Covenants Not to Compete in
Intellectual Property Transactions
I. Introduction
Covenants not to compete are particularly critical in intellectual property
transactions - partly because intellectual property is generally intangible.
It is a creation of the mind. If intellectual property rights are evidenced
by by a government certification of some sort, such as letters patent
or a trademark or copyright registration certificate, you have made out
a prima facie case for ownership - but otherwise it can be very difficult
to establish ownership of intellectual property rights and difficult to
protect those intellectual property rights against infringement or misappropriation
by others.
This is the situation in which restrictive covenants are most valuable.
Regardless of a certificate of ownership, you can protect yourself by
contract law, at least against the specific individuals who have contracted
not to compete with you in the area of your own intellectual property.
By "Intellectual Property" we mean generally patented or potentially
patentable inventions, trademarks, service marks, copyrightable subject
matter, and trade secrets.
I will touch on each of these areas, give you just a quick primer on
some of the substantive rights involved with each, and then discuss with
you the kinds of contractual arrangements and the specific types of provisions
and considerations that you need to be mindful of in connection with each
area.
II. Patents
A. Definition of a Patent
Unlike other forms of intellectual property, patent rights do not exist
unless and until they are granted by the government, the federal government
or the government of a foreign country.
A U.S. patent is the grant of a property right from the Government to
the inventor. It gives the inventor the right to exclude others from making,
using, or selling the patented invention in the United States for the
duration of the patent.
Once the patent expires, the invention enters the public domain and can
be made, used, or sold by anyone.
Only the inventor, or the inventor's assignee, is entitled to apply for
a patent - and only the inventor or the inventor's registered patent attorney
or agent may prosecute a patent before the Patent and Trademark Office.
B. Types of Patents
1. Utility Patent
By far, the most common type of patents issued by the U.S. Government,
are utility patents.
A utility patent is granted for inventions which are novel, useful, and
non-obvious. A utility patent can be obtained for the utilitarian or functional
aspects of an invention.
Utility patents have a duration of twenty years from the date of filing
the application.
During the life of the patent, maintenance fees must be paid in order
to sustain the patent.
There is no renewal of a patent. When a patent term expires, the invention
is forever dedicated to the public.
2. Design Patent
A design patent can be obtained for the physical appearance of an invention.
To be eligible for a design patent, an invention must be novel, non-obvious
and ornamental. In other words, the design must not serve a primarily
functional purpose.
Design patents expire fourteen years from the date of issue of the patent.
Maintenance fees are not paid on design patents.
3. Plant Patent
A plant patent is a patent granted by the Government to an inventor who
has invented or discovered, and asexually reproduced, a distinct and new
variety of plant.
The plant patent lasts twenty years from the date of filing the application,
and protects the inventor's right to exclude others from asexually reproducing,
selling or using the patented plant.
4. Patentable Inventions
Not all inventions are patentable. An invention must fall within one
of four categories provided in the U.S. Patent Laws. These categories
include: machines, articles of manufacture, composition of matter and
processes. or any improvements made upon these categories. As a result
you cannot obtain a patent on laws of nature, mathematical formulas, and
abstract ideas.
C. Inventions Already in Use or on Sale
An invention is not eligible for patent protection if the invention was
on sale, offered for sale, or in public use in the United States for more
than one year prior to filing the patent application. Public use has been
held to include disclosure to one who is not under an obligation of confidentiality.
An invention is not eligible for United States patent protection if it
is described in a publication, including the publication of a foreign
patent, anywhere in the world more than one year prior to the filing of
the application.
Therefore, if you have a client who has filed for a foreign patent, or
who is about to introduce a new product at a trade show, you must look
into filing a patent application immediately.
You also must take the time limitation into consideration as soon as
the inventor starts talking to people about the invention. Whether he
is looking for investors, wanting to sell the idea outright, or discussing
manufacture, unless there is a patent in place, there should be a written
obligation to maintain confidentiality.
The one year time bar is an absolute, statutory bar to obtaining patent
protection.
