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New Ideas, Methods and Products Series
Volume V |
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Employee Contracts, Confidential Disclosure
Agreements, and Consultant Agreements
INTRODUCTION
Frequently when a person
thinks of protecting
his new idea or product,
his thoughts go
to patents, trade secrets
and copyrights.
But the game can be won
or lost long before
the opportunity to establish
those forms
of protection. That is
why the fundamental
forms of protection are
so important: confidential
disclosure agreements,
employment contracts,
consultant contracts.
Whether or not an idea
or product is protectable
by such exclusive statutory
rights as patent
or copyright, there still
is a need, at the
early stages before such
protection can be
obtained, for keeping the
basic information
confidential to prevent
public use or disclosure
which can result in the
loss of rights and/or
inspire others to seek
statutory rights before
you can. Confidential disclosure
agreements,
employment agreements and
consultant agreements,
have some things in common.
They define the
obligations of the parties
during the critical
early stages of development
of a new concept,
product or process. They
are usually overlooked
until it's too late: the
relationship is
well under way, and a problem
has arisen.
Before a patent, copyright
or trade secret
is obtained, even before
the occurrence of
the idea that gives rise
to them, all rights
can be lost if the proper
preliminary steps
are not taken. That is
why for proper protection
of the business there must
be agreements
with employees, consultants
and even in some
cases with suppliers and
customers to keep
secret all important information
of the business
and to assign to the business
all rights
to that information.
Often it is thought that
only technical information
can be protected. This
is not so. Ideas for
new products or product
lines, a new advertising
or marketing program, a
new trademark, the
identity of a critical
supplier, a refinancing
plan, can all be protectable
information
and can be even more valuable
than the technical
matters when it comes to
establishing an
edge over competition and
gaining a greater
market share.
Employment contracts, consultant
contracts
and confidential disclosure
agreements, all
should be in writing and
signed before the
relationship begins, before
any work is done,
before any critical information
is exposed,
and before any money changes
hands. A business
must not be in such a rush
to get on with
the project that it ends
up without full
ownership of the very thing
it paid for.
And the employee or consultant
or other party
must know clearly at the
outset what he is
giving up in undertaking
this relationship
with the company.
EMPLOYMENT CONTRACTS
Employment contracts must
be fair to both
parties, should be signed
by all employees,
at least all employees
who either may be
exposed to company confidential
matters or
may contribute ideas or
inventions to the
business. They should also
be short and readable.
Employment contracts, like
all agreements,
must have considerations
flowing both ways.
If I agree to paint your
house for $1,000.00,
my consideration to you
is the painting of
your house. Your consideration
to me is the
$1,000.00. In an employment
contract the
consideration from the
employee is all those
promises to keep secrets
and assign ideas
and inventions; the consideration
from the
business is to employ the
employee. Thus
it is best to present these
contracts to
the prospective employee
well before he begins
work.
After the job begins the
consideration will
be the employee's "continued"
employment
and that sounds a bit threatening.
While
"continued" employment
is certainly
proper consideration, courts
in construing
these contracts can easily
see that in most
cases the employer has
the superior bargaining
position and so courts
generally like to
know that at the point
the contract was offered
for signature the employee
had a fair opportunity
to decline without suffering
severe hardship.
It is not a good idea to
present the employment
contract the employee for
the first time
in a packet of pension,
hospitalization and
other forms to be signed
the day the employee
shows up to begin work
after moving himself
and his entire family across
the country
and resettling in order
to take this job.
One of the most important
clauses in an employment
contract is the agreement
of the employee
to transfer his entire
right, title and interest
in and to all ideas, innovations
and creations
to the company. These include
designs, developments,
inventions, improvements,
trade secrets,
discoveries, writings,
and other works including
software, databases and
other computer related
products and processes.
The transfer is required
whether or not these things
are patentable
or copyrightable. They
must be assigned to
the company if they were
made or conceived
or first reduced to practice
by the employee.
