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ACQUIRING OWNERSHIP OF EMPLOYEE TRADE SECRETS

The 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.

NDA lightbulbCalifornia 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.

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:

  •      is created with the employee's resources

  •      does not result from work performed for you, and

  •      does not relate to your business.

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

  • CaliforniaCal. Lab. Code 2870-72

  • Delaware    Del. Code Ann. tit. 19  805

  • Illinois    765 Ill. Comp. Stat 1060/2

  • Kansas      Kan. Stat. Ann. 44-1306

  • Minnesota   Minn. Stat.  181.78

  •  NorthCarolina       N.C. Gen. Stat.  66-57.1-.2

  • Washington  Wash. Rev. Code Ann.  49.44.140, .150

*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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