Imagining the Perfect Confidentiality Agreement

The perfect confidentiality agreements is, in most cases, overkill and in any event probably never would be signed. Hundreds, if not thousands of CDAs, NDAs, and other secrecy agreements are signed every day, and the vast majority perform adequately for their purpose.  Rather than chase perfection, the parties should focus on avoiding mistakes.

From the Perspective of the Disclosing Party

Prevent disclosure and use.  The disclosing party should make sure that the agreement not only prevents disclosure but also use of the confidential information.

Define protected information. The definition of protected information should include anything that the disclosure is likely to disclose.  The disclosing party should resist requirements that could result in accidental forfeiture, such as requirements that the information be marked confidential or that oral disclosures must be confirmed in writing.

Define the time.  The duration of the receiving party’s obligations should be clearly defined, as should the period of time during which the disclosing party can disclose information under the agreement.

Have an enforcement plan.  If the party to the agreement discloses or uses the information, there is a breach of contract action.  However, if a rogue employee or contractor, who is not a party to the agreement, discloses or uses the information, what is the plan?  The agreement can provide a right of enforcement, or require the receiving party to enforce the agreement on the disclosing party’s behalf.

Unnecessary obligations.  While it is easier to get a reasonable agreement when the provisions are mutual, a disclosing party should not accept confidentiality obligations to the receiving party if it does not need to.

Disclosing Party Options.  Ownership. The disclosing party may want to control ownership of inventions inspired by the disclosed invention.  Non-filing.  The disclosing party may want to restrict the receiving party from filing patent applications on subject matter inspired by the disclosure.  No Export.  The disclosing party may want to prevent export of the information.  Choice of law.  The disclosing party may want to select law that will protect the disclosed information.  Choice of forum.  The disclosing party may want to select a forum that is convenient and reliable, No warranties.  The disclosing party may want to disclaim any warranties about the disclosed information.  No obligation.  The disclosing party may want to disclaim an obligation to deal further with the disclosing party.

From the Perspective of the Receiving Party

Define protected information.  The receiving party needs to precisely define the information that is subject to the confidentiality obligations,

Exceptions.  The receiving party should define exceptions to its obligations for information that is already in the public domain; information that the receiving party already had in its possession, and information that subsequently comes into its possession other than from a breach of duty to the disclosing party.

Define the time. The receiving party needs to know how long to maintain confidentiality, and how long the disclosing party can make disclosures that the receiving party has to protect.

Receiving Party Options.  Confidentiality. The receiving party may want some protection for its own information that it might exchange with the disclosing party.  No obligation.  The receiving party  may want to disclaim an obligation to deal further with the disclosing party.  Choice of Law.  The receiving party may want to know the law that applies to the construction and enforcement of the agreement.   Choice of forum.  The receiving party may want to limit where it can be sued to enforce the agreement.

Checklist for a Confidentiality Agreement

  1. Parties properly identified
  2. Definition of protected information
  3. Obligation not to disclose protected information
  4. Obligation not to use protect information
  5. Duration of obligation to protect protected information
  6. Duration of agreement (period of disclosures by disclosing party)
  7. Indemnity by receiving party for breaches by those to whom it discloses the protected information
  8. Representations by receiving party
    1. Ability to enter into agreement
    2. Agreements with third parties to ensure performance
  9.  Ownership of developments based upon disclosed information.
  10. Promise not to file filing patent applications on subject matter inspired by the disclosure.
  11. No Export of the disclosed information.
  12. Choice of law that applies to the agreement.
  13. Choice of forum where agreement can be enforced.
  14. Disclaimer of warranties regarding the disclosed information.
  15. Disclaimer of obligation to deal further with the other party.
  16. Boilerplate
    1. Assignability
    2. Severability
    3. Effectiveness of copies
    4. Integration
    5. Authority of Signatories

 

 

Promise to Arbitrate Claims “Arising Under” is Narrower than Promise to Arbitrate Claims “Relating to” Agreement

In Evans v. Building Materials Corporation of American, [2016-2427](June 5, 2017), the Federal Circuit affirmed the denial of a motion to dismiss a complaint for patent infringement and trade dress infringement.