This obligation should
adhere whether or
not the employee was working
alone or with
others and whether or not
during normal working
hours or on the company
premises. So long
as the work is within the
scope of the company's
business, research or investigation
or the
work resulted from or is
suggested by any
of the work performed for
the company, its
ownership is required to
be assigned to the
company.
This clause should not
seek to compel transfer
of ownership in everything
an employee does
even if it has no relation
to the company's
business. An engineer employed
to design
phased array radar for
an electronics company
may invent a new horseshoe
or write a book
on the history of steeplechase
racing. An
attempt to compel assignment
of ownership
in such works to an employer
under an employment
agreement could be seen
as overreaching and
be refused enforceability.
Overreaching could
also jeopardize a clause
which seeks to vest
in the employer ownership
of inventions,
innovations, or other works
made for a period
of time after employment
is ended or before
employment begins.
Ancillary to this transfer
or assignment
clause is the agreement
of the employee to
promptly disclose the inventions,
innovations
and works to the company
or to any person
designated by the company
and to assist in
obtaining protection for
the company including
patents and copyrights
in any and all countries
as the company sees fit.
The employee at
this point also agrees
to execute patent
applications and copyright
applications,
to execute assignments
of issued patents
and copyright registrations,
and to execute
any other documents necessary
to perfect
the various properties
and vest their ownership
clearly in the company.
If these activities
are called for after the
employee has left
the company he is still
obligated to perform
but he may be paid for
his time and expenses.
Another important concern
is moonlighting.
While a company that sells
CAD/CAM work stations
doesn't care if one of
its programmers drives
a fish delivery truck on
his own time, there
are situations that are
extremely sensitive
which the company as well
as the employee
really need to avoid. In
one case a CAD/CAM
company discovered a huge
telephone bill
for various lengthy periods
from 3:00 PM
to 8:00 PM on most days
of the week including
Saturdays and Sundays.
The company challenged
the telephone bill and
found the calls were
indeed made from the company's
own phones
to a major maker of computers
many miles
away. The computer manufacturer
claimed ignorance.
But after a lengthy investigation
it was
discovered that an employee
of the company
had been hired on a consulting
basis by a
middle manager at the computer
manufacturer
to develop a software system.
The employee
had been doing his consulting
for the computer
manufacturer over the telephone
lines from
his computer terminal while
sitting at his
desk in his office at the
company. The employee
was not cheating: he was
working long hours
to make up for his moonlighting
and the software
he was developing was not
in the company's
CAD/CAM area. But the revelation
was chilling.
The mere awareness that
an information line
existed between this giant
computer manufacturer
and the company, and what
might have transpired
over those lines, shook
the company's officers
and managers for some time
afterward.
To prevent this the employee
agrees in the
employment contract that
during his employment
by the company he will
not engage in any
employment or activity
in which the company
is now or may later become
involved.
A closely related notion
to this is a non-competition
provision whereby the employee
agrees not
to compete during his employment
and for
some period after he leaves
the company's
employ. This is a more
sensitive area. It
may be perfectly understandable
that a company
does not want its key salesman,
an officer,
or manager, the head of
marketing or engineering
to take a job with a competitor
and have
the inside track on the
company's best customers,
new product plans, manufacturing
techniques,
or new marketing program.
But the courts
do not like to prevent
a man from earning
a livelihood. Courts do
not compel a lifelong
radar engineer to turn
down a job with a
competitor in the same
field and take a job
designing cellular phones.
A person who spent
his life in marketing and
selling drapes
and curtains cannot be
made to sell floor
coverings or used cars.
However, the higher up
nd more important
a person is in running
the company, the greater
is the probability that
he will be prevented
from competing if the employment
agreement
provides for it. Officers,
directors, founders,
majority investors and
other key personnel
have had such provisions
enforced against
them, but even then the
scope of the exclusion
must be fair and reasonable
in both time
and distance. A few months,
a year or even
two years could be acceptable
depending on
how fast the technology
and market is moving.
