Coolidge & Graves PLLC

    Business and Intellectual Property Law

Protecting Intellectual Property Rights

in Professional Employment Agreements[1]

Daniel S. Coolidge

Coolidge & Graves, Senior Counsel

1.      Introduction

     The best time, of course, to have an employee sign an agreement which includes a scheme of intellectual property protection is at the time of first employment. Indeed, At courts will generally give a greater degree of credence to claims of the employer that the degree of protection sought is reasonable if the employee had a real opportunity to consider the employment agreement before committing to the new job, especially in the context of a post-employment non-competition covenant.

 We will first consider various types of protections pre-employment, and then consider what can be done even in the absence of a written agreement, and what rights the employer may have to the intellectual property created by the employee.

Because the rights of an employer may differ depending upon whether the worker was a statutory employee or an independent contractor, it is important to determine the status of the worker at the beginning. It is not enough to determine that a worker is being paid under a W-10 to make the determination as to whether he is an independent contractor or statutory employee. If there is a question, counsel should use the full panoply of applicable common law criteria (discussed below) to make the determination, and draft accordingly. It is often useful to include clauses in the alternative, especially in the area of copyright such that if for any reason the worker is not found to be an employee, then there are fall-back clauses such as “If worker is found by a court of competent jurisdiction not to be an employee for purposes of this Agreement, then …”

2.                  Patents

Only patents protect actual ideas. (Trade secrecy law protects the secrecy, not the underlying idea. Independent creation may be a defense to a claim of trade secrecy violation, but it is not to patent infringement.) Patent applications, except in a handful of exceptions not relevant here, must be made by the inventor(s), so the cooperation of  the employee-inventor (freely given or court ordered) will be necessary to obtain the exclusive right to an invention.

It is the case in New Hampshire that, even in the absence of a written contract to assign, an employer nevertheless owns an invention created by someone hired to invent such a thing, or to accomplish certain result or aid in the development of products[2] This is not so in all jurisdictions,[3] however. Because of the uncertainty created in the absence of a written agreement, it is prudent to have a written agreement with employees requiring assignment of rights to inventions created within the scope of their employment and a requirement to disclosure all relevant inventions, especially for workers hired to develop products.

The agreement should include a clause obligating the employee to assign his or her rights to all inventions conceived by the employee as a result of or within the scope of the employee’s employment.  In many jurisdictions, it has been found unenforceable to include a provision to the effect that the employer obtains the rights to anything the employee may invent while employed even if unrelated to the employee’s work or invented outside of working hours. It is generally permissible to require disclosure of such inventions to the employer and, if made on the employer’s premises with the employer’s tools and equipment, it may support an obligation to assign.

The enforceability of such a clause will turn on the nature of the worker’s employment: if hired to invent, the employer has the right to require assignment. If hired to clean floors, and the worker comes up with a great idea for an improved mop, while the employer may arguably claim a shop right (discussed infra) to use the invention royalty free, it is generally beyond the ambit of an enforceable covenant to require the employee under these circumstances to assign his rights to the company. Some states will enforce such a requirement if the invention was done on the employer's premises, during working hours and using the employer's tools and equipment. A prudent middle course is to include a clause to the effect that if the employee invents something on the company premises and using company materials and which invention is not related to such employee’s employment, that the employee will grant a royalty free license to the company . 

Requiring every employee to sign an assignment of inventions agreement is not good practice. Indeed, as noted above, many jurisdictions have held that such a clause is invalid where the employee was not hired to invent, or the invention was unrelated to the employee’s work and not conceived on the employer’s time or premises, or using the employers tool. Such clauses should be limited to those employees the nature of whose work is likely to result in the creation of new product ideas or inventions. 

It is typical and appropriate to include a provision requiring the worker to assist (at no cost to the worker) in prosecuting the patent application, a so called “further assurances clause.” Such a clause should make clear that the worker will provide access to all records, and will provide testimony and assistance if required in any patent litigation.

            While not necessary to be covered in an employment agreement, it is good practice to require employees who are hired to invent to keep a laboratory notebook, to have the notebook signed and witnessed periodically by a supervisor (who should actually read the entries and to turn over the notebooks to the company for safekeeping. Such notebooks should not leave the company premises. The frequency of witnessing the entries is a function of the nature of the work, the level of output and the degree to which it is perceived to contain material relevant to a possible patent application in the future. It should be clear that the lab notebook is the property of the company and not the employee, and should contain nothing other than work related entries.

            Having such a laboratory notebook will be an invaluable aid in establishing priority of invention in the event of a later patent dispute.

3.      Copyright

An assignment of a copyright must be in writing. Unless the company is deemed to be the author of a work, it must obtain a written assignment to become the owner of the copyright.

Simply because a company pays someone to produce a work does not mean necessarily that the company owns the copyright in the resulting work. Indeed, absent a written agreement, it is likely in the case of a work produced by an independent consultant that the company obtains nothing other than a limited license to use the work.

There are few areas of copyright so frequently misunderstood than the concept of a “work for hire.” The failure to understand what constitutes a work for hire and to draft and execute an appropriate agreement happens all to frequently, yet is in fact simple enough to prevent.