III. Agreements And Restrictive Covenants Relating To Patents
A. Confidential Disclosure Agreement
A confidential disclosure agreement is really not limited to new inventions.
It can protect any sort of confidential information
- a concept for a new restaurant - a new business venture -
any sort of confidential business information that could be of value
to others if it were disclosed.
A confidential disclosure agreement is particularly critical in the patent
area however, for two reasons, the one year time bar and because of the
nature of patent protection
Because of the one year time bar....if the inventor discloses the subject
matter of the invention to another without an agreement of confidentiality,
the clock starts running on the one year to get the patent application
on file.
When I say it is also important because of the nature of patent protection,
remember the first thing I told you about patents, there is no patent
protection unless and until a patent is granted by the Government. A patent
is granted to the inventor. The inventor is not the first person to conceive
of the idea, the inventor is the first person to reduce the invention
to practice.
Therefore - the inventor has a concept - an idea for a new invention
- he must discuss it with other people, which is the usual situation in
the real world....he needs to consult with someone about the electronic
circuitry, or the practicalities of manufacturing, or regarding investment
capital or partnership -
BUT - If the concept is disclosed to another, before it is reduced to
practice - that is, before the concept really becomes an invention, and
the person to whom it is disclosed is the first to reduce the idea to
practice....he becomes the inventor and he gets the patent, not the guy
who originally conceived the idea.
That is why it is critical to have a confidential disclosure agreement
in place before an invention is disclosed.
You will also hear "Confidential Disclosure Agreements" referred
to as "Non-Disclosure Agreements" for obvious reasons. The point
is, the person who is receiving the information is promising not to tell
anyone else. Typically, a Confidential Disclosure Agreement also provides:
i) that the party receiving the information recognizes that it is confidential
and proprietary;
ii) that the party receiving the information will not to utilize the
information for his/her own benefit; and
iii) that the information and all documents, charts, graphs, notes memoranda
and other items embodying the information will be returned to the disclosor
within a set period of time.
Even if a patent never issues, the contracting party still may be bound
to the inventor not to utilize nor disclose the invention even though
the inventor may not be able to keep anyone else from utilizing the invention.
A Confidential Disclosure Agreement is signed by the person who is receiving
confidential or trade secret information, prior to release of the information
itself. The information is identified in the agreement only in general
terms.
B. Technology Development Agreement
Frequently the next step in developing an invention is the Technology
Development Agreement.
Once the confidential information - the concept for the invention - has
been disclosed and evaluated by the person receiving it, and the parties
have agreed to work together, the details of their working relationship
should be specified in a further agreement. This will often take the form
of a Technology Development Agreement.
This is generally used when the party who has initially developed the
idea needs help to further refine and develop the product.
It also comes into play in other situations such as when an invention
is brought to a company, the company is interested, but needs the assistance
of the inventor to modify the invention so that it works with technology
the company is already using.
Obviously this agreement will set out the rights and responsibilities
of each party, the consideration to be paid, the grounds for termination
and what happens at termination and so forth.
But with a Technology Development Agreement you also need to consider:
i) whether or not the technology is or will be the subject of a patent
application;
ii) who will bear the costs of obtaining the patent;
iii) who is to own the patent should it issue; and
iv) what happens if a patent does not issue.
There can be specific provisions for ownership of the technology to reside
with the inventor regardless of whether or not a patent issues, and specific
provisions that the other party will not compete with the inventor nor
utilize the technology whether or not a patent issues.
The person or company who is contracting with the inventor may want to
provide that they will own the technology or that if a patent doesn't
issue, the agreement terminates, or the obligation to make payment terminates
or is greatly reduced.
C. Technology Transfer Agreement
An inventor can also agree to transfer his invention to another; that
is, to transfer or assign actual ownership.
A transfer of ownership rights can be made whether or not the invention
is patented. The inventor can transfer the right to obtain a patent as
well as a patent application or an issued patent.
If there is going to be a patent application , the agreement must provide
for what is to happen if a patent does issue and what is to happen if
a patent does not issue.
Generally, the inventor agrees that if the patent issues, he or she will
execute the necessary documents for filing with the United States Patent
and Trademark Office to transfer ownership to the transferee.