A worldwide exclusion might
be acceptable
for a salesman of transport
airplanes. In
the restaurant business
a few miles might
be all that is acceptable.
A contract that
seeks to extend the exclusion
beyond what's
fair will not be enforced.
One way to ensure that
an ex-employee does
not compete is to provide
that the company
can employ him on a consultant
basis over
some designated period
of time. In this way
his involvement in critical
information areas
can be phased out so that
by the time he
is free to go to a competitor
he is no longer
a threat and at the same
time the ex-employee
is being fairly compensated.
Bear in mind, however,
that even if an ex-employee
is free to compete, he
is not free to take
with him, in his memory
or recorded form,
any trade secrets, confidential
or proprietary
information of the company
or to use it or
disclose it in any way.
To reinforce this
the employment contract
would provide that
the employee will not during
his employment
or at any time thereafter
disclose to others
or use for his own benefit
or the benefit
of others any trade secrets,
confidential
or proprietary information
pertaining to
any of the businesses of
the company -- technical,
commercial, financial,
sales, marketing or
otherwise. The restriction
could also protect
such information pertaining
to the business
of any of the company's
clients, customers,
consultants, licensees,
affiliates and the
like.
Along with this the employment
contract will
provide that all documents,
records, models,
electronic storage devices,
prototypes or
other tangible items representing
or embodying
company property or information
are the sole
and exclusive property
of the company and
must be surrendered to
the company no later
than the termination of
employment or at
any earlier time upon request
of the company.
This is an important provision
for both the
employer and employee to
understand. The
employee may not take away,
use or disclose
trade secrets, confidential
or proprietary
information in his memory
or in physical
form without subjecting
himself to serious
legal sanctions. In some
states the law imposes
serious criminal sanctions
and fines for
the removal of tangible
trade secret property.
Another potential area
of conflict is employee
raiding, the hiring away
of employees by
an ex-employee who is now
employed by a competitor
or who has founded a competing
business.
This is a particularly
sensitive situation
when the ex-employee holds
a position of
high trust and confidence
and was looked
up to by the other employees
he is now attempting
to hire. And it is particularly
damaging
when the loss of the employees
being seduced
is critical to operations
either because
of their expertise or their
sheer number.
In all circumstances such
an outflow of employees
is threatening because
of the potential loss
to a competitor of trade
secrets and know-how.
One of the most hazardous
areas of ownership
is that dealing with title
to copyrights.
If a copyrighted work is
created or authored
by an employee the company
automatically
owns the copyright. But
the employee must
be a bona fide employee.
That is, there must
be all the trappings of
regular employment.
If a dispute arises over
ownership between
the company and the author
the courts will
seek to determine whether
the author was
really an employee. Was
there provided for
this person a full work
week, benefits, withholding,
unemployment insurance,
workmen's compensation,
an office or workspace?
If the author was
anything less than a full
employee, the copyright
in the work belongs to
the person. It does
not belong to the company!
This means that if the
company hires a part
time employee, a consultant,
a friend, a
moonlighter or your Uncle
George, that person,
not the company, will end
up owning the copyright
in the work. This means
that when that non-employee
completes that software
system which will
revolutionize the industry
and bring income
cascading to the enterprise,
he, not the
company, will own the copyright.
That is,
the company will own the
embodiment of the
system that the employee
developed for the
company but the employee,
not the company,
will own the right to reproduce,
copy and
sell the system over and
over again. It has
happened. A company, having
spent hundreds
of thousands of dollars
to develop a software
system, owns the finished
product but not
the copyright in the product.
The non-employee
owns the copyright and
has the right to reproduce
the product without limit
and sell it to
those who most desire it:
typically the company's
competitors and customers.
A chilling picture but
easy to avoid with
a little forethought. The
solution is easy:
simply get it in writing.
