Increasing Mobility of Technical Employees Raises Intellectual Property Stakes

Some of your company's most important assets may be locked in the minds of key technical employees. If you do not want to lose those assets when employees leave, you need to protect your company with appropriate employment agreements.

Because of the ever-increasing importance of technology and the high mobility of employees, a prudent employer should closely examine employment practices relating to technical personnel. Technical employees often have the only intimate knowledge of the company's greatest resource -- its intellectual property.

A recent survey published in the Harvard Business Review reported that "71% of entrepreneurs responsible for starting the country's 100 fastest growing companies developed their ideas through their former employment -- either by recognizing an opportunity that the former employer didn't appreciate or even know about, or by improving upon some aspect of the company's products or services."

In fact, key technical personnel may often be the only individuals within a company who are familiar with the trade secrets, patentable inventions and discoveries, and the wealth of know-how and technical information accumulated throughout the years as the business developed. Employers face two serious threats when those former employees leave:

• They may misappropriate critical information and use or disclose it in a competing business, and,
• They may not leave behind a record of what they learned and the company will lose that information.

Some states, such as Minnesota, impose a common law "duty of loyalty" in each employment relationship that restricts an employee's right to establish or operate a competing business while still an employee. This duty also prohibits the employee's use or disclosure of the employer's trade secrets and confidential information. However, the remedies available are frequently inadequate, particularly since the employer is usually caught off guard by the former employee's activities, has not taken adequate steps to safeguard its trade secrets or confidential information, and does not require its employees to keep records of their ideas, new developments, or the business opportunities they detect. The trade secret laws protect only those trade secrets that the company has identified and taken reasonable steps to safeguard, and will not protect confidential information. Absent an employment agreement with a non-compete provision, the trade secret laws and implied loyalty duty cannot be extended to prevent a former employee from engaging in a competing business after their employment has ended.

A company should therefore enter into written employment agreements with all its technical and managerial employees at or before the commencement of employment. In drafting employment agreements, the following should be considered:

1. The agreement should obligate the technical employee to assign to the company any inventions derived during the course of employment, at least those relating to the business of the employer. Some states, including Minnesota, prohibit "blanket" assignment clauses, but this legal barrier can be accommodated by a properly drafted contract.
2. The agreement should require the employee to inform the company fully about any inventions, discoveries, trade secrets, or business opportunities relating to the company's work, and to promptly create and deliver a written record of all such information.
3. The agreement should contain a confidentiality provision obligating the employee not to use the employer's confidential information for any purpose unrelated to the employee's duties in the course of employment with the company.
4. The agreement should outline any special provisions applicable to the company's business, such as the use of software on company-owned computers and the protection of passwords.
5. Unless prohibited by state law, the agreement should contain a "covenant not to compete" that reasonably restricts (as to scope, geographic area, and duration) a former employee's ability to work in fields that could jeopardize the company's intellectual property and competitive interests. (California and certain other states do not permit employers to impose such covenants.)
6. The agreement should contain a provision obligating the employee to return all trade secrets and confidential information in the employee's possession --including the originals and copies of documents and computer media -- to the employer upon departure.
7. Prospective employees should be apprised before being hired that they will be required to sign an employment agreement, including non-competition agreements, as a condition of their employment. The non-competition provisions should be discussed and bargained for along with all the other terms of the employment agreement, and the agreement should be signed by the employee at the time of hiring. Subsequent agreements supported by new and separate consideration may be desirable at the time of promotion or change in key responsibilities.

The company does not need to have uniform or identical agreements for all its technical employees. The agreements may be tailored as appropriate to the specific jobs, responsibilities, and technical exposure for each employee's situation. The agreements should be updated as job descriptions, responsibilities, or technical exposure change. Most importantly, the company needs to consider the differences between employees who have and have not signed confidentiality and non-compete agreements, and treat those employees accordingly.

When an employee leaves the company, it is good practice to conduct an exit interview, during which the employer advises the departing employee about his or her continuing obligations to protect the company's confidential information. If possible, the employee should acknowledge whether he or she has had access to trade secrets or confidential information during the course of employment. If the employee is leaving to work for a competitor (as is often the case), it is prudent to contact the competitor's management and request assurance that the competitor will not seek to cause the employee to divulge the confidences of the former employer, and will not put the employee in a position where the disclosure of trade secrets or confidential information is inevitable.

Similar agreements and practices should be developed for other employees who deal with confidential business information such as customer or vendor names, accounts, pricing and cost evaluation, ordering, service, and other competitively sensitive business areas. In addition, all companies should have in place a system and policies for classifying and declassifying confidential information, including designating which technical employees and managers are responsible for procedures such as confidentiality markings on documents or drawings, keeping adequate and up-to-date disclosure records, maintaining trade secret lists, and overseeing other internal security measures.

If you would like information on employment agreements, non-compete, or other intellectual property needs, please call a member of the Briggs and Morgan Intellectual Property and Technology Section.