If a patent does not issue, the inventor will frequently agree not to
disclose the technology to another nor to compete with the transferee
in the utilization of the technology.
Consideration for the transfer will generally be greater if a patent
issues. The patent gives the patent holder rights of exclusivity that
will not be present with unpatented technology.
In some cases, the transferee will be interested in the transfer only
if a patent issues, and will want to terminate the agreement if a patent
does not issue. If this is the case, you must be very careful to define
what the transferee can do in the way of competition, etc. as the transferee
is very likely to have been provided with specific information from the
inventor that would not be available to others.
D. Patent or Technology License Agreement
Inventions, whether patented or not, can also be the subject of license
agreements.
A license agreement does not involve a transfer of title, but grants
permission to another to utilize the technology.
If there is a patent, you frequently see license agreements that are
for the life of the patent, but licenses are also granted for a lesser
term.
Technology licenses may be exclusive or non-exclusive. An exclusive license
is generally interpreted to exclude even the licensor from using the technology
in competition with the licensee, so be careful of the terminology, an
exclusive license is quite literally exclusive of everyone but the licensee.
A non-exclusive license on the other hand allows the licensor to grant
permission to others to use the technology, including competitors of the
licensee. Be sure your client completely understands that, and also take
that into account in negotiating consideration for the license. An exclusive
license is worth a great deal more than a non-exclusive license.
A license may specifically define the application of the technology that
is being licensed. Very often inventions will have application in a number
of different industries. If the licensee only wants to use the technology
in the manufacture of cars, define the license to limit it to the manufacture
of cars. That way the licensee is not paying for areas or uses that are
not of interest, and the licensor can grant another license, even an exclusive
license, to use the invention in the manufacture of prefabricated housing.
Licenses should also specifically define geographic territory. This is
another way for the licensor to retain rights that are not needed by the
licensee and for the licensee to pay for only what he needs.
Finally, you will want to specify whether or not sub-licenses may be
granted by the licensee.
D. Distribution Agreement
Pecause a patent holder can preclude others from making, using or selling
a patented invention in the United States, a company can be liable for
merely distributing patented products even if they are manufactured by
another.
A distribution agreement gives permission for the sale of products which
embody the technology. A distribution agreement should also define the
territory and set out provisions for non-competition.
When obtaining a license or distribution rights from a patentee or inventor,
the licensee or distributor should ask for:
i) a warranty that the product does not infringe the intellectual property
rights of a third party; and
ii) a provision for indemnification should the licensee or distributor
have to defend against a claim of infringement.
Again, since patent infringement occurs when one makes, uses or sells
the patented invention, mere distributors are liable equally with manufacturers,
should the product be found to infringe a patent.
IV. Trademarks
A. Definition of a Trademark
A trademark is a word, phrase, symbol or design, or any combination of
those elements which identifies the goods or services of one party and
distinguishes those goods or services from those of others.
This definition includes service marks, which identify the source of
services, such as hotels, restaurants, tax return preparation services,
etc. rather than products.
There are also:
i) Certification marks which certify that goods or services of others
have certain characteristics or have met certain standards - an example
would be the Underwriters' Laboratories certification that products meet
their standards; and
ii) Collective marks are used to indicate membership in an organization.
B. Purpose of Trademark Law
Trademark law has a two-fold purpose. It is designed to protect the trademark
owner. In using and advertising trademarks in the development of a business,
the trademark owner develops valuable consumer good will and name recognition.
Trademark law protects trademark owners from competitors who want to trade
on that goodwill without having earned it.
The second thrust of trademark law is consumer protection. Because the
owner has used his trademarks in connection with the business, the consumer
has come to recognize the trademarks as our signal for what we are getting.
If we see golden arches, we know that we can go get a Big Mac and that
it will be essentially the same Big Mac that we get if we see golden arches
in North Carolina or in Colorado.
We are entitled to that. We are entitled to take for granted that if
we see a trademark we are going to get the product we are expecting and
not something else.
