Employee to Entrepreneur to Executive
By Joseph S. Iandiorio
The unforeseen expansion
of technology in
the twentieth century:
“Everything that can be invented has been
invented”
Charles H. Duell, Commissioner,
U.S. Office
of Patents, 1899
and especially in the more
recent era:
“I think there is a world market for maybe
five computers”,
Thomas Watson, Chairman,.
IBM, 1943
“There is no reason anyone would want a computer
in their home”,
Ken Olson, Chairman and
Founder, Digital
Equipment Corp., 1977
has made intellectual property
a fundamental
part of running a business.
Once technology
was apparent in a few discrete
easily perceived
products: the McCormack
reaper, steam engine,
cotton gin and electric
light. Now it is
everywhere, permeating
all facets of life.
It is buried in the bioengineered
food on
your dinner plate, the
sophisticated electronics
in your cars, washing machines
and the Global
Positioning System, in
exotic new drugs and
surgical techniques, in
the materials of
everyday items from pots
and pans to airplane
wings and human prosthetics.
Intellectual
property is a form of intangible
property
of the mind protected variously
by patents,
trademarks, copyrights,
trade secrets, know-how,
licensing, employment contracts,
confidential
disclosure agreements,
trade dress, unfair
competition.
Intellectual property protection
is no longer
merely the result of an
ancillary afterthought
that first suggests that
protection may be
warranted only after the
high technology
product has been designed,
sold and is on
its way to success. It
is an essential and
intimate part of planning
and running a business
which must be considered
at every stage,
from a time before the
high tech product
is born or the entrepreneur
emerges until
the enterprise has become
a stable growing
business.
From the seminal moment
when the entrepreneur
sees a high tech opportunity,
intellectual
property will be involved
whether or not
he is aware of it: that
new idea may already
be owned or it may have
been previously made
public by another. In order
to determine
whether or not a new idea
is really novel
and whether or not some
area of exclusive
protection is available
resort must be had
to intellectual property
considerations.
When defining a market,
planning market entry
and estimating obtainable
market share one
must understand not only
the intellectual
property needed to protect
the target market
but also intellectual property
positions
of competitors that could
be a bar to market
entry.
Intellectual property,
as every other aspect
of a new high tech venture,
relies on people;
it is people that invent
products, conceive
trademarks, author software,
and create marketing
and sales plans and materials.
A new venture
must provide encouragement
for its people
to make such innovations
and at the same
time be sure that these
new ideas belong
to the company.
Considerations of intellectual property should
begin at the earliest moment in the formation
of the new high tech business. Initial financial
projections should provide for the expenses
of protecting those ideas and products most
critical to the enterprise and of making
investigations and analyses necessary to
identify and avoid the protected positions
of competitors. Any good business plan will
state the goals, how it expects to reach
those goals and what it will need to get
there. It is only with a solid understanding
of the intellectual property position of
the high tech business and of its competitors
that such goals can be honestly and accurately
defined. A weak or misunderstood intellectual
property position can discredit the entire
business plan and make raising money a difficult
endeavor. This is especially so if the company
is truly a seed-stage company whose idea
or product has not been proven or developed.
Regardless of the stage of development of
the high tech company the investors will
have their own expectations for the intellectual
property position. Angels or individual backers
as well as conventional venture capitalists
will want to know that the products can be
sold without infringing on competitors’ rights
and that the company has some protection
for its market niche. Investors also will
want to be assured that no conflicts with
former employers or present employees will
jeopardize the company’s ownership of its
products and ideas and that the company is
at least aware of the value of its intellectual
property and is moving to secure it. A recent
survey underscores the relationship of intellectual
property concerns and venture capital investment.
Harvesting the return on
a high tech business
can take many forms, initial
public offerings,
mergers and acquisitions.
In each of these
avenues it will be critical
that the intellectual
property of the company
is clearly defined
and free from conflict:
the company owns
its name; its proprietary
products are protected;
and no competitor can interfere
with its
business. In some cases
where the technology
is a critical part or even
the entire motivation
for the buyer, partner
or investor the intellectual
property position will
be a fundamental part
of the deal and will be
carefully evaluated.
