Employers should consider how to optimize the protection of the company's intellectual property in each phase of the employment relationship. Recruiting, hiring, retaining and even terminating employees raises a host of legal issues -- issues that may be overlooked in the intensity of the efforts to grow the business. This outline is intended to give a brief overview of some of those legal issues associated with protecting a company's intellectual property, from the beginning of the employee recruitment process through the termination of the employment relationship.
The goal of such legal advice is twofold. First, the business must be able to attract (sometimes very quickly) the best professionals. Second, legal disputes, which will be disruptive, expensive, and risky, should be avoided. Alternatively, the company should place itself in it strongest position such that legal disputes are containable and the risk made both assessable and as minimal as possible.
II. ISSUES IN THE RECRUITING PROCESS
The starting point for a discussion of the employment relationship is the "at-will" doctrine. Traditionally, at common law, the employer-employee relationship was understood to be one of employment at-will. At-will employment is understood as an employment contract of indefinite duration that can be terminated at the pleasure of either party at any time.
While the at-will doctrine is a powerful, viable concept, there are many exceptions. For instance, Title VII of the Civil Rights Act and other anti-discrimination laws, prohibit action based upon certain enumerated characteristics. Employers can also be held responsible for torts committed in the employment context. Moreover, the at-will doctrine can be modified by contract.
Often, in hiring employees, companies will use written employment agreements, which may promise a fixed period of employment as well as many other terms and conditions of employment. It is also important to remember, however, that other communications - such as oral negotiations, representations, and offer letters - may constitute contracts as well.
A. Tortious Interference with Contract or Business Relations
Not surprisingly, most talented professionals are employed. No company enjoys the departure of talented employees; sometimes, companies will initiate litigation when they think an employee has been improperly lured away.
Maryland, the District of Columbia and Virginia have long recognized that intentional or malicious interference with an existing or potential contractual relationship, including an employment relationship, gives rise to a cause of action in tort. When a business is soliciting the services of a prospective executive employed with another corporation, the soliciting corporation may be accused of interference with contract or business relations.
The hiring corporation's exposure to liability will vary depending upon the nature of the candidate's relationship with his/her existing employer. Third parties have a much greater right to hire away an employee with an at-will employment contract than an employee in the pendency of a fixed-term employment contract. In general one can think of a "sliding scale": if the employee is employed at-will, the interference must be wrongful (tortious) in and of itself. In contrast, if the employee is employed under a fixed term contract, any interference may result in liability for the interfering corporation. Businesses must be quite careful in attempting to woo employees with fixed term contracts away from corporations where they are presently employed.
This is not to say that businesses are wholly barred from actively seeking to hire employees away from other companies. A crucial element of the tort is intentional interference with an employment contract without legal justification. While courts have repeatedly held that use of unlawful means (i.e. threats or coercion) is necessarily without justification and tortious, they have only recently begun to grapple with the issue where the inducement is not independently tortious. Unfortunately, the courts have yet to develop any precise standards for determining whether interference like that of the rival theatre owner is tortious and have approached the problem on a case by case determination.
In an attempt to guide this amorphous analysis, courts have referred to the following considerations:
- the nature of the actor's conduct;
- the actor's motive;
- the interests of the other with which the actor's conduct interferes;
- the interest sought to be advanced by the actor;
- the social interest in protecting the freedom of action of the actor and the contractual interests of the other;
- the proximity or remoteness of the actor's conduct to the interference; and
- the relations between the parties. See Orfanos v. Athenian, Inc., 66 Md. App. 507, 521 (1986).
The mere fact that the soliciting corporation is motivated by competition does not necessarily provide it with a defense. Though the courts have not directly reached this issue, it appears that the nature of the underlying contract is the key element in affixing liability. Given that many executives work under fixed term contracts, the soliciting corporation should take the possibility of having to pay damages to the individual's former employer into serious consideration when determining whether to hire such individual.
To reduce the risk of liability for this tort, the hiring business should directly ask the candidate whether he/she is working under a contract for a fixed term and if there are any conditions in their present employment relationship which would restrict their ability to leave and work for the hiring business. This inquiry is also intended to elicit information regarding any non-competition or other agreements that might restrict the employee's freedom to join the hiring company. In addition, the hiring corporation should include in the written employment agreement, offer letter or other document signed by the employee to be hired, a provision stating that there are no restrictions on the employee's right to leave his/her present employment and join the hiring business.
