Often, the most valuable asset of a startup company is its Intellectual Property (“IP”). The IP gives the startup the competitive advantage in the market place by enabling the startup to exclude competitors in the same business area as the startup. To protect its IP, a startup may take several measures. One of the most important of these measures is securing ownership of the startup.
To secure ownership, a startup should include a proper IP clause in an agreement with its employees and independent contractors to ensure that any IP that is created by them as a result of their employment with the startup is owned by the startup. Absent such a provision, the IP may belong to the employee or the independent contractor. For example, the IP may belong to the employee if the employee can argue that it was created outside of the scope of employment. Similarly, the IP created by the independent contractor, even if it falls within the scope of the employment, rests with the independent contractor absent contrary provisions in the contractor’s agreement with the startup. Therefore, it is crucial to have a well-drafted employment agreement with a solid IP clause.
Unfortunately, often, the relationship between members of a startup company is informal and are not properly captured in an agreement. It is not at all uncommon for a startup to not have an employment agreement with its employees or independent contractors, much less a proper IP clause. Even if astartup includes a formalized relationship with its contractors and employees, it may, as is often the case, be operating with a limited budget. Therefore, a startup may not be able to seek a legal advice to draft a proper employment agreement that would sufficiently protect its interest. Instead, it may work from one of the thousands of templates available online, which can be flawed in many ways. For example, the template may include an extremely limiting IP clause or not one at all. In such an instance, it is highly encouraged for the startup to amend the originally drafted employment agreement and have the employee or contractor sign a supplemental IP agreement.
The IP agreement should, however, specifically identify the consideration provided to the employee for signing the agreement. When the employment has not yet begun, it is easy to show consideration for the terms in the employment agreement. The consideration would include employment with the company. However, it may not be so easy to show consideration when the employee is asked to sign an IP agreement after the employment has begun. In such a scenario, it is wise to specifically point out that theevalid consideration is the continued employment of the employee with the company. Another option for consideration may include a special bonus, stock options, or a new position for signing the agreement.
The IP agreement should also specifically define the IP as including inventions, ideas, writings, confidential information, computer software, improvement, creations, etc. As to the proper language to include to effectuate the assignment from the employee to the startups, the seminal case on automatic assignment is Filmtec Corporation v. Allied-signal Inc., and Uop Inc., 939 F.2d 1568 (Fed. Cir. 1991). This is often referred to as the “FilmTec rule” or “the automatic assignment rule of Filmtec”. The Federal Circuit continues to recognize and apply the Filmtec rule. See, e.g., DDB Technologies, L.L.C., v. MLB Advanced Media, L.P., 517 F.3d 1284, 1290 (Fed. Cir. 2008) (“the transfer of title [occurs] by operation of law” if the inventor’s employment contract recites “agrees to grant and does hereby grant all rights in future inventions”). The agreement should also specify the duration of the assignment. Of course, the assignment should cover the time the employee is employed with the startup. However, a well-drafted agreement may extend the assignment to a reasonable time after the employment of the employee with a startup terminates. This is to prevent against the possibility of employee leaving and then divulging its invention shortly after the departure.
Practice Note:
An IP clause is only one among many important clauses the startup should include in its employment agreement. Other clauses that are equally important include for example, a non-compete clause, a non-solicitation clause, a non-moonlighting clause, and a confidentiality clause.