Most new, high tech ventures
are born while
the entrepreneur is employed
in another enterprise.
After realizing his conception
of the new
products and business he
breaks off and enters
the second entrepreneurial,
stage where he
founds, finances and forges
a new business.
Finally the business is
proven, successful,
and he operates more as
an executive and
less as an entrepreneur.
At each stage there
are concerns in the area
of intellectual
property to ensure first
the survival, then
the success of the enterprise
and finally
to make it attractive for
harvest in the
chosen exit strategy.
Employee
As an employee the primary concern always is honoring the
legal obligations to the employer.
Employment Contracts
The most common expression of these obligations
is often the employment contract. One provision
of such contracts will establish that all
proprietary and confidential information
of the employer must be safeguarded by the
employee and cannot be used or disclosed
to anyone without permission of the employer.
There will also typically be a provision
that any tangible form of such proprietary
and confidential information - blueprints,
documents, flow charts, coding, data bases,
schematics belong to the employer and cannot
be taken without the permission of the employer.
An employee who takes trade secrets in tangible
form is running a double risk. First, there
are severe civil and even criminal sanctions
for such behavior.
Second, it makes the employee and his new
enterprise extremely vulnerable to law suits
at a time when they can do the most damage.
Investors and key new employees will shy
away from any new venture caught in legal
entanglements . And the ex-employer knowing
how vulnerable the ex-employee and new venture
are at this time can be counted on to press
the issue for maximum effect to intimidate
or scuttle the new venture while it is still
small and unable to afford a vigorous defense.
When you leave, take nothing and be sure you have a credible witness
- a boss still loyal to the employer, an
officer of the employer - watch you while
you clean out your files and take what is
yours. Nothing can prevent an angry, threatened
ex-employer from filing suit and making threats
sufficient to interfere with a fledgling
competitor. But don’t provide any help.
And remember the fact that you take nothing
tangible doesn’t mean you are free. If you
use a memorized customer list, market plan,
schematic or flow chart deemed confidential
and proprietary you can still be guilty of
stealing trade secrets. Whether you take
trade secrets in tangible form or you memorize
them you are guilty of theft or misappropriation
of trade secrets if you use or disclose them.
The difference is, when you take them in
tangible form it is much easier to prove
and the consequences can be more severe.
Property identified and cared for as trade
secrets is strongly protected by the courts
even to the point of anticipatory enforcement.
If an employee in possession of trade secrets
leaves for a competitive business where he
may inherently disclose or use his past employer’s
trade secrets courts have applied the “inevitable
disclosure” rule to prevent the new association
and safeguard the secrets.
Other clauses in employment contracts will
require the employee to assign to the employer
all right, title and interest to any new
inventions, innovations or discoveries including
not just the physical embodiment of the idea
or device but the intellectual property resident
in it, too. Thus, if an employee writes an
instruction book, application note, spec
sheet, advertising copy, software, a database
or an architectural design the employer not
only owns that embodiment of the work but
under copyright law will also own the exclusive
right to copy and reproduce that work. If
an employee invents a patentable apparatus,
method or composition the employer not only
owns the embodiment of the invention created
by the employee, the employer also owns whatever
trade secrets are associated with the invention
and has the right to seek and obtain a patent
on patentable aspects of that invention.
If an employee creates a new trademark the
employer owns the design constituting the
mark and has the right to apply the mark
to its goods or services to establish trademark
use.
A particularly nettlesome
provision in many
employment contracts is
one that prohibits
competition by the employee
with the employer.
These clauses generally
prohibit the employee
from consulting to or establishing
another
business as well as simply
accepting employment
with a competitor. The
definition of competition
is critical. Sometimes
it is simply working
for a direct competitor.
Other times it is
merely working in the same
or closely related
industry. Sometimes it
prohibits any engaging
in specific product lines;
other times it's
being associated with any
part of a business
one of whose parts may
be competitive with
your ex-employer’s business.