B. Avoiding Introduction of Pirated Trade Secrets by New Employees
A new employee who brings pirated information can be as damaging to a business as the theft of secret information by a departing employee. Such a theft of trade secrets may taint a business' legitimate activities, as Emulex Corporation learned in Digital Equipment Corp. v. Emulex Corp., 805 F.2d 380 (Fed. Cir. 1986). Emulex hired an employee who brought to Emulex computer tapes containing secret product development materials wrongfully taken from Digital. The court, in preventing Emulex from using or disclosing the trade secrets, fashioned a broad injunctive order preventing Emulex from developing, manufacturing, or marketing any product that used the technology revealed in the trade secrets. The order halted much of Emulex' new product development.
Thus, prior to employment, a business should obtain a full disclosure of past employment and determine if the prospective employee is bound by any restrictive employment covenants. All businesses should be alert to the inadvertent receipt of proprietary property of past employers.
C. Clarifying Ownership of Pre-Existing Inventions
A new employee may have an obligation to assign an invention to a prior employer if it was conceived of during the prior employment, even if the invention is later reduced to practice in the employ of the new company. This can create a conflict between the old and new employers. Also, an employee may assert that he or she holds the right to a prior invention made independently. To avoid ownership disputes later, it is important to clarify at the outset of a new employment relationship what inventions or conceptions the new employee believes were already in existence at the time of hire.
III. DEFENDING CORPORATE INTERESTS THROUGH THE EMPLOYMENT CONTRAC
T Employers should give careful consideration as to how to most fully and effectively protect its business interests upon the future departure of a key employee. Although many employers hesitate to think about protecting the business at the time of hiring, this consideration is crucial to enable employers to protect their intellectual property, trade secrets and corporate information.
A. Restrictive Covenants: Covenants Not To Compete
One method by which the corporation may seek to protect its interests is through the inclusion of a restrictive covenant in its contract with a new employee. Covenants not to compete are typically sought by businesses that employ individuals (1) who have access to trade secrets, intellectual property, or other confidential information and who possess the knowledge or skills to exploit this information; or (2) who have close personal contact with the employer's customers and suppliers. Through such agreements, corporations may guarantee some measure of security over confidential matters and information central to their business operations.
Restrictive covenants may take a number of different forms. These include:
- noncompetition clauses which prevent an employee from leaving the employer and starting or joining another business in direct competition with the former employer;
- nonsolicitation clauses which prevent or at least limit the departed employee's access to former customers;
- employee piracy clauses which keep employees from taking other of the corporation's employees with them or soliciting those employees to leave;
- nondisclosure agreements which are valid to protect company trade secrets and other confidential information; and
- intellectual property clauses which prevent departing employees from taking technology or information developed by the former employer and using it in competition or prevent present employees from using company resources to develop inventions for their own personal benefit. The enforceability of a covenant not to compete depends upon the facts and circumstances of each case. Courts will generally uphold the covenant "if the restraint is confined within limits which are no wider as to area and duration than are reasonably necessary for the protection of the business of the employer and do not impose an undue hardship on the employee or disregard the interest of the public." Holloway v. Faw, Casson & Co., 319 Md. 324, 334, 572 A.2d 510, 515 (1990); see also Blue Ridge Anesthesia & Critical Care, Inc., 239 Va. 369, 371-72, 389 S.E.2d 467, 468-69 (1990) (examination of same factors). Factors that a court may consider in assessing the reasonableness of a non-compete agreement, therefore, include the geographic scope of the restriction, the duration of the restriction, the nature of the business, the skill of the restricted employee, and the hardship that enforcement would impose on the employee. Budget Rent-A-Car v. Raab, 268 Md. 478, 302 A.2d 11 (1973).
Different cases produce widely divergent views on the permissible geographic scope of a covenant not to compete, and the results turn on specific facts including the nature of the employer's business and the scope of the employee's duties. A fifty-mile restriction on competition in one case may be too broad, while a nationwide restriction in another case may be deemed reasonable. See Diversified Human Resources Group, Inc. v. Levinson-Polakoff, 752 S.W. 2d 8, 12 (Tex. Ct. App. 1988) (holding that restriction on competition within fifty miles of employer's profit centers was overly broad); Micro Plus, Inc. v. Forte Data Sys., Inc., 484 So. 2d 1340 (Fla. Dist. Ct. App. 1986) (enforcing covenant with nationwide scope). But see Medline Indus., Inc. v. Grubb, 670 F. Supp. 831 (N.D. Ill. 1987) (holding that nationwide restriction was too broad).