To achieve both of these goals, protecting the trademark owner's valuable
goodwill and also protecting consumers against deception, trademark law
prevents the use of a mark which is "confusingly similar" to
the mark of another. That is, one cannot use a mark which is so similar
to an existing mark that it is likely to confuse consumers into thinking
that these goods or services are connected with the original mark owner.
C. Obtaining Trademark Protection
Unlike a patent, a trademark does not have to be registered to be protectable
under the law. There are common law trademark rights begin as soon as
a mark is used. Common law protection, though, is generally limited to
the geographic area in which the actual use is taking place.
To obtain nationwide trademark protection, a trademark must be registered
with the U.S. Patent and Trademark Office in Washington. Trademarks can
also be registered on a state by state basis, but frankly the situations
in which you would want to rely on state registration rather than federal
registration are pretty limited.
It is interesting though, that the reason there is state registration
of trademarks is that only patents and copyrights are mentioned in the
Constitution. So the law concerning patents and copyrights is exclusively
federal. Since trademarks are not mentioned in the Constitution, the states
are not precluded from regulating trademarks and each state does so.
The federal government can exercise jurisdiction over trademarks only
under the Commerce Clause. So a mark must be used in "commerce which
may be regulated by Congress", generally interstate or international
commerce before it can be registered by the federal government.
You must have actual use in commerce before a registration will issue,
but an application may be filed on the basis of a bona fide intent to
use the mark in commerce.
So when you are dealing with transactions which involve trademarks, keep
in mind that , unlike patents or copyrights, trademarks may be registered
in individual states and not just with the U.S. government or foreign
governments.
D. Term of Trademark Protection
The final factor that you should take into account when you are dealing
with trademark transactions is that trademark registrations can last indefinitely.
So long as the mark is still in use and the registration is renewed every
ten years, there is no upper limit on the duration of a trademark registration.
V. Agreements And Restrictive Covenants Relating To Trademarks
A. Assignment of Trademark
The first type of agreement I want to discuss with you in connection
with trademark practice is an Assignment.
An assignment is the transfer of ownership rights to the trademark. However,
because a big part of the trademark and of trademark law, is the goodwill
of the mark, or its reputation in the mind of the consumer, a trademark
assignment is not valid unless the mark is assigned along with that portion
of the goodwill of the business that is embodied in the mark.
It is not necessary to sell the entire business, but the sale must include
machinery or equipment or a formula or recipe, or maybe just the specifications
of the specific product, or the policies for how the business is conducted,
but there must be some indication that goodwill is being transferred along
with the mark. Otherwise, it is considered an assignment in gross and
is invalid.
The other factor you want to take into consideration with an assignment
is what rights are being assigned. Are there state registrations, federal
registrations. Are the rights to be transferred in the United States only
or are there foreign rights to be acquired.
Will the transferor retain any rights to use the mark, or will the ownership
revert under certain circumstances - this is particularly critical when
the mark is an individual's own name, and it comes up more frequently
than you might imagine.
It arose when Monty Trainors' restaurants were sold, for example - and
recently I heard of a situation where a celebrity had allowed a company
to register his name as the service mark for a chain of retail stores.
The chain is now going into bankruptcy. Bankruptcy courts have been treating
trademarks like any other asset of a business and allowing them to be
sold out of the bankrupt estate. So this person may totally lose control
of his or her own name.
So it is very important to look ahead to appropriate disposition of trademark
rights under various contingencies.
B. Trademark License Agreement
One who owns a trademark at common law, or through registration, has
the right to license another to use the mark. As with patent licenses,
trademark licenses may be exclusive or non-exclusive, may be worldwide,
or for some limited territory, and may be with or without royalty.
There are several unique aspects of Trademark licenses however, which
I want to call to your attention.
1. Quality Control Provisions
Historically, trademark licenses were not allowed at all. The consumer
protection aspects of trademark law were such that a trademark signified
to the consumer that the trademark owner made the product. If another
was allowed to use the mark, that guarantee was no longer there for the
consumer, and the trademark owner was considered to have given up his
ownership rights.
