cases and
applies to both employees and independent contractors. A shop right can
arise only if the employee uses the employer's resources (materials,
supplies, time) to create a trade secret, invention or process. As you can see, winning a shop right is often a hollow
victory since the employee is free to use the trade secret to compete with
you. In addition, you must file a lawsuit to prove you have a shop right
since only a judge can ensure that a shop right exists. It's far better to
get outright ownership by including the Employer Ownership Provisions in
Section A in a signed agreement with the employee. A shop right does provide some benefit if the employee
patents the creation, ending its trade secret status. At that point you have
the right to use the innovation without infringing the employee's patent. EXAMPLE: A consultant for a power company was
hired to install and maintain an electrostatic precipitator. However, the
power company was not happy with the operation of the device. The
consultant, observing the problems, conceived of an innovation that would
detect particles of ash. The power company installed the device at several
locations and the consultant, who later acquired a patent, sued for
infringement. A federal court ruled that the power company had a shop right
since the consultant had developed the innovation while working at the power
company and using the company's resources. McElmurry v. Arkansas Power &
Light Co., 995 F.2d 1576 (CAFC 1993). Copyrights Even without a written agreement, an employer always
owns copyrightable works-for example, software programs, books, artwork and
music-that are created by an employee within the scope of the employment.
These works are called "works made for hire," and the employer is considered
the author of the work. The copyright lasts for 95 years from publication or
120 years from creation, whichever is shorter. (17 USC 101.) So you can
always make the material in a copyrightable work the subject of an NDA
because it belongs to the company even if created by an employee. EXAMPLE: Jim is employed by a motion picture
company to create software code that is used for special effects. The code
is a trade secret and can also be protected by copyright. Since the motion
picture company owns the copyright it can prevent Jim from reproducing the
code in any software he may later write for another employer. If a copyrightable work were not within the scope of
employment, the employee would own it. EXAMPLE: Jim, the special effects programmer,
writes a novel during his vacation. Jim owns the copyright in the novel. The rules for acquiring copyright ownership from
independent contractors are different from those that apply to employees; we
discuss those differences in Section C.
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California
Law Establishes Trade Secret Ownership. California is unique in
that its laws expressly establish that the employer owns trade secrets
created by an employee. (Cal. Labor Code Sec. 2860). However, an employer in
California would not own trade secrets created on an employee's own time
without the use of employee materials. Although the law does not
require a contract, it's a good idea to buttress your position in California
by the use of a written agreement.