Evans U.S. Design Patent No. D575,509 on a three-dimensional roofing model designed to be used by a seller of roofing products during a sales pitch.  He entered into an agreement with GAF under which GAF agreed to promote the product to GAF’s network of certified contractors, Evans agreed to sell the product at discounted prices to the GAF contractors and to pay GAF a percentage of sales.  The Agreement contained an arbitration clause for “any dispute or disagreement [that] arises under this Agreement.”

Evans sued alleging that after termination of the agreement, GAF made and sold infringing roofing models.  GAF moved to dismiss or stay pending arbitration, invoking the arbitration clause.  The district court found that 2009 agreement has expired, and thus did not apply, and alternatively, that the present dispute did not “arise under” the terminated 2009 agreement.

The Federal Circuit found GAF’s contention “wholly groundless.” The Federal Circuit said that the arbitration clause only reaches claims arising under the 2009 agreement. GAF conceded that under controlling Fourth Circuit precedent the focus is “whether the claims at issue have a direct nexus to the contractual obligations, and more specifically, whether the claims are ‘related to the interpretation and performance of the contract itself.’” The Federal Circuit noted that the “arising under” language was narrower than “relating to” — under which a claim may be arbitrable if it has a “significant relationship” to the contract, regardless of whether it arises under the contract itself.

What Would the Perfect Employee Agreement Look Like?

Lawyer’s strive for perfection in their , but time constraints, budgets, and other factors work against us.  Also, perfection is not always the same thing in every circumstance.  It is interesting, however, to contemplate, what perfection might look like

1. Confidentiality

One of the primary purposes of an employee agreement is to protect the confidential information of the employer, as well as the employers suppliers and customers.  The agreement should obligate the employee to protect all confidential information that the employee reasonable knows the employer regards as confidential, regardless of whether the information is marked confidential.

2. Non-Compete

While in some jurisdictions it may be possible to get an injunction against an former employee from competing with the former employer where it is inevitable that the former employee will disclose or use the former employer’s trade secrets, generally the only way to stop a former employee from competing is with a specific covenant not to compete.  Even with such a covenant, the protection is usually limited to instances where the departing employee had access to trade secrets or had contacts with customers.

While current employees cannot complete with their employer, they are generally permitted to prepare to compete.  However such preparation is something that an employer might be able to restrict by contract, for example requiring an employee refrain from making preparations to compete with the employer while still employed, or preventing an employee from working with current or former employees in preparing to compete with the employer while still employed.  The employer should also consider requiring employees to report any breach of the non-compete provisions, so that it gets timely notice of problems.

To facilitate enforcement of a covenant not to compete, the employer might require the employee to keep the employer advised of subsequent employers.  The employer should further obtain a consent of the employee to contact subsequent employers to advise them about their new employees obligations to the former employer.  Otherwise, the employer could face a claim of tortious interference from the former employee.

3.  Non-Solicitation

It’s bad enough when an employer loses a critical employee, but losing a group of employees can be devastating.  This can be addressed in part with carefully crafted covenant not to compete.  However, an employee can agree not to solicit his/her co-workers to work for a competitor,

4.  Assignment of Inventions

Aside from confidentiality, the critical function of employee agreements is to transfer employee inventions to the employer,  The agreement should require the employee to promptly disclose new inventions to the employer.  The agreement should also include a promise to assign inventions, as well as a present assignment of inventions. Employers should be careful, however, because some states restrict the inventions that an employer can require an employee inventor to assign.

The employer should include a specific consent by the employee to file a patent application on any invention made by the employee during the term of employment. The employer should also consider an agreement not to contest any patents that are obtained.  While the courts generally won’t entertain such attacks because of assignor estoppel, but the Patent Office will allow inventors to attack the patent through inter partes review.

