During the course of employment, employees learn various skills specific to an organization and its products or services. They may learn about software codes, internally used algorithms, company processes, etc. These constitute the intellectual property rights (IPR) of a business and are the lifeblood for a technology company. Also, employees routinely create intellectual property for the employer. Did you write some new code? Did you improve existing systems in your company? Documented some customer behaviour? Created a product description video? All these are intellectual properties – and all the intellectual property of a company is either generated by employees, or bought from an outsider.
In the past some businesses operated as if intellectual property doesn’t matter. For instance the local grocery may not be relying on any intellectual property. However, as businesses scale, intellectual property becomes important – provides competitive advantage, and often constitutes a significant part of a business value. Think of Wal-Mart vis-a-vis the local grocery store. Wal-Mart will have multitudes of trademark, confidential process documents, internal reports, manuals, research, supplier list, creative marketing campaigns, visuals, videos etc. Most technology businesses depend heavily on intellectual property. In a technology business, it is relatively easier for a competitor to replicate the business model, if its intellectual property is compromised.
Since founders are the first line of defence to protect a startup’s intellectual property, it helps immensely if a startup entrepreneur understands the law and contractual mechanisms which enable him to safeguard his venture’s innovation.
Broadly speaking your objectives while hiring employees from an IPR perspective are as follows:
i) to prevent an employee from stealing your code, algorithms, business plans, manuals, etc. and all proprietary materials,
ii) to prevent leakage of such materials to third parties through employees,
iii) to have ownership rights over anything created by the employee in course of employment
iv) to avoid situations where you have ended up infringing someone elses IPR (which could have been incorporated by your employee in your product or service without your knowledge)
This module discusses key measures you should take to protect the intellectual property of your company from employees.
- Mechanisms for protection from litigation by a former employer/ third parties
An employer does not subsequently want to realize that an employee may have violated intellectual property rights of a third party or even a former employer in course of his employment. Litigation from third parties or former employers of this nature can be expensive. Therefore, it is advisable to include a contractual term which prohibits an employee from using any IP developed while working for a former employer, or a third party, during his employment. Employers often obtain warranties for breach of such terms as well.
- Intellectual property assignment
Intellectual property may be created by the employee while working for the organization. For example, an employee may be writing software codes from time as per the requirements of the business or its customers. In certain companies (Google was one of them), employees have the right to pursue something that is company-related but interests them personally, and use the company’s resources for one day every week. Unless it is completely unrelated to the organization’s business, a startup would usually be interested in retaining intellectual property rights over all work created by the employee for the duration of his employment (including any work created using the employer’s resources).
As a general principle, copyright in all works created during the course of employment vests in the employer. This is known as the ‘work for hire’ doctrine. However, note that this principle may not be broad enough to protect an employer’s commercial interest. Sometimes, ‘employees’ are actually engaged in their capacity as consultants by a startup, in which case the default legal principle that copyright is with the entity that avails of the services of the applicant is not applicable. It is always preferable to include a term in the employment contract specifying how the intellectual property developed by the employee in course of employment will be dealt with.
Therefore, companies usually incorporate an ‘intellectual property assignment clause’, which states that intellectual property in all work or inventions created by the employee would vest in the employer. This clause is contractually applicable to all kinds of intellectual property – patents, trademarks, copyrights, integrated circuits, etc.
Note: These clauses should be applicable to all who advise the business as consultants, freelancers, etc. They could be incorporated in the consultancy agreement or a fresh intellectual property assignment agreement could be executed with them. In case there are employees with whom the organization does not have employment agreements, a separate intellectual property assignment agreement can be executed.
- Confidentiality obligations
An employee gets access to a host of confidential information, such as:
- Pre-existing codes of the company
- Specifications
- Internal guidance notes
- Manuals
- Client lists and information
- The business model and future plans of the company
Disclosure of any such information in the market can be commercially detrimental to the company. Some of the above categories of information are covered within the meaning of ‘trade secrets’. However, India has no special law for protection of trade secrets. Any business secrets are typically protected by incorporating a confidentiality clause in the contract governing the commercial relationship between the entities concerned.
Thus, the employment agreement includes a confidentiality clause which prevents the employee from disclosure or utilizing any information that is marked as confidential or is otherwise proprietary information of the company.
Where possible, information that is confidential should be specifically identified, so that the possibility of dispute over whether certain information was intended to be confidential or not does not arise subsequently.