Gradually, the law changed so that today licensing is very common. But
the aspect of consumer protection remains strong. A trademark license
must include provision for the trademark owner to exercise quality control.
Otherwise, the license is considered a sham and the trademark owner runs
the risk of having the mark declared abandoned.
2. Restrictions on Use at Termination
It is also very important that there be a clearly defined period of time
for use of the trademark and provision for disposition of products and
other items bearing the trademark at the termination or expiration of
the agreement.
Typically, a trademark license will permit the use of a trademark for
a period of time, say five years. At the end of that time, the licensee
will not create any more products that have that trademark on them, but
what happens with products then in inventory, what happens with sales
orders that have been taken but not yet filled?
What if the orders were taken and the product was to have been shipped
before the end of the license period, but there were delays that were
outside the licensee's control. If the licensee ships the goods after
the termination date, he breaches the license agreement, and if the licensee
doesn't ship after the termination date, he breaches the sale agreement
and possibly alienates a customer.
There is no right or wrong answer to these problems, and in fact the
answer will depend upon the industry, the nature of the products and the
nature of the business. My point is just to be certain you take these
things into account.
When I say that the answer is particular to the industry, I am very serious
about that. Many license agreements call for all products, advertisements,
and materials bearing the mark to be destroyed at the conclusion of the
license term. I was once involved in a license agreement for the use of
a trademark in the airline industry, and the other lawyer actually proposed
a license which had that provision. A contract that provided for the destruction
of aircraft was just a bit draconian in our view. We ultimately agreed
that repainting them, within a reasonable period of time, would work just
as well.
C. Franchise Agreement
Let me shift focus for just a bit and talk about franchise law.
A franchise agreement is essentially a trademark license. Obviously,
there are a number of other business terms and conditions attached as
well, and franchise law is an entire specialty unto itself, But at its
essence, a franchise agreement is permission to use the trademark or service
mark of another. All of the rules and considerations governing trademark
licenses apply equally to franchise agreements.
One particular problem area occurs when one single business owner has
a number of different locations, and then sells different locations to
different entities or individuals without adequate provision for trademark
ownership. The result is numerous owners of the same trademark, in the
same geographic area, such that each of them owns everything...and nothing.
That is, they each have the right to use the mark, but none of them can
stop a third party from infringing because no one can establish superior
ownership rights. It is also unlikely that any of them could preclude
any of the others from opening additional locations or licensing others.
So they each have the right to use the mark but there is virtually no
value in the mark, because anyone else can use it also.
You always want to avoid a situation of multiple trademark ownership.
Ownership of the trademark should either be retained by the seller or
transferred to one of the transferees, with licenses granted to all of
the others. This maintains the integrity of the mark and preserves its
value.
D. Acknowledgment of Ownership in Other Agreements Relating to Trademarks
In connection with patent law, we discussed Confidential Disclosure Agreements,
Technology Development Agreements, Technology Transfer Agreements, and
Patent and Technology License and Distribution Agreements.
Frequently, agreements relating to technology such as these, will also
involve the use of a product name and/or a company name. In such cases,
there are trademark considerations.
As with Trademark Licenses and Franchise Agreements, they should, minimally:
i) recite an acknowledgment of ownership of trademark:
ii) contain a disclaimer of any ownership rights by the party who is
given permission to use the mark; and
iii) include a representation that the contracting party makes no claim
of ownership and will take no action in derogation of ownership rights.
VI. Copyrights
A. Definition of a Copyright
A copyright is a federally granted right which protects the author's
particular expression of an idea. One of the fundamentals of copyright
law is that a copyright does not protect an idea itself.
Rather, it protects the particular form of expression the author used
in expressing his or her idea. Thus, anyone is free to express the same
idea as long as the author's particular form of expression is not copied.
For example, two nearly identical photographs taken of the Eiffel Tower
by two different people can each be individually copyrighted if they are
independently created since each photograph is an expression of its respective
author.
B. What Can Be Copyrighted
Copyright is accorded to original works of authorship of literature,
drama, music, sculpture, computer programs, sound recordings, film, photography,
and works of fine art.