The definition
of “association” can also
be difficult: does
it mean just an employee
or principal of
the competing concern?
Or can it include
directors or even minority
shareholders.
These obligations cannot be taken lightly.
A lawsuit based on your alleged violation
of such a contract can cause a new employer
to rethink your importance and investors
will easily find more comfortable places
to put their funds. And the spectre of the
litigation and accusations of wrongdoing
can intimidate you personally, resulting
in loss of initiative and self-confidence
at a time when it is most in demand. See
an expert before you start. There is never any guaranty of
the outcome of such disputes. But if you
learn the rules - first, then play by them
- honestly, you maximize your chances of
avoiding, or at least ending quickly and
positively, for you and your venture, any
charges of misconduct.
A Company’s Right to Employee’s
Ideas and
Effort
Quite apart from an express written employment
contract there are rules of law that govern
an employee’s conduct. When an employee not
specifically hired to invent, invents something,
usually while on the job, the employer gets
a royalty free non-exclusive license in the
invention and under any patent granted for
that invention. This is known as a “shop
right”. The license typically includes the
right to use the invention but not sell it
or prohibit others from using it. If the
employee was specifically hired to invent,
e.g., solve technical problems, the employee’s
shop rights will be stronger.
Another concept in law
known as “fiduciary
duty” also applies to employees
notwithstanding
the absence of a contractual
obligation.
Directors and officers
of corporations have
a duty of loyalty to their
companies. They
may not compete or participate
in businesses
that compete with their
corporation. They
cannot use corporate facilities,
funds or
personnel in their other
businesses. They
cannot steer the corporation
away from competing
with their other businesses
or use insider
information to compete
or profit. And they
cannot lure away customers,
suppliers, employees,
consultants or interfere
with others having
beneficial relationships
with their corporation.
One aspect of the fiduciary duty is the prohibition
against any director or officer of the corporation
usurping a “corporate opportunity”. A corporate
opportunity is any business activity which
uses corporate information or property, or
which is closely related to a business in
which the corporation is engaged or plans
to be engaged, or was offered to the corporation
but intercepted by the employee for his own
benefit and not that of the corporation.
Job Description
An employee’s duty to the
corporation increases
directly in proportion
to his importance
to the corporation. Directors
and officers
have the highest and broadest
duty, other
employees will have a lesser
duty and it
may be more specific. The
head of marketing,
vice president of sales,
or chief engineer
may have a less broadly
defined obligation
in accordance with the
tasks for which they
were hired. For this reason
it is extremely
important that you know
and understand your
position. Your job description
should be
articulated when you are
hired and preferably
should be in writing. Further,
any time your
actual duties change from
the original description,
especially if your job
focus narrows, you
should request a new more
accurate job description.
This could be critical
when you are honestly
trying to do the right
thing by your employer
when you leave to start
your new business.
It will also help clarify
any legal issues
that arise and give your
investors a measure
of comfort.
Before Leaving
We have covered a number
of things you should
not do in terms of contractual
and common
law obligations to your
employer. But there
are some things you can
do while still employed.
You could incorporate the
new business. Don’t
use any lawyer who is or
has been associated
with the employer. It not
only could give
rise to ethical conflict
problems for the
lawyer resulting in your
having to change
lawyers when you least
want to, but can be
viewed as a conduit for
confidential and
proprietary information
from your old employer
to your new employer or
business or just
to you. You could have
market studies done.
Don’t “borrow” your employer’s
study; don’t
use it as a model; don’t
employ the same
consultant to do it. Don’t
hire moonlighting
employees of your new employer
Stay clear
of all associations. You
could solicit investment;
not from your employer’s
investors and not
by networking through your
employer’s accountants,
brokers and financiers.
You could hire staff;
not through signs in the
company cafeteria;
not by word of mouth through
fellow employees;
not through the same personnel
agency used
by your employer. Hire
a different one. Advertise
in a publication of general
circulation or
at least trade or professional
journals.