- Return of materials
Retention of any codes, manuals, specifications, confidential or proprietary information by the employee after the end of his employment can be against the commercial interest of the organization – the materials could be used by the employee in his own venture or in a subsequent employment, he could sell them to a competitor, etc. Detection of such actions could be impractical and time consuming. Therefore, companies usually include a clause requiring return of all confidential information, manuals and other property such as credit cards, etc.
It may be advisable for the organization to maintain a list of the key documents and property that has been provided to the employee, and wherever possible, obtain the employee’s signature on the list so that there are no disagreements in future.
- How you can prove that an employee has used IPR owned by your business – Prepare a list excluded inventions/ works
Under law, if a former employer seeks enforcement of its intellectual property rights (IPRs) against an ex-employee, the burden of proving that the employee has used the IPR of the former employer illegally will be on the employer. This is because of the general principle that whoever is claiming a relief from a court must establish that he has a right, and that the right has been violated by the defendant (in this case, the employee).
This can be quite difficult practically sometimes, as it is not always easy or cost-effective/ efficient to demonstrate that the employee has used the codes or other IPR of the business.
For this purpose, a list can be prepared of inventions/ creations that the employee claims IPR on prior to accepting employment. This list should be annexed to the employment agreement. All IPR that is not in the excluded list would automatically be owned by the employer. This can prevent the employee from claiming that certain IPR being used by the company was originally owned by him prior to joining the company.
Apart from this, the many technology companies sometimes exclude work of the employee that meets all of the following criteria:
i) it is made by the employee during his own time, and not during working hours
ii) no resources of the company have been used
iii) the employee’s work does not relate to the current or anticipated business of the startup
iv) it does not result from the work performed for the business
Usually, creation during an “80-20 rule” such as Google’s (some of Google’s employees are entitled to work on their own project for 20% of their work time using Google’s resources) would be made using the resources of the startup – so the above exclusion would not apply to such situations, and the startup will be able to claim ownership over the IPR in the work.
Is it unfair to claim IPR over the work of employees?
As a general legal position, it is not unfair for the employer to claim ownership over the employee’s creation – because the employee has used the resources, infrastructure and skill-sets learnt in the organization. Further, it is always possible to remunerate employees who contribute in the development of the intellectual property of the business by way of bonuses or even sweat equity in the company.
- The relevance of employment-related policies
Some of the terms of employment are purely administrative in character and are subject to variation. For example, an organization may maintain a list of internal materials which are ‘highly confidential’ and whose contents must not be disclosed by one set of employees to any other entity (disclosure to other employees may also be prohibited). The contents of this list may vary from time to time, as the list expands or shrinks.
In such cases, periodic amendment of the employment agreement and obtaining consent of individual employees would be extremely inconvenient. Hence, employment contracts refer to a set of policies of the company, which are subject to change from time to time. Such policies could include a dress code, over time policy, software usage and IT policy, code of conduct, disciplinary proceedings policy, social media or blogging policy and many other policies as relevant to a business.
Let’s take the example of confidential documents again. While the obligation to observe confidentiality is imperative, specifying the exact list of documents which are confidential in the employment contract is impractical. Hence, this can be addressed by internally maintaining a set of policies, which are mentioned in the employment contract, which can identify confidential documents, circumstances and principles on which disclosure can be made by employees. These could differ for different categories of employees. These policies can change from time to time, but at all times the policies remain binding on the employees by virtue of the employment contract.
In order to make these policies contractually binding, the employment contract must state that all employees must comply with the internal policies of the organization from time to time. It must clarify that internal policies form a part of the terms of employment and that disciplinary action (including remedies available to the business under the employment contract for breach of employment) may be taken if the employee does not comply with the policies.
Maintaining documentation as to the precise processes and software and notifying the same to employees periodically can be a useful practise to prove a violation by an employee in a court or arbitration proceeding. When in doubt about whether certain information is confidential, the employee should be required to consult a specifically designated person in the organization before any disclosure of the same is made.