To protect against the situation where an inventor is unwilling or unable to execute a subsequent assignment document, the employer might include a power of attorney, so that an officer can execute assignment document on behalf of the employee.

Particularly where an employee has a history of inventing, the employer should consider requiring new employees to identify previously made inventions that the new employee may claim do not belong to the inventor.

While copyrightable works prepared by employees in the scope of their employment are works-made-for-hire that belong to the employer, works prepared by employees outside the scope of their employment — even if they relate to the employer’s business — belong to the employee.  An employee agreement can of course change this result, and the employer should ensure that it obtains ownership or at least the right to use all of the works of its employees that relate to the business.

5.  Access to Computers

The Computer Fraud and Abuse Act (can corresponding state laws) provides some protection from disloyal employee’s misuse of the employer’s computer systems and data.  However, this protection hinges on whether or not the employee’s access to the computer system and data was authorized.  Since most employees are on some level authorized users. it is important for an employer to define what access is authorized, and what access is not.

6. Return of Employer Property and Confidential Information

The Employer should specifically require the return of any employer property and information by a specific date.  The failure of a departing employee to do so is surprisingly common, and gives the employer legal leverage over the departing employee.

7.  Publicity and Social Media Restrictions

Employee names and likenesses are often incorporated into the employer’s marketing, and the employer would prefer not to have to rework these materials every time an employee departs.  Thus, an employer should obtain the express consent of employees to use their names and likenesses in promoting the employer, and this consent should survive the termination of the employee’s employment.

For employees that are active on social media, the employer should consider imposing some restrictions on employee conduct on social media.  The employer might require that employees not associate the employer with their personal posts.  The employer might also require that the employee not comment about the employer, or at least comment negatively about the employer.

Occasionally, whether by design or by accident, an employee who is active on social medial becomes the official or unofficial voice of the employer.  The employer needs to consider what happens to the employer’s social medial presence when this employee leaves.  Does the employer get to take over the account? Does the employer have the user name and password?

Checklist

  1. Recitation of Consideration
  2. No impact on Status of Employment at Will
  3.  Confidentiality
    1. Protects Company information and that of customers and suppliers from disclosure or use.
    2. Regardless of whether marked “confidential.”
    3. Prevents export of information (if appropriate).
    4. Promise not to disclose confidential information of previous employers and other third parties
  4. Covenant to Not-to-Compete
    1. Appropriately limited in geographic scope or time.
    2. Protects confidential information and/or customer contacts.
    3. Includes preparations to compete while employed.
    4.  Competition/Competitors clearly defined.
    5. Guaranteed period of non-competition.
    6. Obligation to advise employer of subsequent employment
    7. Consent for employer to contact subsequent employers
  5. Non-Solicitation
    1. Appropriately limited to key personnel
    2. Appropriately limited as to duration
  6. Assignment of Inventions
    1. Appropriate definition of invention (consistent with state law).
    2. Requirement of prompt disclosure (of all inventions including those not subject to obligation to assign).
    3. Automatic, immediate assignment of inventions when made, as well as a promise to assign inventions.
    4. Power of attorney to execute confirmatory assignment on behalf of employee.
    5. Authorization to file patent applications on assigned inventions
    6. Identification of prior inventions not subject to assignment,
    7. Treatment of inventions made in period after termination of employment.
    8. Assignment of copyrightable works.
    9. Agreement to execute further documents to secure and enforce rights in assigned inventions
    10. Promise not to challenge validity of patents on assigned inventions
  7. Access to computers and data
    1. Access limited to activities that solely benefit employer and no other purpose.
    2. Acknowledgement that accessing computer system or data for any purpose other than for the benefit of the company is unauthorized.
    3. Acknowledgment of and consent to monitoring of computer usage, email, and company resources.
  8. Return of Employer Property
    1. Obligation to return all employer property
    2. Obligation to return/delete all employer data from personal computers and other electronic devices
    3. Obligation to turn over or destroy all physical and electronic files containing information belonging to employer
  9. Publicity and Social Media
    1. Consent to use name and image in advertising and promotion, even after the employee leaves.
    2. Restrictions on references to employer on social media, including in usernames or scree images on any social media.
    3. Requirement to turn over login information for any social media accounts officially or unofficially associated with employer.
  10. Representations from Employee
    1. Free to accept employment
    2. Not under any covenant not to compete (or identification of existing covenants)
    3. Not under any confidentiality agreement (or identification of existing agreements)
  11. “Boiler Plate” Provisions
    1. Choice of law.
    2. Choice of forum.
    3. Non waiver.
    4. Modifications must be in writing.
    5. Duplicates and Facsimiles of Agreement are effective.
    6. Integration.