In Maryland, courts have upheld covenants that covered multiple counties. See Millward v. Gerstung Internat'l Sports Educ., Inc., 268 Md. 483, 302 A.2d 14 (1973) (upholding covenant that extended to Baltimore and surrounding counties); Ruhl v. F.A. Bartlett Tree Expert Co., 245 Md. 118, 225 A.2d 288 (1967) (upholding covenant that covered six counties). A restriction that appeared to apply nationwide, however, did not survive judicial review. See Macintosh v. Brunswick Corp., 241 Md. 24, 215 A.2d 222 (1965). Maryland courts have also enforced covenants without any geographic limitation at all where the restriction on competition was limited to the employer's customers. See Gill v. Computer Equip. Co., 266 Md. 170, 292 A.2d 54 (1972). See also Intelus Corp. v. Barton, 7 F.Supp. 635 (D.Md. 1998) (in which the court upheld a covenant not to compete on a worldwide basis because the covenant protected the software provider's business concerns that spanned internet communications and a worldwide client base). The District of Columbia courts have also upheld restrictive covenants without geographic limitations. See Ellis v. James W. Hurson & Assoc., Inc., 565 A.2d 615 (D.C. 1989).
In two relatively recent cases, the Virginia Supreme Court upheld restrictive covenants that extended to the counties in which the employee worked. First, in Paramount Termite Control Co. v. Rector, 238 Va. 171, 380 S.E.2d 922, 924 (1989), the court upheld an agreement that prohibited employees of a pest control business from "carrying on or conducting the business of pest control, fumigating, and termite control . . . in any county or counties in the state in which the Employee works." Similarly, in Blue Ridge Anesthesia and Critical Care, Inc. v. Gidick, 239 Va. 369, 389 S.E.2d 467, 468 (1990), the court enforced a covenant that prohibited employees of a medical supply company from "render[ing] the same or similar services as Employer, within any of the territories serviced by agent of Employer." In rejecting the former employees' contention that the geographic scope was overly broad, the court noted that the restriction applied only to territories serviced by the former employees and not to the employer's entire market area. Id. at 469. But see New River Media Group, Inc. v. Knighton, 245 Va. 367, 429 S.E.2d 25 (1993) (upholding covenant between radio station and disk jockey that extended 60 miles where the signal strength of the station was approximately 60 miles).
The duration of a covenant not to compete must be no longer than is necessary to protect the employer's interest. For example, Maryland courts have upheld a term of two years, and have reinterpreted a five-year provision to three years, Gill v. Computer Equip. Co., 266 Md. 170 (1972) (two years); Holloway v. Faw, Casson & Co., 319 Md. 324, 334, 572 A.2d 510, 515 (1990) (five years). In addition, in the District of Columbia, courts have sustained non-compete agreements of three, five, and even ten years. See Ellis v. James V. Hurson Assocs., 565 A.2d 615, 621 (D.C. 1989) (collecting cases).
A covenant not to compete is more likely to be enforced against skilled workers than against unskilled workers. Employers generally have invested significant resources in training skilled workers. Moreover, unskilled workers do not provide any unique abilities to the employer and are less likely to have access to the employer's valuable information, and thus will tend to have a far smaller impact on the employer if they go to work for a competitor. See, e.g., Budget Rent-a-Car v. Raab, 268 Md. 478, 482, 302 A.2d 11, 13 (1973) (refusing to enforce an otherwise reasonable covenant not to compete against unskilled former employee); Pet World v. Walker, 1994 WESTLAW 384617 (Del. Ch. 1994) (salesperson at retail store not compelled to comply with non-compete covenant where there was no threat of exploitation of proprietary information or customer relationships).
As a result, courts often distinguish between businesses in which success is attributable to the quality of the product sold, as opposed to businesses in which success is attributable to the employee's customer contact. In the latter case, the employer has a stronger need to protect against diversion of business. Millward v. Gerstung Int'l Sport Educ., Inc., 268 Md. 483, 302 A.2d 14 (1973) (enforcing covenant against former employee because of his unique abilities and reputation which employer had cultivated). Likewise it appears that the more central the employee's role was in the business of the corporation from which he or she is being hired, the more likely it will be that a court applying will enforce a covenant not to compete. This conclusion follows from the fact that such central employees typically offer unique services and are in a position to misuse trade secrets, confidential information and unfairly solicit prior customers. See Fowler v. Printers II, Inc., 89 Md. App. 448, 464-65 (1991).