- Consequences of breach of confidentiality
The obligation to maintain confidentiality may be included either in the employment contract or in a separate non-disclosure agreement (NDA) entered with the employee. When he signs an employment contract containing a confidentiality clause (or if he signs an independent non-disclosure agreement), the employee agrees that disclosure of confidential information is prohibited, and that breach of the obligation to protect confidentiality may result in irreparable injury and damage to employer. The contract provides certain remedies to the employer against wrongful disclosure by employees –
i) Injunction – Injury caused by wrongful disclosure may not be adequately compensated by monetary compensation. If the employer apprehends that an employee who possesses confidential information is likely to disclose it, he can approach a court for seeking an injunction against the employee, restraining him from making such disclosure. In a recent case decided by the Bombay High Court in 2010 Bombay Dyeing claimed an injunction against a former executive director (who was an IIT and IIM alumnus), restraining him from further divulging confidential information, in breach of the employment contract. The director was on the payroll of the company as an employee, and had forwarded by email a manual for customized software and a process document for submitting tenders, which were both confidential. The Bombay High Court issued an injunction restraining the former employee from making any disclosure of the confidential information.
ii) Claim for losses or damages: An employer can claim any losses or damages incurred out of wrongful disclosure by the employee. In this context, proving that harm has been caused by an employee due to wrongful disclosure has been difficult for employers – even though Indian courts may grant an injunction against further disclosure, they are reluctant to accept that loss has been caused by disclosure on the presumption that significant amount of details of the employer’s business will already be known by its competitors.[1]
iii) Re-imbursement of legal fees and other costs: The agreement may also specify that the employer may be able to claim ‘reasonable’ legal fees and costs in case his claim against the employee succeeds. Courts are likely to not award high amounts by way of costs.
Note that the obligation to keep codes and organization specific skills secret extends beyond the duration of employment, so that employees cannot use these to benefit another employer even after they cease employment.
- Use of managerial processes to protect intellectual property
Businesses can also devise customised internal managerial processes in to minimise the possibility of leakage of secrets. The workflow or manufacturing process can be divided such that information is restricted and confined to people on a need to know basis only. For example, companies such as Coke, Mc Donalds or Kentucky Fried Chicken do not disclose the full recipe of their products to their employees and managers, in order to protect the unique taste of their products. Their manufacturing operations are segregated such that managers or employees are only aware of the ingredients for a portion of the recipe (and not the entire recipe). This prevents leakage, replication or use of the recipe of the products. While this may not be appropriate for every industry, it is a mechanism that an entrepreneur can consider while devising his IP strategy.
- Use a combination of methods to protect IPR
Sometimes, organizations use multiple methods to protect their IPR – for example, Google protects its algorithms through a combination of patent and trade secrets. PageRank, the algorithm for Google is patented. Its patent claim is only eleven pages long and is available in the public domain.[2] Although the patent a monopoly on Google to use the algorithm, there is a commercial risk that if the manner in which its servers handle the algorithm to present search results is known, a competitor could reverse engineer an alternative algorithm. Therefore, the patent document states that Google’s algorithm uses more than 200 signals, 500 million variables, and 2 billion terms. Details of these functionalities are not disclosed and kept confidential by Google as trade secrets and the search engine optimization (SEO) industry has not managed to completely figure out the exact mechanism through which Google provides search results till date.
NOTE – Protection of IPRs from Lenders, Suppliers, Investors
A non-disclosure agreement must be signed by all your suppliers or third parties whom you contract with, and who are likely to know about confidential information about your business. It should identify the code and functionality of the software, business plans, client lists, manuals, etc. as part of the confidential information of your business, so that suppliers/ third parties cannot disclose it further. In the event they do so, they would have to pay specified amount of damages in it. An injunction preventing the defaulting party from further disclosure may also be claimed from a court, in case of a breach. This prevents internal processes and codes from being disclosed without your authorization by any third parties that your organization deals with in the course of its business.
This is an excerpt from the diploma course in Entrepreneurship Administration and Business Laws offered by NUJS, one of the top national law schools in India. To know more about intellectual protection in India and IP commercialising strategies, which is taught as part of the diploma course. The course also teaches how to structure businesses, how to protect your commercial intent in key business transactions and relationships, raise investment, protect intellectual property, hire employees and consultants, information technology law issues (cloud computing agreements, EULAs, payment gateways, etc.), rules for government contracts and more.
To see what all we are teaching in the NUJS diploma course, you may check out the demo version for free here. You may also wish to someone who has already taken the course, for that you may drop an email to [email protected] or call on 09582630056.
[1]See for example Bombay Dyeing vs. Mehar Karan Singh Bombay High Court (2010).
[2] See http://www.personal.psu.edu/dgl5047/blogs/ist_432_goog-d_blog/2012/03/googles-pagerank-trade-secrets.html. Patent over a product or process is only possible once a detailed description of how the product or process is created is disclosed to the patent authority in the concerned jurisdiction.