And do not target specific
individual co-employees
by name or even by “rigged”
experience requirements.
It is not impossible to
avoid conflict with
your ex-employer as you
transition from employee
to entrepreneur. It needn’t
even be difficult.
Just be honest and fair;
consider each move
thoughtfully before you
execute and if the
problem seems cloudy or
puzzling get legal
advice right away before
the trouble can
materialize.
Entrepreneur
As an entrepreneur you have left employee-hood behind. Now
you must protect yourself and your new business.
Confidential Disclosure
Agreements
First, you will want to
be sure that your
partners and you all have
executed agreements
in writing containing generally
the provisions
of a conventional employment
contract as
well as non-compete and
confidential disclosure
provisions. Investors might
also be asked
to sign such agreements.
Smaller investment
firms and individual investors
may be willing
to sign such agreements
but the larger firms
generally decline because
they have such
broad involvement with
new ideas that it
would be hard to police.
Confidential disclosure
agreements can be
as simple as one or two
pages that prohibit
use and disclosure of the
sensitive information
as well as safeguarding
and return or destruction
of all tangible forms of
the information.
There is usually a provision
specifically
exempting from coverage
any such information
in the published domain
or disclosed by others.
In many cases these agreements
with suppliers,
distributors and even customers
in addition
to limiting use and disclosure
may if properly
handled be made to limit
their dealing with
competitors of yours to
prevent any leaking
of information at least
for the period of
time until the business
is well launched.
One of the most common areas of concern at
this time of business startup is with consultants.
The experience required can’t always be afforded
full time by the business yet it may be sorely
needed. Consultants are a good answer but
a conflict can arise. The consultant makes
his living because of his expertise in a
specific area and that typically means his
clientele can be a limited number of members
of the same industry - your competitors.
The consultant can’t give up his field and
clients to comfort you. Yet you can’t feel
totally safe disgorging your intimate problems
and plans to one who necessarily travels
in the same circles as your competitors.
This requires a personal relationship of
trust and a clear definition of what the
consultant is willing to do and not do in
order to get your work and where you will
be willing to compromise to get that consultant
and the price your want. The terms should
be clear and in writing. Further, ownership
of all new inventions, ideas and products
arising out of the consultant’s work should
be clearly assigned to you. If not some control
or a license must be agreed upon in advance.
Before any work begins or money changes hands
there must be a fully understood, protective
agreement in place. This applies to all consultants
-- sales, marketing, and financial as well
as technical.
Idea and Product Protection
More formal approaches
for protecting ideas,
products and other intellectual
property
which also positively build
valuable business
assets include patents,
trademarks and copyrights.
Patents come in three forms: utility, design
and plant. Plant patents cover inventions
in asexual reproduction of distinct and new
varieties of plants. Design patents cover
the new design - the ornamental appearance
of a device. Utility patents, the kind most
often meant when people refer to patents,
cover any new and useful process, machine,
manufacture or composition or improvement
thereof including new uses of old devices
or new combinations of well known components.
Most patents are indeed new combinations
of old elements, few are wholly new, cut
from whole cloth. There are three types of
inventions as classified by the U.S. Patent
and Trademark Office: chemical, electrical
and general/mechanical inventions. All of
these classes cover inventive processes as
well as products. Perhaps the two fastest
growing areas are biotech and software/internet
inventions. Both the biotech and software
patent areas have been highly active. The
growth of the internet and worldwide web
have further increased the push for patents
to protect the market edge of new and emerging
companies in this highly competitive field.
And two recent cases have amplified the interest.
The State Street case held that methods of doing business
are patentable while the Amazon.com case made it clear that specific software
features directed at internet communications
are patentable. The speed with which the
Amazon.com litigation unfolded testifies
to the importance of patents in this field.
Within a few weeks after the Amazon.com “one
click” patent issued a patent infringement
suit was filed and an injunction obtained
against Barnes and Noble.