Maryland has adopted the following methodology to determine whether the court should rewrite a covenant that is unreasonable under the law: (1) Does the restrictive covenant as a whole evidence a deliberate intent by the employer to place unreasonable and oppressive restraints on the employee/covenantee? (2) If the answer to question (1) is yes, then the entire covenant is invalidated, whether severable or not. (3) If the answer to question (1) is no, then the court should modify the express terms so as to align the reasonable expectations of the parties to the reasonable expectations of the law, so long as it is fair to do so. Holloway v. Faw, Casson & Co., 78 Md. App. 205, 238 (1989), aff'd in relevant part, 319 Md. 324 (1990).
In the District of Columbia, courts will enforce reasonable provisions of an otherwise unreasonable covenant not to compete, provided that the reasonable provisions are grammatically severable from the remaining provisions. See Ellis v. James v. Hurson Assoc., 565 A.2d 615 (D.C. Cir. 1989).
Virginia courts, however, take an "all or nothing" approach. If any part of a covenant not to compete is unreasonable, the entire agreement is invalid; the court will not sever the offending provisions and enforce the reasonable restrictions. See Roto-Die Co., Inc. v. Lesser, 899 F. Supp. 1515 (W.D.Va. 1995) (concluding that the "blue pencil" power does not exist under Virginia law).
For an agreement to be enforceable, it must be supported by valid consideration; that is, each party must give something of value to the other. If a covenant not to compete is entered into at the beginning of employment, the employment itself is generally sufficient consideration to support the covenant. If the employment relationship already has begun and is contractual in nature, the employer generally must provide some new consideration, such as a promotion or a raise, in exchange for the addition of a covenant not to compete. Whittaker Gen. Med. Corp. v. Daniel, 362 S.E.2d 302 (N.C. App. 1987), aff'd in relevant part, 379 S.E.2d 824 (N.C. 1989); Maintenance Specialties, Inc. v. Gottus, 455 Pa. 327, 314 A.2d 279 (1974). If, on the other hand, an employee is employed "at will" or for an indefinite term and the covenant not to compete is executed after the commencement of employment, many jurisdictions recognize the continuation of employment as sufficient consideration to support the covenant, provided that employment actually continues. See Paramount Termite Control Co. v. Rector, 380 S.E.2d 922 (Va. 1989) ("Even though [the employer] could have terminated the employees at its will after they signed the non-competition agreements, [it] continued to employ them . . . This supplied the consideration for their promise not to compete"); Simko, Inc. v. Graymar Co., 55 Md. App. 561, 567, 464 A.2d 1104, 1107-08 ("Were an employer to discharge an employee without cause in an unconscionably short length of time after extracting the employee's signature to a restrictive covenant through a threat of discharge, there would be a failure of the consideration."), cert. denied, 298 Md. 244, 469 A.2d 452 (1983); Hogan v. Bergen Brunswiq Corp., 153 N.J. Super. 37, 378 A.2d 1164, 1167 (1977) ("The existence of sufficient consideration to support a post-employment restraint may be found in . . . a post employment contract, where the supporting consideration is at least, in part, the continuation of employment.").
Given the state of the law regarding restrictive covenants, a corporation that does business in any highly competitive industry should seriously consider having their professional employees agree to a restrictive covenant as part of their employment agreement. Through such clauses, the corporation can stop an employee from soliciting customers and benefiting from the exposure to trade secrets and intellectual property. In addition, the corporation can keep the employee from "pirating" other corporate employees to leave with them.
The corollary to this analysis is that a hiring corporation ought to inquire as to whether or not a job candidate is presently working under a contract which contains a covenant not to compete. This will enable employers to find out whether a potential employee is enjoined from working for them.
IV. PROTECTING TRADE SECRETS DURING THE COURSE OF EMPLOYMENT
A. Secure Confidential Information
From both a practical and legal standpoint, it is important for employers to adopt policies and procedures to protect confidential information. Practically, of course, adequate security measures will help prevent the disclosure of sensitive information in the first place. Legally, the existence of security measures is essential to demonstrating that reasonable efforts were made to maintain the secrecy of information. In devising security policies and procedures, employers should seek to: (1) limit access to confidential information, and (2) identify clearly the confidential nature of information.