Copyright gives the owner the exclusive right to reproduce, distribute,
sell, perform, or publicly display the copyrighted work and to prepare
derivative works.
C. Requirements for Protecting a Copyright
In order to obtain copyright protection, a work must be original and
fixed in a tangible medium of expression.
To satisfy the originality requirement, the author must have engaged
in some form of intellectual endeavor, and not mere copying, and must
exhibit some form of creativity.
Further, in order to be deemed "fixed in a tangible medium",
the work must be created on something sufficiently permanent to be perceived,
reproduced, or otherwise communicated for a sufficiently long duration.
D. Time Constraints on Registration
Copyright protection begins automatically as soon as the work is created.
In other words, the author need not register the work in order to obtaiin
copyright protection.
However, registration is a prerequisite to bringing an infringement action.
To achieve maximum protection a copyright should be registered within
three months after publication. This maintains the copyright owner's right
to recover statutory damages and attorney's fees. E. Duration of Copyright
The duration of copyright protection is the life of the author plus 50
years. Or, in the case of works made for hire, 75 years after the first
publication or 100 years after creation of the work, whichever expires
first.
Copyrights cannot be renewed.
VII. Agreements And Restrictive Covenants Relating To Copyrights
A. Work for Hire Agreements
If a copyrightable work is created by an employee within the scope of
his or her employment, the work is a work made for hire and the employer
is the owner of the copyright.
If, however, the creator of the work is an independent contractor, or
if the work is commissioned, the copyright will belong to the creator
of the work.
If a copyrightable work is created by anyone other than an employee in
the course and scope of employment, it is critical to have a "work
for hire" agreement and/or assignment of copyright, so that the one
who commissioned and paid for the work actually enjoys ownership of the
copyright.
This is a real trap for the business person because it is counter intuitive.
If you hire someone else to do something for you, and pay them, we are
accustomed to owning the results of that effort. If you hire someone to
build a house for you, you own the house.
This is not true with copyright law. If you hire a photographer to take
photographs for use in advertising your business, or if you hire a computer
programmer to write software for you, they own the copyright, and you
are liable if you reprint the brochure which includes the photographs
or have another programmer come in and de-bug the software.
In any such situation, you must have the independent contractor execute
a work for hire agreement and assignment of copyright in the work created.
B. Transfer of Copyright Ownership
The transfer of copyright is not an "all or nothing" proposition.
Copyright is frequently referred to as a "bundle of rights",
including, among others, the right to reproduce and distribute the work,
the right to perform the work, the right to create derivative works, such
as a screenplay from a story or a translation, etc.
Any portion of these rights can be assigned to another, with the copyright
owner retaining all other rights, or assigning certain other rights to
other entities or individuals.
An assignment of copyright is not valid unless it is in writing and signed
by the copyright owner.
C. Copyright Licenses
As with assignments, copyright licenses can be restricted to specific
rights, with the copyright owner retaining all other rights.
Appropriate restrictions must be built into the licenses to assure the
owner the flexibility to utilize the copyright for all uses which should
be retained and to assure to the owner the benefit of his bargain, not
releasing rights that are not compensated.
D. Publishing Agreements
Publishers' standard agreements almost invariably call for assignment
of copyright from the author to the publisher.
This makes matters easier for the publisher, because the publisher then
has unrestrained use of the work worldwide for future editions, abridgments,
translations, books on tape any future use the publisher may wish to make.
It is not necessary, however, and is rarely advantageous for the author.
A publisher need only have a license to publish and distribute the work.
Copyright generally can and should be retained by the author.
E. Software Development Agreements
Another type of agreement frequently encountered in copyright practice
is the Software Development Agreement, in which a company or an individual
programmer is hired to develop software for a specific application.
Under copyright law, unless the programmer is an employee, employed for
the purpose of writing software, copyright in the software will most likely
be considered to be owned by the programmer, or the company who employs
the programmer.
If you are representing the programmer - the programmer's copyright is
protected by covenants not to copy or reproduce or alter the software,
similar to the "shrink wrap licenses" packaged with commercially
available software. These covenants are frequently secured by the programmer's
retaining the source code, or having it held in escrow, and allowing access
to the purchaser only on certain specified conditions.