 

 

 

 

 

Where’s My %$^&# Dollar?

The issue of consideration in an assignment is always in the background, but only occasionally comes up.  In Memorylink Corp. v. Motorola Solutions, Inc., 773 F.3d 1266, 113 USPQ2d 1088 (Fed. Cir. 2014). the Federal Circuit had to a resolve over the adequacy of consideration in a patent assignment.  Memorylink claimed that its assignment to Motorola was void for lack of consideration, since it was supported by Motofola assignment to Memorylink, which was illusory because Motorola had no rights because its employees were not inventors,

The Federal Circuit started with the axiom that consideration is a basic requirement of a contract, but nominal consideration will suffice.  Courts will not inquire into the adequacy of consideration.  The Assignment on its face stated:

 [f]or and in consideration of goods and valuable consideration of the sum of One Dollar to us in hand paid, and other good and valuable consideration, the receipt of which is hereby acknowledged . . .

The Federal Circuit agreed there was no issue of material fact because the assignment explicitly acknowledges consideration for the .  The Federal Circuit said that discounting extrinsic evidence, the four corners of the agreement recited consideration,  Memorylink complained that this was merely boilerplate, but the Federal Circuit said that the use of boilerplate language does nto make the stated consideration invalid or non-existent.

Other courts that have faced the issue reached similar conclusion.  In Network Protection Sciences, LLC, v. Fortinet, Inc., 2013 WL 4479336 (N.D. Cal. 2013), the district court, applying Texas law, said that the recital “[f]or good and valuable consideration, the receipt of which is hereby acknowledged” was “conclusive: even if no actual consideration were paid.

The lesson is that a recitation of consideration and acknowledgement of receipt is likely to be accepted by the Federal Circuit, and should be considered in every assignment.

 

You Can’t Put Your Head in the Sand; Manage Employee Departures

Personalized User Model, LLP v. Google Inc., [2014-1841, 2015-1022] (August 18, 2015), has a number of valuable lessons to employers about handling employees and employee inventions.  In addition to lessons about present versus future assignments (see Prior Post), the Federal Circuits also explained the diligence required when an employee leaves.  As a defense to Personalized User Model’s infringement claims, Google tried to acquire the rights of the invention owned by SRI, the employer of one of the co-owners at the time of conception.  However, to assert these rights, Google had take the position that the employee breached its agreement to disclose and assign the invention, while the employee took the position that such a claim was barred by the statute of limitations.  Google argued that the statute of limitations was tolled because the breach was “unknowable” by SRI, but the Federal Circuit disagreed.

The Federal Circuit said that SRI knew the employee was leaving to immediately work at a start-up technology company. Considering the competitiveness of companies and relatedness of the technology, the employee departure was a “red flag” that should have generated further inquiry.  The Federal Circuit indicated that SRI should have conducted an exit interview, even if a disclosure would not have been forthcoming.  The Federal Circuit also said that SRI could have asked other employees and watch competitive patent filings.  The Federal Circuit said:

Employers do not need to track a former employee’s every movement for an indefinite period of time to look for potential claims, but there should be some basic level of diligence in looking after one’s interests.

