Protecting Intellectual Property

Years ago, the most important assets of a business were often limited to land, buildings, machinery and equipment, and although manpower was important, it was also fungible. Employees could easily be replaced without jeopardizing the value of the business. In today's technology and service oriented economy, human capital, specifically, key employees who possess valuable information and ideas concerning a company's products or services, are often of more value to a company than its hard assets. Therefore, it is important for a business to take appropriate steps to protect its intellectual property. Furthermore, in an acquisition of a business, it is important for the purchaser to verify that the intellectual property of the selling company is properly protected.

Intellectual property generally falls into the following categories:

(a) trade secrets - A trade secret is generally any formula, pattern, device or compilation of information which is used in one's business, and which gives the business an opportunity to obtain an advantage over competitors who do not know or use it.

(b) computer software - Computer software is owned by a business if it was created by the employees of the business, created pursuant to a written agreement assigning the software to the business, or purchased by the business pursuant to a written agreement assigning all rights. If the business is not the owner of the software, it may possess limited rights to use the software pursuant to a license agreement.

(c) copyrights - A business is the "author", and hence the owner, of a work when an employee creates work capable of being copyrighted in the course of employment at the direction of his or her employer. Generally, an independent contractor will own the copyright unless there is a written "work for hire" agreement or there is a written agreement of the contractor assigning the copyright to the company.

(d) trademarks, service marks and trade names - A trademark, service mark or trade name is a name, term, phrase or design used in commerce to identify the origin of specific goods and services. Trademark or service mark rights are obtained through registration and use, or through prior use.

A properly managed business should take steps to assure that its intellectual property is properly protected. A specialized intellectual property lawyer may be useful in evaluating the adequacy of existing formal protections, risks associated with any deficiency in protection, and the benefits of obtaining additional protection.

One of the most common, yet often overlooked, means to assure the protection of intellectual property is to have employees and third party contractors (such as consultants and suppliers) enter into proprietary information and confidentiality agreements with the business. These agreements prohibit the employee or contractor from using trade secrets and other proprietary information for the benefit of any other party and will give the business legal remedies in the event of a breach.

These agreements also contain provisions in which the employee or contractor who develops proprietary information for a business (such as computer software, an invention, or a secret process) releases to the business any and all ownership rights and claims that such employee or contractor may have with regard to such property.

Finally, these agreements sometimes contain noncompetition provisions whereby a key employee or contractor agrees not to work for competitors of the business and/or not to solicit customers of the business if he or she does compete with the business.

Noncompetition and nonsolicitation agreements take many forms and are generally subject to strict interpretation by courts because the law generally provides that overly broad noncompetition and nonsolicitation agreements are against public policy. Therefore, such provisions should be tailored to the specific needs of the business by an advisor who is experienced in intellectual property matters.

*George F. Eaton II, Esq. is a partner with Rudman & Winchell. He concentrates his practice in the areas of business planning, corporate and securities law.

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