Before any work
starts, payment changes
hands or plans are
revealed to the proposed
author, have him
sign a written agreement
by which he agrees
that, whether or not he
is an employee or
a non-employee, he assigns
to the company
all his right, title and
interest in any
copyrightable material.
Don't hesitate. The
lack of such a clear understanding
in writing
can wreck great dreams,
ruin friendships
and partnerships, and hamstring
businesses
to the point of insolvency
while the parties
fight over who owns the
bunny rabbit, the
book, the software, the
poster, the videotape
on how to be a successful
entrepreneur. Just
do it.
Another area that must be considered is the
moral rights of authors in their works. Under
a law effective June 1, 1991, in the United
States, moral rights of artists in their
visual works are protected. Moral rights
are variously defined as the rights of attribution
and integrity, or as the rights of paternity
and integrity. What it means is that an artist
has a right to insist that his or her name
be associated with the work or to refuse
to have his or her name be associated with
the work if it is mutilated in the artist's
opinion, and also that the work may not be
mutilated: that is, the integrity of the
work must be maintained. The moral rights
doctrine has been invoked, for example, to
attempt to prevent removal of a wall containing
a painted mural.
The law in the United States
which established
the moral rights doctrine
provides that the
artist's moral rights may
not be transferred,
but may be waived by the
artist in a writing
that specifically identifies
the work and
the uses to which the waiver
applies.
Therefore, in every agreement
dealing with
copyrights it would be
prudent to include
a clause by which the artist
in writing specifically
refers to the work or works
and waives that
moral right for all uses
of all the works.
It probably would also
be wise to refer to
Section 106(a) of the Copyright
Act, which
embodies the moral rights
doctrine.
There is another issue
to consider under
employment contracts. When
a new employee
is to be hired, obtain
a copy of his employment
contract with his last
employer or last few
employers to determine
whether he is free
to come to work for this
company now, and
in the capacity he seeks.
Prior employers
have rights, too, that
can conflict, rightly
or wrongly, with the employee's
new employment
by the company.
CONSULTANT CONTRACTS
Consultant contracts should
contain provisions
similar to those in an
employment contract
along with some additional
provisions. A
consultant agreement should
clearly define
the task for which the
consultant is hired:
research a new area, analyze
a problem, solve
a problem, design or redesign
a product,
set up a production line,
assist in marketing,
sales, management, technical
or financial
matters. his is important
to show why he
was hired, what he is expected
to do, what
he may be exposed to in
the way of company
trade secrets, confidential
and proprietary
information, and what he
is expected to assign
to the company in the way
of innovations,
inventions, patents and
copyrights.
An important feature of
a consultant contract
is the time when the task
will be completed.
There should be stepping
stones or tunable
benchmarks so both parties
know what has
to be achieved and by when.
Goals such as
purely time, specified
achievements or total
solution should be set
forth. Payment must
be clearly stated, both
the amount and the
plan of payment: Is the
payment to be based
on mere passage of time
or on specified achievements
or milestones? There should
be a reporting
process with clear delineation
of when reports
are due, initial, interim
and final; their
form and content; and the
keying of payments
to the timely receipt of
satisfactory reports.
Another area to be clarified
is: Who will
actually do the work --
the consultant or
one of his employees or
apprentices?
Clearly a company hiring
a consultant wants
to own the result of whatever
the consultant
was hired to do just as
in the case of an
employee. But in the case
of a consultant,
his stock in trade is his
expertise and his
ability to solve problems
swiftly and elegantly
in his specific area. Sharp
lines must be
drawn as to what the consultant
must and
will not assign to give
both parties peace
of mind. In any task in
which software is
part of the solution the
ownership problem
is magnified. Commonly,
a software system
uses many different routines
and subroutines,
some of which the consultant
may have used
before and may intend to
use again. Who will
own them? The company wants
to secure the
position which it identified
and hired the
consultant to assist with.
