How Start-ups Can Protect their Intellectual Property With Employment Contracts by Akinola Marian.
The apprehension over losing innovative ideas and creative talent is a real concern for all companies, especially start-ups. Consequently, employers in all sectors tend to include clauses in employment contracts to prevent the loss of valuable confidential information and trade secrets. This is to prevent the mishap of developing a great product and then having the result of the company’s years of hard work and expenses walk out unrestricted. Such a product could end up in the hands of competitors if there are no protections set in place. Restrictive clauses in employment agreements are popular tools used to protect investments made in intellectual property assets. These clauses govern the relationship between an employer and an employee in relation to the intellectual property assets of the employer.
One of the biggest challenges start-ups face is access to qualified talent and struggle to retain these talents against the fierce competition of their competitors. Start-ups rely on the ability to hire individuals who can take the skills and knowledge they have developed working for other companies to foster innovation and growth for emerging businesses. This is particularly true in industries where technical knowledge and expertise are valuable assets for companies. Losing such an employee to competitors can pose many risks to a business, including the exposure of trade secrets and the loss of crucial business contacts. To protect business interests, start-ups should prepare employment contracts containing clauses that restrict employees, during and after they leave the company and also give the company the rightful ownership over any invention created by an employee during the course of their employment.
ASSIGNMENT OF OWNERSHIP OF IP RIGHTS
Legally, any IP created by an employee in the course of their employment belongs to the employer, but this should not be taken for granted. Businesses must ensure the ownership of IP rights is made clear to deter claims from employees. Startups should necessarily ensure there are robust provisions in an employee’s contract of employment that directly address ownership of IP rights. These provisions should make it explicitly clear that any IP generated during the course of employment belongs to the employer. In the case of patented inventions, Employers should consider carefully who is named as the inventor on any patent application. Where the assignment of IP rights has strong contractual backing, the employer will have the basis for a breach of contract claim against the infringing employee in the event of a breach.
NON-COMPETE CLAUSE
A non-compete agreement or clause is a legal document that prohibits employees from competing with a business after their employment is severed. Such an agreement can provide a company with several types of protection. A non-compete agreement guards the company against employees leaving for competitors, starting a competing venture, or sharing trade secrets with existing companies.
Despite being widely used by employers, non-compete agreements are not foolproof. Utilising non-compete agreements leaves start-ups in a precarious position. While a non-compete agreement can protect the startup from the release of valuable information when an employee leaves, the non-compete agreement can also act as a deterrent or impediment to attracting employees. Potential employees may find a non-compete agreement restrictive in nature. Hence, potential employees may be reluctant to work for a company that restricts their future direction. Moreover, there aren’t any guarantees that non-compete agreements will hold up in a court of law. Many courts have been hesitant to enforce such agreements because they are often deemed unfair and viewed negatively in many jurisdictions. For a court to enforce a non-compete, the agreement can’t last too long or cover too large of a geographical area.
NON-DISCLOSURE OR CONFIDENTIALITY CLAUSE
This is another alternative that could be used in employment contracts to govern the protection of an employer’s confidential information and trade secrets. Nondisclosure agreements or confidentiality agreements can protect the company from intentional or unintentional disclosure of confidential information by employees— especially employees who interact with sensitive information. Businesses especially need to employ a confidentiality agreement during their hiring and onboarding process to ensure employees don’t reveal trade secrets. Such a clause requires that an employee should not disclose the trade secret and confidential information of the employer or other third party which is in the custody of the employer. A non-disclosure agreement allows a business to share intellectual property rights with others without the risk of having it stolen by that party. The contract defines the scope and meaning of trade secrets and confidential information. It also includes the kind of confidential information the employee will have access to, be required to utilize and other intellectual property and business information that should not be disclosed by the employee.
NON-SOLICITATION CLAUSE
Start-ups can also use non-solicitation agreements in employment contracts. In a non-solicit, an employee who has moved to a competitor agrees to not take clients or other employees with them. This is much more enforceable and equally offers protection however, the terms must be limited to a scope and period which are deemed reasonable. The enforceability and legality of a non-solicitation agreement remain a controversial subject. A non-solicitation agreement may be enforceable if the agreement is clear, unambiguous, and reasonable considering the employee’s position. If the agreement is ambiguous or includes unfair terms, it will not be enforceable in court. There must be a legitimate business reason to require an employee to sign a non-solicitation agreement.
What Should Start-ups Take into Consideration in Using Contract agreements?
To be valid, these restrictive clauses have to be drafted appropriately such that they abide by the laws of the relevant jurisdiction (each state is different). It should be reasonable for the employed individual to find other employment or establish a business. The company should make sure the agreement is proportionate to what is being protected and what the employee is giving up. Courts will only enforce these sorts of restrictive clauses if doing so is reasonable and necessary to protect the interests of the business without comprising the interests of the employee.
Start-ups must determine the merits and downsides of incorporating each clause into their employment agreement. All contracts should be customized to a company’s specific needs. Even existing employment contracts clearly set out the IP that is protected, it’s worth regularly reviewing them to ensure the definition is broad enough and remains relevant to the nature and process of the business. Sometimes, to give the company the broadest possible protection, employment contracts should include two or all of these clauses.
Final thoughts
In today’s competitive market, it’s important for start-ups to understand the basics of intellectual property and how to protect their ideas. Start-ups shouldn’t hire employees merely based on mutual trust or verbal agreement. Without appropriate protection, an employee could become the rightful owner of the IP invented by him or her during the course of their employment. Equally, stakeholders should take note of whether potential employees they’re looking to hire are still subject to employment agreements as well as the legal consequences of employing someone who previously signed an employment agreement. It is a settled principle of law that parties are bound by their contract. Therefore, where the employee breaches any of their obligations under their employment contract, an employer is entitled to seek remedies from the court.
References
- Bertrand Théau, 6 Tips for a Solid Intellectual Property Strategy for start-ups available at https://statrys.com/blog/intellectual-property-strategies-for-start-ups accessed 25th, January 2023.
- Bisola Scott, S.P.A. Ajibade & Co, Essential Intellectual Property Clauses In Employment Contracts available at https://www.mondaq.com/nigeria/contract-of-employment/871330/essential-intellectual-property-clauses-in-employment-contracts accessed 24th January 2023.
- Helen Snow, Protecting intellectual property with employment contracts available at, https://www.peoplemanagement.co.uk/article/1796129/protecting-intellectual-property-employment-contracts accessed 23rd, January 2023.
- McCann FitzGerald LLP, How Start-Ups Can Protect their Intellectual Property available at, https://www.mccannfitzgerald.com/knowledge/start-ups/how-start-ups-can-protect-their-intellectual-property accessed 25th, January 2023.
- Sanjana (Uttar Pradesh), The Relevance Of A Non-Disclosure Agreement In Protecting Your Intellectual Property available at https://www.mondaq.com/india/trademark/1107582/the-relevance-of-a-non-disclosure-agreement-in-protecting-your-intellectual-property accessed 25th, January 2023.
- Tileke & Gibbins, Non-competition and Non-solicitation: Protecting start-ups and Online Businesses from the Loss of Employees available at https://www.tilleke.com/insights/non-competition-and-non-solicitation-protecting-start-ups-and-online-businesses-from-the-loss-of-employees/ accessed 25th, January 2023.
- Vilendrer, Non-Compete and Non-Solicitation Agreements available at https://www.vilendrerlaw.com/non-compete-and-non-solicitation-agreements/ accessed 25th, January 2023.