The Federal Circuit said that whether this “basic” level of diligence is satisfied by evidence of a standard exit interview wherein the departing employee is asked if all contractual obligations have been met, or of inquiring unobtrusively about the employee’s new startup company, should be determined on a fact-specific basis.

An employer should consider:

  • Providing for an exit interview in its employee agreement (use a checklist that you get the employee to sign).
  • Requiring the employee to advise of subsequent employers.
  • Getting permission of the employee to contact subsequent employees (and avoiding a tortious interference claim).
  • Monitoring the patent applications published and patents issuing to the former employee and his/her new employer.

 

 

 

 

 

 

 

“I agree to assign and hereby do assign”

Personalized User Model, LLP v. Google Inc., [2014-1841, 2015-1022] (August 18, 2015), reminds us that an employee agreement will preferably include a immediate assignment of the employee’s inventions. Personalized User Model sued Google for patent infringement.  In the course of discovery, Google learned that the patented inventions were conceived while one of the co-inventors was employed by SRI.  In a move worthy of Harvey Specter and Mike Ross in Suits, Google attempted to acquire SRI’s rights in the invention.  Unfortunately for Google, the Federal Circuit agreed with the district court that the statute or limitations prevented Google from asserting a breach of contract action against the co-inventor.  The result likely would have be very different, if, instead of simply agreeing to assign inventions conceived during employment:

I agree to execute such documents, disclose and deliver all information and data, and to do all things which may be necessary or in the opinion of SRI reasonably desirable, in order to effect transfer of ownership in or to impart a full understanding of such discoveries, improvements and inventions to SRI.

the agreement provided that the inventions automatically belonged to SRI.  While one can forgive this lapse in an agreement drafted more than thirty years ago, today it is generally advisable to have an automatic assignment.  Several years ago in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832, 842 (Fed. Cir. 2009) the Federal Circuit explained that the language “agree to assign” is merely an agreement to assign in the future requiring a subsequent written instrument.  In contrast, the words “do hereby assign” have been construed as a current  assignment of future inventions.  See FilmTec Corp. v. Allied-Signal, Inc., 939 F.2d 1568, 1572-73 (Fed. Cir. 1991).  If SRI’s agreement had included a current assignment of future inventions, SRI would have had ownership rights to sell to Google, irrespective of any breach by the employee.

Personalized User Model is a great reason to review existing employee agreements, and to make sure that they include a current assignment of future inventions.  Of course, if your agreement does provide include a current assignment, you have to make sure that the rest of your paperwork is consistent.  Thus, rather than having the inventor subsequently execute an assignment of a particular invention, one should have the inventor execute a confirmation of the prior assignment of that invention.  Furthermore, if because of some business arrangement, a company want to assign rights to some third party, the company must do so itself (because of the automatic assignment), and an assignment from the employee would be ineffective to do so, because the rights had already been assigned to the company.  Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832, 842 (Fed. Cir. 2009).

 

Ownership of Inventions

A critical component of IP Management is the acquisition of IP.  It is therefore appropriate that the inaugural post of this blog addresses acquiring ownership of inventions — in this case employee inventions.  An employer does not automatically own the inventions or its employees merely by virtue of the employer/employee relationship.  The employer only owns inventions that the employee has agreed to assign.  Sometimes this agreement is implied, for example when the employee is specifically hired to invent or is later assigned the task of inventing.  However, most times agreement is express.  Such an agreement can be oral, but as the saying goes, oral contracts aren’t worth the paper they are printed on.  An agreement with an employee to assign inventions should be in writing.

What should this written agreement say?  After Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832, 842 (Fed. Cir. 2009), we know that an agreement to assign, is just that — an agreement to do something in the futureSuch an agreement can be trumped by an automatic assginment.  Thus is seems prudent to combine a promise to assign with a present assignment:

I agree to assign, and hereby do assign, to Employer all right, title, and interest in and to the Inventions.

Of course, this leaves open the question of what is an “Invention,” but that is a topic for another pose.