Over the years, I have had the pleasure of working with many engineers or deeply technical people. These creative and industrious geniuses have numerous novel ideas that may or may not be related to their day job. Companies working with these talented employees want to be assured they have the full “mind share” of their workers.
Let’s face it. There is a natural tension between companies and their creative talent. Companies must own the intellectual property it is paying to create. A technology company’s value is denigrated if its IP ownership rights are murky. Engineers want creative freedom and independence to make money from ideas and inventions that they believe should belong to them and not their companies. The solution is to be clear about expectations, while respecting the needs of the company and the engineer.
Understand the difference – from an IP perspective – between employees and consultants
The law provides a default level of protection for employers. Under US copyright laws, an employer automatically owns an employee’s “works made for hire.” Outside of an employment relationship, a worker and her company could agree that her work is “work for hire,” but without this contractual agreement, the default in the law is that a consultant or independent contractor owns her work product. A critical term in any consulting agreement is the worker’s agreement to assign that work product to the company.
Focusing only on IP ownership, the important difference between employees and consultants is who carries the burden of defining the scope of the worker’s work product. Typically, an employee’s scope of work is broadly defined as something reasonably within the “business” of the employer and related to the employee’s role (and the higher the position the more expansive the scope). What happens if the company’s business changes? (See my discussion about the California Labor Code below, if you’re a California employer/ee.) Or what if the company is huge and has its fingers in numerous unrelated businesses? When a large employer hires creative talent, the employer typically wants to corner the market on its employee’s great ideas – even if it turns out the employee was hired for a distinctly different purpose. Unless an employee negotiates otherwise, the employer will have an expansive right to the employee’s creative works that fit reasonably within its “business” and the worker’s role.
Contrast that with a consultant’s scope of work, which is (hopefully) detailed with specificity in a consulting agreement. Companies must take extra care with consulting agreements, to assure complete assignment of the IP rights they expect to receive.
Devil in the Details
Most proprietary information and inventions agreements are company-favorable – they should be… they are drafted by attorneys representing companies. As a starting point, “standard forms” provide a very comfortable level of protection for companies who desire clean ownership rights to the IP work product of their creative talent.
In California, employees have statutory help in protecting their right to create IP outside of their regular job. Labor Code section 2870 provides a public policy limitation on the employer’s scope of work. An employee can retain ownership of his independent creations, if he invents the IP on his own time, without using the employer’s equipment, supplies, facilities or trade secret information and the invention does not relate at the time of conception or reduction to practice to the employer’s business or actual or demonstrably anticipated research or development or results from any work performed by her for her employer. This Labor Code section must be referenced in any employee proprietary information and inventions agreement. In fact, many agreements require employees to notify their employer if they are working on something that would fit this exclusion.
Nobody wants to be tangled in a dispute about IP ownership when workers move from one company to another – especially not the hiring company or job-changing worker. Every proprietary information and inventions agreement should have a section confirming that the hired worker is not bringing any previously created IP with her to her new job. The agreement should also have a place for the worker to list her prior work. For seasoned engineers, the listing of prior works could be burdensome and worrisome, placing the engineer in a puzzling situation if the prior work was highly confidential. The key is to provide a sufficiently descriptive reference to the prior work – without disclosing confidential information. And again, the tension arises… Companies will desire a narrow description of IP in any listing of “prior works” and engineers will desire a broad reference. This is a topic to be discussed and worked through at the outset of the relationship.
To ensure the company’s clean ownership of its IP, most proprietary information and inventions agreements contain a special license clause. The clause typically says that the worker grants a nonexclusive, royalty-free, irrevocable, perpetual, worldwide, transferable and sublicensable license to any “prior work” IP that the worker incorporates in a company’s product. This broad license protects the company from being sandbagged. Heads will roll if the company finds itself in a situation where it must negotiate with a worker to get a license in order to sell the products the company thinks it has paid for. As an engineer-entrepreneur, the time to discuss licensing a prior work to your company is before you use it in the course of your employment and before you incorporate it in a company product.
So what is the net-net?
Companies need great talent – and engineers need jobs. The upper hand in any negotiation will be the party with the lesser need. Think about your leverage as you approach your new relationship – whether you are a company hiring your next technology guru or an engineer looking for a new job.
Communicate and be sure everyone involved understands a few crucial facts that effect IP ownership: What is the company’s “business?” What are the company’s plans for development? What is the employee’s “role?” Or, what exactly is a contractor expected to do – and what is the resulting work product? Who has control over the direction of the company’s development? If you do not have control of the direction of development- and you’re the worker – anticipated new development directions need to be communicated to you. When you consider the California Labor Code section I referenced in this post, it is important to remember that whether an invention falls within that exclusion depends on:
- the scope of the employer’s business at the time of conception or reduction to practice of the invention; or
- the scope of the employer’s demonstrably anticipated research or developments at the time of conception or reduction to practice of the invention; and
- whether the employee used the employer’s equipment, supplies, facilities or trade secret information; or
- did the work on the employer’s “time” or
- used the “results” from any work performed for the employer.
All to often, the answers to these questions are not clear. Good communication and a willingness to negotiate and clarify these terms at the beginning of the relationship helps avoid problems later in the relationship.
One of my serial entrepreneur clients succeeded in doing just that. He was considering an employment offer from a large company. Despite the large company’s obvious leverage (he wanted and needed a job), he was able to limit the scope of his new “full time” job to carve out IP he could continue to develop at his pre-existing “part time” job, even where there was risk of overlap – because the part time employer was also quite large (with a huge business scope). Why did he succeed? He approached the discussion with openness and a concern to protect the IP of the new employer. He focused on assuring their rights of ownership to the IP that related to the reason they were hiring him – and he had logical and reasonable explanations for the need for this carve-out for the prior job. Turns out, at least that time, a balanced approach worked and both the company and engineer were satisfied with the results.