The most important aspect of a patent for
the entrepreneurial business is the scope
of the claims which the U.S. Patent and Trademark
Office allows. A utility patent has three
parts: drawings, a written description of
those drawings, and the claims. The drawings
need only present a single embodiment of
the invention. It should represent the best
mode the inventor knows of making the invention
and it should be clear enough to enable another
skilled in the art to make and use the invention
but it need not disclose all known embodiments
and variations. One will generally do. However,
the claims must cover all embodiments you can imaging so
that no one can in the future design around
your patent. The drawings need not be detailed
engineering drawings of your product, the
written description does not have to be in
manufacturing detail or cover every option
or provide scientific and mathematical justification.
But the claims had better cover the invention, i.e., all embodiments you can think of.
That is where you should concentrate all
your time and effort. Often fully half the
time of writing a patent application is devoted
to writing the claim or claims. One further
point about patents. In the United States
inventors have a period of grace, one year
from the time when they first make an invention
public in some way, before they must file
a patent application or be forever barred.
This period starts to run upon any publication
of the invention, upon a sale or offer to
sell the invention or a public use of the
invention. If all you are concerned about
is protection in the U.S. that is all you
need to care about. But, if you want protection
abroad be aware that there is no such period
of grace in any other country. In every other
country you must have your patent application
on file before you make any disclosure. Thus
if you want foreign protection be sure that
your patent application is on file before
any public use or sale or publication. Under
certain treaties a filing in the U.S. will
satisfy that need.
Copyright is a relatively inexpensive and
swift way for a young business to protect
eligible works: writings, catalogs, spec
sheets, databases, software, graphics, photographs.
It provides good coverage for software under
the “look and feel” doctrine and is easy
to do. Merely creating an eligible work gives
rise to the copyright and filing the properly
filled out and executed form of application
will in most cases result in a copyright
registration which is prima facie proof of ownership and entitles you to enforce
the copyright in federal courts and to obtain
awards of statutory damages.
Trademarks are another
relatively inexpensive
but potentially extremely
valuable intellectual
property asset useful in
defining a market
niche for a new product
or service. The market
power of such marks as
Amazon.com, Microsoft,
Mobil and Boeing are worth
more than any
patent. The trademark you
apply to your goods
or services will be promoted
in all your
advertisements, signs,
and promotional materials
and will thus represent
a substantial investment
not just in printing and
promotional materials
but also in the goodwill
and notoriety you
have earned for your mark.
Thus before you
adopt a mark you should
be sure that it is
available for you to own.
The owner of a
mark is he who first uses
the mark on the
goods or in connection
with the services.
Therefore, before you adopt
a mark, it is
wise to have a search done
to see if anyone
else is using the same
or a similar mark
for the same or similar
goods. If it is clear
to use your should begin
using it in commerce
immediately and file an
application to register
the mark as soon as possible.
If you are
only using the mark in
a local area within
a single state then you
may only file an
application to register
the mark within that
state. If you are using
the mark in connection
with goods or services
that are in interstate
or foreign commerce then
you may apply to
register it with the U.S.
Patent and Trademark
Office In addition to bestowing
access to
federal courts to enforce
your trademark
against infringers, federal
registration
also gives you plenary
protection in all
fifty states even though
you may not be using
the trademark in all the
states. Further,
even if you have not started
to use the mark
in commerce yet you may
file an intent-to-use
application with the U.S.
Patent and Trademark
Office in order to protect
the mark until
you actually do use it.
The Office will notify
you if and when the intent-to-use
application
is approved and at that
time demand proof
within six (6) months that
you are now actually
using the mark before they
will grant the
registration.
Even if you do take the
approach of an intent-to-use
federal application, eventually
you must
use the mark in commerce,
and the faster
the better. Use is not
a simple concept when
applied to trademark ownership.
In order
to establish ownership
of a trademark for
goods one must apply the
mark to the goods
or containers for the goods
and ship the
goods in commerce. If a
federal registration
is sought the goods must
be shipped in interstate
or foreign commerce. Mere
use of the mark
in advertisements and brochures
is not sufficient.