From the standpoint of the purchaser, however, conditions like these
can be devastating. It is generally important that the purchaser be able
to copy the software onto other computers, to de-bug and update it, and
to alter its function as business circumstances dictate. On behalf of
the purchaser, one would seek to negotiate copyright ownership - the work
for hire - and possession of the source code.
VIII. Trade Secrets
A. Preliminary Considerations
Trade secrets exist in almost every business, they consist of virtually
any information which is :
i) beneficial or potentially beneficial to the business;
ii) developed through the expenditure of time and effort;
iii) unknown to others in competing businesses; and
iv)which gives a business advantage to the company.
Trade secrets can include formulas, patterns, compilations, computer
programs, devices, methods of production, techniques, or processes. They
can also include customer lists, supplier lists, and source lists
But in order to qualify as a trade secret, the information must be subject
to "efforts that are reasonable under the circumstances to maintain
its secrecy."
This is where restrictive covenants come into play. "Efforts that
are reasonable under the circumstances to maintain secrecy."
The security measures to be taken are many and varied, but key among
them are contractual agreements restricting access to and disclosure and
use of trade secrets.
Among the steps to be taken to protect trade secrets are:
(i) employee confidentiality agreements;
(ii) prominent labeling or identification of documents or other items
containing confidential materials;
(iii) limiting distribution of documents to a "need-to-know"
or "need-to-use" basis;
(iv) numbering documents (when reasonable) and maintaining ledgers to
track each copy;
(v) creating a document destruction program;
(vi) visitor control (registration, badging, supervision);
(vii) fencing the premises;
(viii) limiting access to sensitive materials, as well as sensitive areas,
such as computer and document storage areas;
(ix) restricting photocopying (logs or central copying);
(x) reviewing all outgoing materials;
(xi) posting signs and periodically circulating reminders cautioning
employees to protect confidential information;
(xii) having employees periodically acknowledge their duty to protect
confidential information, perhaps during employee reviews; and
(xiii) exit interviews.
I am going to discuss with you only a few of these measures, those which
rely upon restrictive covenants of some nature.
B. Specific Measures Which Rely Upon Restrictive Covenants
1. Document Marking and Control
All documents which contain confidential or proprietary information should
be identified and all confidential documents should be marked with an
appropriate proprietary information notice an example is given in the
written materials:
The information disclosed herein is proprietary with XYZ Company and
shall not be duplicated, used or disclosed, nor shall the articles or
subject matter contained herein be reproduced, without written permission
of XYZ Company.
Confidential documents which must be submitted to the government for
any reason should be marked to ensure that they are not inadvertently
released to others under the Freedom of Information Act. There are specific
exemptions under the Act for trade secret information, and the document
marking should specifically refer to the exemption.
2. Documents to be Released
There are certain categories of documents within the company that are
intended to be released to the outside world. These documents fall into
two categories, documents which are not intended to disclose trade secrets
and documents which intentionally disclose trade secrets.
a. Documents not intended to disclose secrets
Documents containing technical information prepared for general release
are not intended to disclose trade secret information. They should be
screened before release to ensure that they do not disclose trade secrets
of the business.
These documents include advertisements, sales brochures, hand-outs for
trade shows, newspaper press releases, articles to be submitted to technical
or trade journals, and training and maintenance manuals intended for unrestricted
release to customers.
In addition to documents for general release, there also may be specific
requests for information that should not disclose trade secret information.
For example, The company may receive an inquiry for information about
a product so that the inquirer may determine whether the product will
meet the inquirer's requirements.
A customer may want to know whether a trade secret formulation contains
a particular ingredient in order to avoid possible adverse reaction with
materials to be added by the customer. To accommodate requests like this,
the business may be able to release censored drawings, or descriptions
insufficient to reveal any trade secrets involved,
Or a company may be able to release the information subject to a Confidential
Disclosure agreement such as we discussed earlier in connection with patents.
b. Documents containing trade secrets
There are other documents which must be released outside the company,
which do intentionally contain trade secret information.