But the consultant
cannot afford to assign
away rights which
will prevent him from earning
a living in
the future.
Closely related to this
is the problem of
preventing a consultant
from working for
a competitor or a customer.
It would be suicide
to hire a consultant who
after solving the
company's problem is free
to move on and
simply reapply what he
learned at the company
to solve the same problem
for a competitor
(who may not have even
been aware of the
problem) or teach a customer
how to do certain
tasks for itself that the
company previously
did for that customer.
Sometimes, the consultant's
work opens up a whole new
door for him by
revealing a problem he
never knew existed
until the company identified
it and hired
him to investigate it or
solve it. Consultants
are uncomfortable too in
these situations.
A consultant's reputation
for honesty and
ethical dealing is essential
to his success.
But freedom to consult
to others is important
too. If a consultant has
a niche in designing
a certain type of machinery
he must be allowed
to continue to work in
that field. Good fences
make good neighbors. Define
the boundaries
early and precisely.
In addition to careful
delineation of these
troublesome areas, the
approach of a joint
endeavor could work. The
newly identified
problem or new solution
to an old problem
would be owned by one party,
the one best
situated to exploit the
market, with the
profits being shared between
them: ownership
in the company, royalties
to the consultant.
Such a sharing arrangement
can work where
a consultant whose expertise
the company
really needs balks at providing
a solution
that will bring the company
millions of dollars
in cost savings or increased
profits for
payment of only a few hours
of consultant
time.
Consulting relationships
by their nature
can expose each of the
parties to a great
deal of the other party's
trade secret, confidential
and proprietary information.
The company
protects itself with clear
definitions of
the pertinent information
and by employing
the usual safeguards for
trade secrets and
also limits disclosure
to the consultant
of only what is necessary
for him to do his
job, and also limits the
consultant's freedom
to use the information
for others and to
disseminate the information.
The consultant
protects himself in the
same way to prevent
the company from misappropriating
the consultant's
special knowledge, problem
solving approaches
and analytical techniques.
An often overlooked area
is the ownership
of the notes, memos and
failed avenues of
investigation. False starts
and failures
can be as important as
the solution, especially
to competitors. Related
to this is the question
of the ownership of the
raw data. Not only
can the raw data be extremely
valuable in
its own right but it may
be used to easily
reconstruct the end result
of the consultant's
work, e.g., a market survey.
Finally, the company and
the consultant should
be sure that the consultant
is free to engage
in the work the company
needs done. A consultant
may warrant that he is
free to carry out
his promises. The consultant
may identify
any similar work and any
potential or actual
competitors or customers
for which he has
worked. The company and
consultant should
review the pertinent parts
of previous agreements
to see that the consultant
is not violating
them in doing this work
for the company.
The consultant may warrant
that he will not
use information, ideas,
designs, routines
for this job that he has
used for others
who may claim superior
rights.
CONFIDENTIAL DISCLOSURE
AGREEMENTS
Wherever an idea, information,
an invention
or any knowledge of peculiar
value is to
be revealed, a confidential
disclosure agreement
should be signed by the
receiving party.
The disclosure may be necessary
to interest
a manufacturer in taking
a license to make
and sell a new product;
to hire a consultant
to advise in a certain
area; to permit a
supplier to give an accurate
bid; to allow
a customer to determine
whether or not it
wants a product or wants
a product modified;
to interest investors to
invest in the business.
Such agreements are not
only important to
protect the knowledge or
information itself
but also to preserve valuable
related rights
such as domestic and foreign
patent rights.
These agreements should
be short and to the
point.
Basically the receiver
of the disclosure
should agree to keep confidential
all information
disclosed to it. Information
is defined as
all trade secrets, proprietary
and confidential
information, whether tangible
or intangible,
oral or written, of whatever
nature, e.g.,
technical, sales, marketing,
advertising,
promotional, merchandising,
financial, commercial.