In order to establish ownership
of a trademark
used in connection with
services, more correctly
referred to as a service
mark, the mark must
be used in advertising
in connection with
the services. Here advertisements
in magazines
and newspapers, promotional
items, signage,
or brochures which display
the mark and advertise
the service are required.
And if federal
registration is desired
these advertisements
must occur in interstate
or foreign commerce.
Choosing a trademark wisely
can avoid many
problems. The trademark
Apple for a phonograph
company doesn’t interfere
with the trademark
Apple for computers. But
it would be unwise
to choose Coca Cola as
your trademark for
baseball bats. And mere
variations from pre-existing
marks such as by color,
pluralization, font
style or misspelling will
not avoid likelihood
of confusion. You will
want a mark that is
distinctive, perhaps suggestive
of the goods
or service but definitely
not descriptive.
Marks that tend to be descriptive
of the
particular goods or services
are weak for
everyone has the right
to describe his goods
or services using descriptive
words so no
one can actually “own”
them even if they
are the first user. And
the U.S. Patent and
Trademark Office will not
register descriptive
marks. Sometimes a new
business may wish
to purchase or license
the mark of another.
This is tricky business.
Legal counsel is
advisable. If you buy the
mark outright you
must also purchase the
portion of the business
to which the mark applies;
otherwise you
have acquired nothing.
The mark will be judged
abandoned; ownership of
a mark may not be
transferred in gross. Licensing
is only effective
if the licensor includes
in the license the
right to inspect your goods
or services to
ensure that their quality
is up to the licensors
standards, a constraint
you may not be comfortable
with but without which
the mark can become
abandoned and cause problems
for both licensor
and licensee.
Trade secrets are another
type of intellectual
property protection. A
trade secret may be
anything that gives you
an edge over your
competitors and is kept
secret. Unlike patents,
trade secrets can cover
any type of subject
matter, not just technical:
plans for growth,
expansion, new products,
pricing, advertising,
marketing, employee hiring.
Customer lists,
sources of supply, secret
formulas and recipes
all can be trade secrets.
Unlike patents, trademarks and copyrights
there is no government grant involved which
bestows title. In order to enforce your rights
against one who misappropriates your trade
secret you have to establish by your own
prior conduct that you had a trade secret
and made an effort to keep it secret. All
employees, consultants, agents, suppliers,
customers and others who have access to trade
secrets should be made aware of that fact
and admonished that they may not use or disclose
the information. The premises where the secrets
exist should be made secure: fences, locks,
alarm systems, guards, receptionists, badges,
sign-in books, mandatory escorts are a few
of the things that establish that this has
been done. All documents that contain the
trade secrets should be stamped confidential
and be inaccessible without express authority.
Recruiting Staff and Acquiring
Customers
The thing most likely to
cause problems for
a new venture is its approach
to acquiring
customers and recruiting
staff. It was discussed
in an earlier section with
regard to conduct
as an employee. It applies
with equal force
now that you are an entrepreneur.
There is
a great temptation to resort
to the familiar,
to work with customers
you knew as an employee
and who may even have given
you the inspiration
to go off on your own.
Nevertheless, stay
clear of them. Advertise
and solicit through
the general market. It
would not be a bad
idea to have a paper trail
showing acquisition
of potential customers
from publicly available
directories and lists,
followed by personal
contact or some form of
communication to
all the names in the list
- not just those
you know through your previous
employer.
It might be good, if you
can afford it, to
hire an outside consultant
to set up the
sales and customer program.
Recruiting staff
should also be done with
care: advertise
positions in the general
press and trade
journals; hire a personnel
agency if you
can. Avoid directly approaching
anyone of
particular value to your
ex-employer whether
he be in finance, marketing,
sales, or a
technical area. Be especially
wary of hiring
anyone from your ex-employer
who may have
trade secrets regardless
of how that person
came to you. The less threatening
your new
business is to your ex-employer
the less
serious are these concerns.
Executive
As an executive of an established concern you have similar
concerns to the employee
and the entrepreneur
but in different forms.