Access to confidential information can be limited by: maintaining confidential files in secure area; disseminating information on a need-to-know basis only; and requiring passwords to open computer files and electronic mail. To limit access and prevent inadvertent disclosure of confidential information, it is also advisable to make as few duplicate copies of sensitive documents as possible. In addition, efforts should be made to ensure that confidential material is never left unattended on employees' desks or in conference rooms.
In order to make employees aware of the confidential nature of information, employers should conspicuously label all confidential materials. Computer files and electronic mail transmissions with confidential information should contain a header that conveys to the reader the confidential nature of the information. Furthermore, an employer may want to consider including a nondisclosure policy in its employee handbook and requiring employees to sign a nondisclosure agreement. Any nondisclosure policies or agreements should be strictly enforced, and employers should frequently remind employees of the need for confidentiality.
Many employees are privy to the trade secrets and business strategies of their employers. Employees have an implied duty to protect their employer's trade secrets even in the absence of any express contract provision to that effect. Nevertheless, a confidentiality provision should be included in all employment agreements. Such a provision should define what is considered to be confidential information. It should also prohibit disclosure of confidential information during and after the individual's employment. It should also require the employee to return all documents and materials containing confidential information to the employer upon departure from the company. The terms should also provide for enforcement, including the right of the company to obtain injunctive relief.
B. Prevent Misappropriation of Trade Secrets
The law of trade secrets seeks to balance free competition and an employee's right to use learned skills for his or her own benefit against an employer's interest in shielding its business from unfair competition. At common law, employees had an implied duty to protect their employer's trade secrets. The term "trade secret" was generally defined as information used in one's business, which provides a competitive advantage to the owner and which is maintained in secrecy. See Restatement (First) of Torts &#sect; 757. The employee's duty to protection this information was held to exist even in the absence of an agreement expressly imposing this obligation. Head Ski Co. v. Kam Ski Co., 158 F. Supp. 919 (D. Md. 1958) (stating that "the duty to protect an employer's trade secret exists apart from a contract embodying the obligation").
A number of jurisdictions, including Maryland, Virginia, and the District of Columbia, now have adopted the Uniform Trade Secrets Act (UTSA). Pursuant to this statute, an individual who discloses or uses another's trade secret without consent is liable for damages consisting of: (a) the actual loss caused by the misappropriation of the trade secret; and (b) the unjust enrichment caused by the misappropriation. In the alternative, the misappropriator may be ordered to pay a reasonable royalty for the unauthorized disclosure or use of the trade secret. If the misappropriation is willful and malicious, the statute further authorizes the award of punitive damages in an amount not to exceed twice the amount awarded as compensatory damages. Injunctive relief is also available under the UTSA. See Md. Code Ann., Comm. Law art., &#sect; 11-1201 et seq.; Va. Code Ann. &#sect; 59.1-336 et seq.; D.C. Code Ann. &#sect; 48-501 et seq.
Under the UTSA, a trade secret is defined as information that "derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and . . . is the subject of efforts that are reasonable under the circumstances." UTSA &#sect; 1(4). Thus, to qualify as a trade secret, information must be unavailable in the public domain, and the employer must have taken reasonable steps to maintain its secrecy.
The USTA defines misappropriation as: (1) Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (2) Disclosure or use of a trade secret of another without express or implied consent by a person who: (a) used improper means to acquire knowledge of the trade secret; or (b) at the time of the disclosure or use, knew or had reason to know that his knowledge of the trade secret was derived from or through a person who had utilized improper means to acquire it; acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use, and (c) before a material change in his or her position, knew or had reason to know that the information was a trade secret and knowledge of the trade secret had been acquired by accident or mistake.
Examples of Trade Secrets
A trade secret, if truly valuable, not known in the industry, and properly protected, can consist of almost any type of information. Perhaps the most famous trade secret is the formula for Coca-Cola. No one outside the company knows it and no one can duplicate or "reverse engineer" it. Examples of information commonly claimed to be trade secret information include the following:
- Business Information
- Customer lists and confidential customer and information;
- Sources of supply;
- Procedures, such as employee selection procedures, business methods, standards and specifications, inventory control, and rotation procedures;
- Financial information, including pricing policies, bidding methods, material costs, overhead costs, and profit margins, and
- Advertising and marketing information, including marketing and advertising plans, marketing research, and new product development. Scientific and Technical Information
- Processes and methods of manufacture;
- Machinery designs and material specifications;
- Tolerance data;
- Chemical formulas and ingredients;
- Computer software;
- Recipes and formulas;
- Operating manuals, and
- Customer service and quality control standards. Perhaps the most frequently litigated area of trade secret law is whether trade secret protection extends to customer lists and similar competitive sales information. In most cases, a customer list will be treated as a trade secret where, in fact, it is a trade secret. Thus, if a customer list is kept confidential and is not readily discoverable through proper means (such as making a list from a phone book), a person who uses or discloses such a list may be liable for misappropriation of a trade secret.
