Employees or Independent Contractor Generated IP (Part 2)

In part 1, I reviewed patents and copyrights. In this post, I will discuss trade secrets, IP rights, and other protection measures. 

Trade Secrets

No federal or state statute expressly addresses initial ownership of a trade secret as between a company and the employee or independent contractor who develops the trade secret. All US states, but New York, have enacted a version of the Uniform Trade Secrets Act (UTSA), which includes a trade secret definition substantially consistent with the definition under the federal trade secret protection statute, the Defend Trade Secrets Act of 2016. Under both federal and state law, trade secret protection is only available for business, financial, or technical information if:

• The information is not generally known or ascertainable outside of the owner’s organization and control.
• The owner derives independent economic value or business advantage from the information not being generally known.
• The owner makes reasonable efforts to preserve its secrecy.

Whether an employer, an employee, or independent contractor who developed a claimed trade secret will be in a better position to show that these ownership criteria are met will depend on the relevant circumstances of the trade secret’s development. However, some courts have argued that, under the duty of loyalty an employee owes an employer, any efforts an employee may take to protect a trade secret are in fact attributable to the employer. This approach makes it almost impossible for an employee to claim ownership of the relevant trade secret. 

Trademarks

Under US law, trademark ownership depends on who first uses the mark to identify its products or services. Conceiving of or designing a mark, without use in connection with a particular product or service, does not establish trademark rights in the mark. Therefore, if an employee or contractor conceives of or designs a mark in the course of employment or providing service to an employer, the employer owns the mark if it is the first to use the mark to identify its goods or services — and any use by the employee or contractor is for the benefit of the employer.

Maximizing Protection in Employee and Contractor Work Product

While an employer may be willing to rely on the default IP ownership rules, any IP created during the term of employment may be of great value. It is a best practice for an employer to both (a) adopt comprehensive policies and procedures for identifying and protecting IP rights in employee- and contractor-created work product; and (b) confirm and secure ownership of IP rights by express written agreement.

Key policies and procedures for identifying and protecting a company’s interest in IP rights in employee and contractor work product should include:

• An invention disclosure process that allows employers to seek patent protection for potentially patentable inventions. 
• Documentation of development activities, allowing an employer to capture potentially valuable IP and determine the appropriate form of protection. These records can include lab notebooks; software specifications and instructions; or version control and change.
• Proper trademark use to protect the strength and enforceability of the employer’s marks. 
• Information technology (IT) systems security to protect an employer’s computers, networks, communications systems, and other IT systems, as well as the trade secrets and other confidential and proprietary information stored on those systems from unauthorized access. 
• Confidentiality to prevent unauthorized disclosure of the employer’s company’s trade secrets and other confidential and proprietary information.

IP Rights Provisions for Employee and Independent Contractor Agreements

It is best practice and common in technology-driven and creative industries for an employer to secure legal ownership of IP rights in employee and contractor work product by requiring personnel to expressly:

• Acknowledge the company’s ownership of the employee’s or contractor’s copyrightable work product that is a work made-for-hire under the Copyright Act.
• Assign to the company all of the employee’s or contractor’s rights in inventions and other work product to the extent that legal ownership does not automatically vest in the company.

In drafting and negotiating IP ownership acknowledgment and assignment provisions, employers should consider:

• the adequacy of consideration;
• the operative effect of the assignment clause;
• the scope of what is being assigned including the definition of work product covered by the assignment, the duration of the employee’s or contractor’s obligation to assign, and any state law limitations on assignment of employee inventions;
• whether the employer needs the right to use any pre-existing works of the employee or contractor;
• whether the employer should seek representations and warranties from the employee or contractor concerning: potentially conflicting obligations to past employers or other third parties, or infringement of third-party IP rights;
• additional assistance that may be required from the employee or contractor in securing the company’s ownership of IP rights; and
• restrictions on activities that may conflict with the employer’s ownership of IP rights under the agreement.

David L. Cohen, P.C. – Kidon IP
123 West 93rd Street
New York, NY 10025
[email protected] 
(914) 357-5196