Confidential Disclosure
Agreements
Confidential disclosure agreements are still
of great concern to protect your own trade
secrets, proprietary and confidential information
but now you must protect yourself against
the constraints inherent in such agreements.
When someone now is proposing to disclose
to you some new idea or product either as
a new product line for you or as something
you may wish to buy or license you will be
on the other end of the confidential disclosure
agreement. Now you must agree not to use
or disclose someone else’s ideas. But you
don’t want to agree not to use or disclose
an idea and then find out later that someone
in your company is already aware of the idea
or information. And you certainly don’t want
to be bound to non-use and non-disclosure
and if the idea is already known to suppliers,
customers or competitors. So the first and
best advice is don’t sign any such agreement.
In fact, don’t accept any outside ideas unless
they agree that their disclosure is wholly
not confidential. Even that doesn’t work sometimes.
And sometimes you will
need the information
but can’t verify by a negative
check that
the idea is truly not abroad
in the public
domain. In that case at
least provide in
the agreement that you
will honor the non-use,
non-disclosure provisions
for only a limited
time, and perhaps for limited
location and
purpose and further that
the confidentiality
will be waived if it can
be shown at any
time that the information
is known or used
by others, generally in
the public domain
or was possessed by your
own company before
the disclosure to your
company.
Employment Agreement Revisited
Now that you must be concerned
about the
business you may wish to
add some provisions
to the employment contract.
In addition to
the provisions discussed
in a previous section
you may wish to add one
preventing moonlighting.
Moonlighting seems harmless
enough - unless
it is done for a competitor
or customer.
But today’s work environment
including the
internet and the worldwide
web makes it easy
for anyone anywhere in
many disciplines and
vocations to work for anyone
else anywhere
else making perhaps all
your software, protocols
and data available to third
parties either
directly or through the
filter of the moonlighting
employee’s mind.
Separately, it is important that there be
a specific assignment of copyrights regardless
of how the employee’s status may be viewed:
as a bona fide employee or an independent
contractor. As a bona fide employee all of
the copyrights in works the employee produces
are owned by the employer. But if the “employee”
is later determined to be an independent
contractor, e.g., consultant, part-time employee.
helpful friend or relative then the “employee”
not the company will be the owner. The contract
should therefore provide for ownership in
the company of all works copyrightable or
not and all copyrights regardless of the
true status of the “employee”. Further, with
respect to copyrights there should be a waiver
of “moral rights” of the artist or author.
Moral rights are the rights of the author
to not have his work defaced or altered or
destroyed. A mere assignment of copyright
or sale of the work does not automatically
nullify the artist’s moral rights in his
work. It should be expressly recited in writing.
Non-Competition Agreements
In addition to or as a
part of an employment
contract, especially for
key employees there
should be a non-competition
provision to
prevent those who have
intimate knowledge
of the company’s business
from becoming or
aiding a competitor. Such
provisions typically
include limitations as
to time, area and
subject and these limitations
must be reasonable
in view of the scope of
the business as well
as the employee’s importance
to the company.
The subject area from which
he is proscribed
can include all of those
in which the company
is engaged, becomes engaged
in or is planning
to engage during the period
of the prohibition.
The time limitation should
be no more than
necessary to legitimately
protect the company’s
interests. For example,
in a fast changing,
rapidly growing industry
one, two or three
years may be adequate,
whereas in a slower
changing established industry
where little
changes five years may
be reasonable. The
geographic area in which
the employee is
prevented from competing
must also be reasonable
to protect the company:
a company that owns
a single restaurant may
have a difficult
time enforcing a geographic
restriction which
is worldwide or nationwide,
or even statewide
while a manufacturer of
jet fighter planes
may have legitimate interests
to protect
with a worldwide prohibition.
The difficulty
in enforcing these agreements
comes when
the ex-employee actually
engages in a competing
business and a dispute
arises over whether
or not he is violating
his agreement. The
court will seek to balance
the employee’s
right to use his skill
and experience to
earn a living against the
employer’s legitimate
right to protect its business.