Under U.S. copyright law, an employer is deemed to be the author of a work for hire. The term “work for hire,” however, has a specific meaning under copyright law: among other things, it means a work prepared by an employee within the scope of his or her employment. Works created outside of the scope of employment, unless they fall into certain special categories,  may not be works for hire. The Supreme Court has held that state common law principles apply in determining whether a worker is an employee or an independent contractor for purposes of the Copyright Act.[4]   The court in Reid considered the Restatement (Second) of Agency criteria in section 200. If the worker turns out not to be an employee, and there is no written agreement requiring the assignment of copyright, all is not lost if the nature of the work turns out to be one of the special categories of works for hire. These are:

·        A contribution to a collective work

·        As part of a motion picture or other audio-visual work

·        As a translation

·        As supplementary work, such as a forward, or illustration for a book, or charts and tables)

·        A compilation

·        An instructional text

·        A test

·        Answer material for a test

·        An atlas

            Even a work created by an independent contractor which does not fall within the above categories may be deemed work for hire if there is a written agreement between the parties and they elect for the work to be treated as a work for hire. It is generally good practice to draft in the alternative: elect that the work be a work for hire, and in addition, include an executory obligation to assign the rights to the work to the employer in the event a court finds that the work is not a work for hire.

            Note that there are potentially different results if a work is a work for hire as opposed to rights in the work obtained by an assignment of copyright. In a work for hire, since the employer is deemed to be the author, all of the rights of authorship vest in the employer. In the case of an assignment, the company obtains only those rights that may be obtained by assignment. The author retains certain non-waivable reversionary rights (which are heritable).[5] If there is likely to be a significant long term value to the work beyond the statutory termination right period, it is vital that every effort be made to have the work be treated as a work for hire.

In a company’s employment agreement, as in the patent arena, it is useful to include an obligation to assign the exclusive copyright in and to all works created within the scope of the worker’s employment. While this is not necessary in a true statutory employment (such works already belonging to the employer) it is useful for the avoidance of doubt, and especially useful where the worker’s status as a statutory employee may be in doubt. Wherever possible, however, it is better (in terms of the scope of rights granted) that a work fall within the category of work for hire and not an assignment from an independent contractor.

Where the worker is not an employee, but a consultant, it is vital to get a written contractual obligation to assign the sole and  exclusive copyright to the employer, and to obtain a specific written assignment of each work as it is delivered The assignment requirement should include an obligation to warrant original authorship and non-infringement.

. In the case of contract work, where there may be included work that is not original or to which the copyright is not to be assigned, it is vital to understand the nature of the rights that will in fact be obtained, whether they may be terminable, assignable, sub-licensable or available to others. For example,  when using a consultant to develop computer software, it is often the case that the programmer will use library subroutines he or she has developed over the years (and which in fact increase their value to prospective employers) and which subroutines are not to be assigned to the employer. So long as what is conveyed is sufficient for the needs of the employer, this is fine and normal practice. If, however, use of the subroutines for further maintenance of the program is required, or to be able to sell the rights to the software, care must be taken in assuring that the appropriate rights are granted.

4.      Trade Secrets

Since coverage of trade secrets and the use of non-disclosure agreements has been provided in other of the materials for this program, they will be dealt with only in brief here.

 It is useful to consider the following:

·        Job Applicants. Inform job applicants upon their first visit to the company facility of the secret and sensitive nature of the work being conducted. Determine in advance if prospective employees are covered by a non-compete or non-disclosure agreement.

·        New Hires. Conduct an entrance interview of new hires to emphasize the importance of maintaining company secrets and confidential information. Make clear to the employee that he or she is not to disclose information in violation of pre-existing applicable non-disclosure agreements. Question the employee about such agreements, and the nature (i.e. general areas) that may be subject to non-disclosure.

·        Letter to Former Employer.  It may be useful to consider a letter to the former employer notifying it of the employee’s new duties. If the former employer fails to object, it may form a basis for an estoppel argument against the former employer later.

Simply because a secret process has become public knowledge does not mean that the fact that company A uses that process is no longer a trade secret. For example, a company may use a well known gasoline additive that it calls “XTP-4000” which is in fact nothing more than alcohol. Alcohol may be well known as a gasoline additive, and may have a reputation as undesirable. Accordingly, the fact that XTP-400, the “secret ingredient” is in fact alcohol can be a valuable trade secret with real economic value that it remain a secret.  It is worthwhile making this distinction clear when drafting, and advising clients with regard to steps to be taken to protect their trade secrets.

5.      Tools in the Absence of a Written Agreement

Even in the absence of a written agreement, the employer has variety of tools to protect its intellectual property rights.  If discovered early enough, it is possible even post employment to craft an enforceable agreement, which issues have been covered by others elsewhere in these seminar materials.

Shop Right. As mentioned above, if an employee invents something during working hours, or using the employer’s tools and facilities, or a combination of the forgoing, the employer may be entitled to claim a shop right to the invention, even if the employee is unwilling to license it to the employer. A shop right gives the employer the right to a non-transferable non-terminable royalty free license to practice the invention for its own purposes (but not to manufacture the invention for sale to third parties.

Statutory Trade Secret Misappropriation. While it is a somewhat difficult task to overcome the absence of a written non-disclosure agreement when trying to establish that reasonable steps were taken to protect the secrecy of a company’s trade secrets, there may be circumstances where such absence may be excusable, particularly if the departing employee was a founding principal of the company. If the new employer is given written notice that the former employee has knowledge of valuable trade secrets of the former employer, and is warned off, an action for misappropriation may subsequently lie.

Misappropriation of Corporate Opportunity. If the former employee was a company executive, he or she may have had a fiduciary duty to the company. Such executive cannot seize the opportunity for him or herself if the company was in a position to be able to exploit it, and it was within the company’s line of business.

Inherent Disclosure of Trade Secrets. In the absence of a non-competition agreement, there are circumstances in which a court will grant an injunction protecting a former employer from an employee who has taken a job with a competitor “the nature of which will demand that the employee disclose and use  trade secrets of the former employer regardless of the employee’s intent so to disclose or to make use of the trade secrets.[6]”