"Know-how" may constitute a trade secret, but such know-how must be information that is not generally known in the trade, as opposed to general technical training commonly imparted in teaching a craft, trade, or skill. A business may not be able to restrain an employee from working for a competitor simply out of fear that the employee might use the skills that an employee has acquired while working for the business. The employee's general right to earn a living must be reconciled with his former employer's right to restrain the use of his trade secrets.
Businesses often try to protect themselves with written agreements with their employees regarding trade secrets and the ability to work for competitors on termination of employment.
C. Criminal Actions Against Employees Under the Economic Espionage Act of 1996
The Economic Espionage Act of 1996 imposes harsh criminal penalties for the theft of trade secrets. In particular, the Act provides that anyone who "with intent to convert a trade secret" knowingly or without authorization appropriates, copies, destroys, delivers, conveys, receives, or possesses the trade secret, knowing it to have been appropriated without authorization, or anyone who attempts or conspires to commit such acts, can be fined in an amount up to $500,000, or imprisoned up to 15 years, or both. 18 U.S.C &#sect; 1831(a). An organization that commits such an offense can be fined up to $10 million. 18 U.S.C. &#sect; 1831(b). The statute also provides for the forfeiture of any property used in any manner to "commit or facilitate the commission of such violation." 18 U.S.C. &#sect; 1834.
A "trade secret" includes all forms of information, including compilations and programmed devices, whether tangible or intangible, if (a) the owner of the trade secret "has taken reasonable measures to keep such information secret," and (b) "the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public." 18 U.S.C. &#sect; 1839. This definition encompasses information which is not even secret, as long as the information is not "generally" known or "readily ascertainable" through proper means. Under the new law, the "owner" of a trade secret can include licensees and anyone else who has a right to use the trade secret. Id
Companies which "knowingly" appropriate, copy, deliver, convey, receive or possess a trade secret without authorization, knowing the trade secret to have been appropriated without authorization may be subject to harsh penalties. Therefore, due diligence in any transaction in which a trade secret may be involved is essential. Moreover, an employer should consider taking reasonable steps to advise new employees of the importance of avoiding trade secret violations and to document the training of its employees.
V. OWNING AND PROTECTING PATENTS
The original inventor(s) of an invention owns the patent absent assignment to someone else. Patents may be assigned in whole or in part by the inventor. Assignments of applications and patents are recorded with the Patent and Trademark Office. A patent may be owned by more than one entity, such as joint inventors or multiple assignees. In the absence of any agreement to the contrary, each of the joint owners of the patent may make, use, or sell the patented invention without the consent of and without accounting to the other owners. 35 U.S.C. &#sect; 262.
Frequently businesses have agreements with their employees that require assignment of inventions to the company. These agreements are usually enforceable under applicable state law. However, many states have laws limiting the ability of an employer to require an employee to assign inventions. Many states have an employee patent act that restricts the scope of agreements requiring an employee to assign rights to an invention to the employer. Under the state statutes, such an agreement does not apply to an invention for which none of the employer's equipment supplies, facilities, or trade secrets was used and which was developed entirely on the employee's own time, unless the invention relates to the employer's business or anticipated research and development, or results from work performed for the employer.
Even absent an agreement, the courts have created a limited doctrine called "shop right" to give an employer a non-assignable, non-exclusive, royalty-free license to an employee's patented invention. The shop right is much more limited and less valuable than an assignment. An employer has a shop right when it can show that the employee made the invention during employment with company facilities and materials. Absent a written agreement, the only right an employer usually has in an employee's invention is a shop right. See Crown Cork & Seal v. Fankhanel, 49 F. Supp. 611, 615 (D. Md. 1943); St. Louis & O'Fallon Coal Co. v. Dinwiddie, 53 F. Supp. 655, 662 (D. Md. 1931); but see Avtec Sys. v. Peiffer, 1994 U.S. Dist. LEXIS 16946, p. 26 (E.D. Va.. September 12, 1994) ("no shop rights in copyright").