The best way
to avoid such conflict,
assuming the prohibitions
are fair, is to maintain
an ongoing relationship
with the ex-employee such
as by paying him
a monthly or annual fee
to be available for
consultation for a period
of years. This
makes the non-competition
prohibition more
reasonable on the part
of the company and
compensates him for his
forbearance as well.
In some cases the employer
can simply have
a “golden-handcuff” agreement
whereby the
employee is prevented from
competing as broadly
as desired and the company
pays him a substantial,
even generous, amount of
money beyond any
hint of hardship.
Advertising
At some point advertising
will become an
important factor in the
growth of the business.
It need not be a 30 second
spot on the Superbowl;
it may be just a brochure
or spec sheet.
Whatever the form or extent
of your advertising,
keep two things in mind:
it should be truthful
and not confusing.
Exaggeration is allowed. You can always brag
that your product is the best. This is regarded
as mere “puffery” and is acceptable. But
if you go further and say that your product
is better than your competitor’s or your
product relieves headaches in three minutes
you had better have proof: fair tests or
comparisons fairly reported. It is not enough
to advertise that 80% of people using the
shampoo had shinier, healthier hair when
the test was only performed on 14-18 year
olds and the ad pictured adults. That is
truthful but it is also misleading. Without
comparison a simple statement that your oil
increases bearing life by 22% had better
be true and it had better be normal bearings
and normal undoctored oil. Also, in presenting
the advertisements you should not use phrasings,
graphics or scenes that are used by others.
In addition to the possibility of running
afoul of their copyright or trademark rights
you may by misleading the audience make yourself
open to further charges of unfair competition
under federal and state laws. Truth and clarity.
Trade Dress
The appearance of a product if it is distinctive
can be an important aspect of its value.
Provided that its appearance is not merely
a necessary result of its function such appearances
are a protectable property right. Thus avoid
copying or coming too close to the appearance
of a competing product and be on guard against
others coming too close to your product in
appearance. Trade dress is not based on a
grant of rights from the government as is
a design patent and it covers a much broader
area: the decoration and ambience of a restaurant
can be protected as trade dress.
Antitrust
Antitrust considerations
are generally thought
to be of interest mainly
to truly large companies
who have huge size and
dominance in their
industries or markets but
smaller companies
can run afoul of these
laws too, especially
when the exclusive rights
bestowed by patents,
trademarks and copyrights
are involved. Any
attempt to fix the price
or geographical
area in which your customers
can resell your
products can result in
violation of antitrust
laws. Attempts to tie one
product or service
to another product or service
can also have
serious consequences especially
if one of
them involves a patent,
copyright or trademark,
for example, forcing a
franchisee to buy
supplies from a franchisor
in order to be
able to operate under the
franchisor’s trademark;
forcing a customer to buy
a computer only
when bundled with certain
software.
“Buying” or “Renting” Intellectual
Property
Often at some time in the
life of the company
it becomes beneficial to
buy or sell intellectual
property. The company may
have, for example,
valuable patents that it
is not using and
would like to make some
profit from the technology.
Or it may need technology
that it does not
have in house. Patents,
copyrights and trademarks
can be purchased outright
- an assignment;
or some interest less than
title and ownership
can be had - a license.
The license can be
exclusive - granted only
to the one licensee
or it can be non-exclusive
- granted to more
than one licensee. Presently
many universities
and the federal government
have technology
transfer programs under
which assignments
and licenses are made available
to the private
sector. An assignment is
pretty straightforward.
The entire property is
changing hands; the
only issue is how much
is it worth and how
will it be paid. A license
can be much more
complex for by definition
it is something
less than all the rights
and so many questions
must be answered: what
is being licensed?
for how long? in what geographical
area?
for what field of use?
at what price? how
to share the rewards and
responsibilities?
how to insure performance.
The entrepreneur now has succeeded in transitioning
from employee to executive. The business
has been started and operated to avoid loss
of intellectual property and involvement
in litigation, it has protected its own intellectual
property and is ready to harvest a return
to its investors.
~ Finis ~ |