The company should establish a system to track and retrieve all confidential
documents which have been provided to outsiders for any reason.
Even when documents disclosing trade secrets are released to outsiders
with the appropriate restrictions, protection may be lost by the failure
of the trade secret owner to recover the documents after the purpose has
been accomplished. Therefore, an adequate system to track and retrieve
documents is important.
And it is is always wise to release sensitive documents under the protection
of a Confidential Disclosure Agreement.
3. Employee Agreements
Even without a written agreement, Florida courts will generally enforce
an obligation of confidence binding an employee or ex-employee not to
disclose or use the trade secrets of his employer.
However, there are several reasons for requiring an employee whose duties
will involve access to trade secrets to sign a written agreement at the
time of hiring.
A written agreement may be necessary if the employee was the originator
of trade secrets and then seeks to leave the company and take them to
his new employer. The fact that an employee signed a secrecy agreement
puts the employee on notice that trade secrets are involved.
You also want an acknowledgment by the employee that the trade secrets
were not previously known to him. This will help to establish that they
were in fact trade secrets of the company.
Generally, an employee agreement should also contain provisions for:
non-disclosure, non-use, a duty to disclose and assign inventions to the
employer, and for non-competition with the employer
a. Non-disclosure
A non-disclosure provision requires the employee not to disclose the
trade secrets of the employer or use them other than for the employer's
benefit.
b. Non-use
A non-use covenant obligates the employee not to disclose or use the
employer's trade secrets after termination of the employment, even when
such trade secrets were originated by the former employee.
c. Duty to disclose and assign to employer
A duty to disclose and assign requires the employee to promptly disclose
and assign to the employer any discoveries, improvements or inventions
made by the employee during the course of his employment which relate
to the business of the employer.
Absent such provision, the employee may be considered to have an interest
in the subject matter at least equal to that of his employer or, in the
alternative, it may be considered that the knowledge is part of the employee's
skill and experience, rather than a trade secret of the employer.
d. Non-competition
A non-competition provision should include a duty not to moonlight, not
to complete with the employer, not to organize a competing company, and
a duty not to solicit fellow employees to leave the company to undertake
competitive employment.
As an incentive for an employee to comply with the agreement, it is helpful
to include a provision which prohibits the breaching employee from receiving
any benefits to which he or she would otherwise be entitled.
4. Vendors/Outside Contractors
Not only employees, but also vendors and outside contractors will likely
have access to trade secret information.
Any business which hires vendors to work to specification on parts or
formulations that incorporate trade secrets, or which utilizes an outside
contractor to build machinery, components, or which engages outside consultants
to provide services involving sensitive information, should obtain advance
commitment of the vendor, contractor or consultant to hold in confidence
any trade secret information supplied by the business to enable the vendor's
performance.
This may be in the form of a Confidential Disclosure Agrement, or it
may just be included as a clause in the company's standard documents,
such as Purchase Orders or Requests for Proposals.
An example of such a clause is provided in the written materials. Any
such agreement should obligate the recipient of any documents containing
the trade secrets to return them promptly to the discloser, together with
any copies which have been made, after the purpose for which they have
been furnished has been accomplished.
IX. SECRECY IN LITIGATION
Generally, litigation requires that proceedings be a matter of public
record and may involve the very trade secret itself. This poses special
problems of secrecy which are best resolved on a case by case basis, with
specific regard to the facts, issues and posture of the client in the
case itself.
Precautions should generally include:
i) an early agreement upon an appropriate protective order;
ii) filing evidence and certain testimony under seal;
iii) blacking out sensitive material which is not relevant to the proceedings;
iv) restricting access to copies of documents; and
v) excluding individuals from the presence of depositions or testimony.
X. CONCLUSION
In the protection of intellectual property, trademarks, patents, copyrights
and trade secrets, it is important to utilize all means available. Obtaining
appropriate registrations, and taking adequate security precautions are
critical, but they are no substitute for contractual restrictions on the
use and disclosure of intellectual property.
Agreements such as those we have discussed provide a measure of protection
that can be obtained from no other source.
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