VI. OWNING AND PROTECTING COPYRIGHTS
Under the 1976 Copyright Act, a copyright vests in the author of the work automatically upon the work being fixed in some tangible medium of expression. The copyright may be owned by a single author or by two or more contributors. Each of the authors is a joint owner of the copyrighted work. A "joint work" is one created by two or more authors intending that their respective contributions be merged into a single work.
A contributor will be a true co-author only if he or she has contributed material to the work that would be copyrightable by itself. Each co-author of a copyrighted work has an independent right to use and exploit the entire work. However, each author must ultimately account to the co-authors for any profits earned from the work.
B. Works Made For Hire
Perhaps the most perplexing copyright ownership issue today is that of works made for hire. Generally, these are works developed for another party, either by employees or independent contractors. The work-made-for-hire doctrine represents an exception to the rule that the individual who creates a work owns the copyright in it. If a work qualifies as a work made for hire, the employer or other person commissioning the work is considered its author and is the copyright owner, not the individual who created the work. 17 U.S.C. &#sect; 201.
There are two types of works made for hire. 17 U.S.C. &#sect; 101. The first type is any work prepared by a regular employee working within the scope of his or her employment. The second type (commissioned work made for hire) is a work that falls within one of nine specific statutory categories, is specifically commissioned, and is developed pursuant to a written agreement expressly providing that the product is intended to be a work made for hire.
If a work falls outside the nine protected categories and is not developed by a regular employee, the company will own the work's copyright only if it obtains a written assignment of the copyright from the party or parties doing the work. Computer programs are a good example of work product that does not always fall neatly within any of the nine statutory categories. Whether the subject matter is computer programs, advertisements, or any other commissioned items, legal counsel should be consulted any time work will be commissioned (in whole or in part) from non-employees. A work-for-hire agreement or obligation to assign may be required.
VII. TERMINATING THE EMPLOYMENT RELATIONSHIP
As noted previously, an at-will employment contract is terminable at any time, by either party to the contract. In contrast, the fixed term contract can be terminated prior to the date of conclusion only under the circumstances set forth in the agreement, when the employee engages in conduct which violates the express or implied terms of the agreement or otherwise when there is good cause for discharge.
If a company has entered into a contract with an employee for a fixed term, the company must be careful to terminate the relationship according to the terms of the agreement prior to the expiration of the contractual period. When a contract is entered for a fixed period of time but the employment relation continues beyond that time, there may be a presumption that the contract continues for this same period (i.e., a one-year contract becomes a second, one-year contract). See The Traveler's Ins. Co. v. Parker, 92 Md. 22, 30 (1900).
A. Terminating Fixed-Term Employment Contracts
An employment agreement of a fixed term may provide specific causes for terminating the agreement and discharging the employee. It is impossible, however, to list all of the possible reasons for terminating the relationship, and employers should ensure that the agreement provides sufficient leeway to end the relationship when it is in the company's interests to do so. Careful drafting and review by qualified counsel are essential. It is critical, as well, that employers follow precisely any procedural requirements (such as notice, etc.) in terminating an employment contract.
Good cause for discharge cannot be reduced to a definitive list; however, good cause includes acts of misconduct, such as disloyalty or insubordination, or any failure by the employee to competently perform the essential duties of his job. Examples of good cause include:
- Unsatisfactory Performance: The corporation may terminate the agreement when, in good faith, it subjectively believes that the employee's performance was unsatisfactory, even if a reasonable person might have viewed the performance to the contrary. See, e.g., Ferris v. Polansky, 191 Md. 79, 85-86 (1948).
- Incompetence: The corporation may terminate the agreement if the performance of the employee demonstrates that he does not possess the qualities of skill and character which he expressly or impliedly represented when the contract was formed. See, e.g., Wischhusen v. American Medicinal Spirits Co., 163 Md. 565, 571-72 (1933).
- Insubordinate or Insolent Behavior: The corporation can terminate the agreement if the facts surrounding the termination indicate that the conduct of the employee is contrary to the implied conditions of the master-servant relationship. See, e.g., Dorrance v. Hoopes, 122 Md. 344, 350-51 (1914).