The receiver should agree
to receive all
such information in confidence
and not to
use or disclose the information
without the
express written consent
of the company. It
should be made clear that
there is no obligation
incurred by the receiver
for any information
which it can show was in
the public domain,
or which the receiver already
knew, or that
was told to the receiver
by another party.
The receiver should be
limited to disclosing
the information to only
those of its employees
who need to know in order
to carry out the
purposes of the agreement
and who have obligations
of secrecy and confidentiality
to the receiver.
Further the receiver should
agree that all
of its employees to whom
any information
is communicated are obligated
under written
employment agreements to
maintain secret
information. The receiver
should also represent
that it will exercise the
same standard of
care in safeguarding this
information as
it does for its own and
in no event less
than a reasonable standard
of care. This
latter phase is necessary
because some businesses
have no standard of care
or a very sloppy
attitude toward even their
own important
information.
Provision should be made
for return of all
tangible embodiments of
the confidentially
disclosed information,
e.g., drawings, blueprints,
designs, parameters of
design, monographs,
specifications, flow charts,
sketches, descriptions,
data. A provision could
also be included
preventing the receiving
party from entering
a competing business, or
introducing a competing
product or service in the
area of the disclosed
information. Often a time
limit is requested
by the receiver after which
the receiver
is free to disclose or
use the information.
If acceptable, such a time
period could extend
from a few months to a
number of years depending
upon the life cycle, tendency
to copy, competitive
lead time, and other factors
present in a
particular industry. Strong,
clear language
should be used to establish
that no license
or any other right, express
or implied, whether
or not it results in a
patent or copyright,
is given by the agreement.
While such confidential
disclosure agreements
between the discloser and
receiver are the
ideal, they are not always
obtainable. Often
the receiver argues that
no such agreement
is necessary, saying in
effect: trust me.
Or the receiver may flatly
refuse on the
grounds that it is against
the receiver's
policy. Some large corporations
turn the
tables and will demand
that their non-confidential
disclosure agreement be
signed before they
will receive any information.
Under such
idea submission agreements
the discloser
gives up all rights to
the ideas except as
covered by a U.S. patent
or copyright. Outside
of those protections the
receiver is free
to use, disclose, do whatever
it wishes with
the information. This is
not due simply to
arrogance or orneriness.
A large corporation
has many departments and
divisions where
research and development
of new ideas is
occurring unknown to other
areas of the corporation.
In addition, in a number
of cases courts
have held corporations
liable for misappropriation
of ideas and information
when no written
agreement existed and even
where a non-confidential
disclosure agreement purported
to free the
receiver from any restriction
against dissemination
and use of the idea.
If no agreement can be
reached or the Non-confidential
Disclosure Agreement counter-offer
occurs,
the discloser must decide
whether to keep
the idea in his mattress
or take a chance
on the honesty of the receiver
while cutting
the initial disclosure
down to a minimum
to cut the losses should
a careless or unscrupulous
receiver make public or
misappropriate the
idea.
One middle ground which
courts have recognized
is the implied confidential
relationship
evidenced by the actions
of the parties.
In one case a letter soliciting
a receiver's
interest in a particular
field and indicating
that the matter was confidential,
resulted
in a face-to-face meeting
between the discloser
and receiver where the
full idea was revealed.
Later when the receiver
came out with a product
using the idea, the discloser
sued and won.
The letter set up a confidential
relationship
which the receiver did
not reject, but rather
accepted by meeting with
the discloser and
accepting the idea without
any comment or
exclusion. The letter was
not signed by the
receiver but it bound him
nevertheless under
the totality of the circumstances.
These basic forms of protection:
employment
contracts, consultant contracts
and confidential
disclosure agreements,
need not be complex
or lengthy, but they are
essential at the
earliest stages of idea
generation to protect
and preserve to the business
some of its
most valuable and critical
property.
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