- Disloyalty: The corporation can terminate the agreement if the employee fails to faithfully serve the corporation or willfully engages in any conduct which might injure the business of the corporation or is disloyal to important interests of the corporation. See, e.g., Maryland Metals, Inc. v. Metzner, 282 Md. 31, 38 (1978).
- Absenteeism: Inherent in any employment relationship is the employee's implied duty to regularly report for work. See, e.g., Dep't of Economic & Employment Development v. Jones, 79 Md. App. 531, 536 (1989). Of course, there are statutory considerations (such as the Family and Medical Leave Act) which must be carefully reviewed when attendance is at issue.
- Neglect of Duty: Related to the implied obligation to report for work is the employee's basic obligation to perform the work for which he was hired. If an employee refuses to perform his assigned duties, the employer is allowed to terminate the contract and discharge the employee. See, e.g., Silkworth v. Ryder Truck Rental, 70 Md. App. 264, 272, cert. denied, 310 Md. 2 (1987).
- Criminal Misconduct: A crime against an employer or the employer's reasonable belief that an employee committed such a crime constitutes just cause for terminating the relationship. B. Termination Procedures
Once the determination is made to terminate an employee, or when an employee tenders their resignation, it is in the interests of the corporation to have a formal "exit interview" process in place. A formal exit interview can stop unauthorized disclosures by an employee, protect trade secret and confidential information from disclosure or further disclosure, and prevent the raiding of other employees. In addition, the interview can put the exiting employee on notice of the corporation's intent to fully enforce its contractual rights if the employee fails in his legal duties and responsibilities.
The following matters should be discussed in the exit interview:
- Employees owe the corporation fiduciary duties after they leave the corporation, even if they were employees at-will and did not sign any agreements as the common law imposes a duty not to disclose confidential information and trade secrets.
- Employees who leave must not take any employer or client property with them.
- Employees should be expressly cautioned not to take any copies of confidential information or trade secrets, nor to disclose such information after termination.
- Any confidentiality agreements or other surviving provisions of an employment contract should be discussed and brought to the employee's attention.
- The meaning of any restrictive covenants or clauses should be discussed and the corporation should provide a copy to the exiting employee even if the employee may already have copies.
- Any inventions conceived of during the employment should be noted. It is often desirable to have a clause in the employment agreement creating a presumption that any invention reduced to practice within six months of termination belongs to the prior employer. The employee should be reminded that the mechanics of this provision require the employee to notify the former employer of any inventions that fall into this category, so that a decision as to ownership can be reached.
Companies can protect their assets most effectively by establishing policies to control the release of key assets at the outset of an employment relationship and by extending the asset control mechanisms for a reasonable period following the end of the relationship. This will enable companies to maintain a competitive advantage within the relevant industry and to protect itself from infringing upon the property rights of other corporations.
Comparison and overview of patents, trademarks, copyrights, and trade secrets.
Utility Patents Design Patents Plant Patents Trademarks Copyrights Trade secrets Protectable subject matter
Useful processes, machines, articles of manufacture, and compositions of matter. Ornamental designs for article of manufacture. New varieties of plants. Words, names, symbols, or other devices used serve to distinguish goods or services.
Including, service marks, certification marks, and collective membership marks. Works of authorship, including writings, music, works of art, and the like, reduced to a tangible medium of expression. Information not generally known in a trade which gives a business an advantage over competitors, such as formulas, chemical compounds, blueprints, dimensions, tolerances, customer lists, etc. Sources of Protection Issuance of patent by the U.S. Patent and Trademark Office Issuance of patent by the U.S. Patent and Trademark Office. Issuance of patent by the U.S. Patent and Trademark Office. Common law protection, so long as proper use continues.
State registrations available.
Issuance of Federal Registration by the U.S. Patent and Trademark Office. Federal law protects when fixed in a tangible medium of expression.
Issuance of Registration Certificate by Copyright Office. Protected by common law, state statutes, principle of express or implied contract law, and law of unfair competition.
Not specifically protected by federal statute. Terms of Protection From issuance of patent to 20 years from filing of patent application. 14 years from issuance of patent. From issuance of patent to 20 years from filing of patent application. 10 years from issuance of Federal Registration renewable for additional 10 year terms, as long as properly used and not abandoned.
State terms vary; typically 10 years and renewable. Life of author, plus 50 years for works created after January 1, 1978.
75 years from first publication for works made for hire, and anonymous and pseudonymous works. As long as information remains a secret.