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Employer vs. Employee: Who Owns the Secrets?

December 23, 2019

Employer vs. Employee: Who Owns the Secrets?

December 23, 2019

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Employers often assume that they own trade secrets developed by their employees. That is not necessarily the case. And failing to take appropriate precautions may result in employers unexpectedly losing their intellectual property protections.

It is true that in the United States, trade secrets developed by an employee typically belong to the employer. See Solomons v. United States, 137 U.S. 342, 346 (1890) (“If one is employed to devise or perfect an instrument, or a means for accomplishing a prescribed result, he cannot, after successfully accomplishing the work for which he was employed, plead title thereto as against his employer. That which he has been employed and paid to accomplish becomes, when accomplished, the property of his employer.”). As is typical in the United States, however, the precise confines of this rule of thumb vary on a state-by-state basis and are typically governed by a combination of statute and case law interpreting the relevant statutes.

That said, employers must be cautious, both in the U.S. and abroad, because trade secrets may not automatically accrue to them. For instance, the Supreme Court of Pennsylvania in Wexler v. Greenberg, 399 Pa. 569, 582-83 (1960) found that chemical formulas developed by the plaintiff’s former chief chemist during the course of his employ merely “form[] part of the technical knowledge and skill he has acquired by virtue of his employment with [his former employer] and which he has an unqualified privilege to use.” Similarly, the Chinese court in Beijing Puran Track Transportation Technology Ltd Co v. Anan He found that a plaintiff that did not know the formula for its alleged trade secret material could not, therefore, be the owner of that trade secret.

In both cases, the employer lacked an agreement explicitly stating that ownership of information developed during the course of employment is the property of the employer and may not be used for other purposes. The Wexler court emphasized the lack of written agreement in framing the issue it was asked to resolve:

We are thus faced with the problem of determining the extent to which a former employer, without the aid of any express covenant, can restrict his ex-employee, a highly skilled chemist, in the uses to which this employee can put his knowledge of formulas and methods he himself developed during the course of his former employment because this employer claims these same formulas, as against the rest of the world, as his trade secrets.

Wexler, 399 Pa. at 575-576 (emphasis in original). This outcome is analogous to that reached by the Supreme Court in Bd. of Trustees of the Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc. in a patent context. 563 U.S. 776, 780 (2011) (Bayh-Dole Act does not “automatically vest[] title to federally funded inventions in federal contractors,” which would displace the norm that inventions belong to the inventors.). Indeed, the Court expressly endorsed the longstanding principle that “unless there is an agreement to the contrary, an employer does not have rights in an invention which is the original conception of the employee alone.” Id. at 786 (internal quotation marks omitted) (quoting United States v. Dubilier Condenser Corp., 289 U.S. 178, 189 (1933)).

Combined with trade secret and patent protection, copyright can provide a third leg to support a claim of employer ownership over employee-generated intellectual property. While both trade secret and patent protection are directed to the substance of employee-generated intellectual property, copyright may also be used to protect its form. Unlike trade secret and patent ownership, the nuances of which are governed by state law, copyright boasts a theoretically uniform application as a creature of purely federal law. More specifically, 17 U.S.C. §101 defines a “work made for hire” to include “a work prepared by an employee within the scope of his or her employment.” Further, the Copyright Act expressly provides that “[i]n the case of a work made for hire, the employer or other person for whom the work was prepared is considered the author” and therefore the owner. 17 U.S.C. § 201(b). The work made for hire doctrine can thus be a valuable tool to secure ownership of an employee’s memorialization of trade secrets developed during the course of their employ. In order to do so, however, the employee must be precisely that – an employee and not an independent contractor. See generally Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730 (1989).

Accordingly, to protect their rights, employers should require that all employees sign an agreement acknowledging their status as an employee and stating that, as a condition of employment, all trade secrets and other intellectual property developed by that employee automatically become the property of the employer. Employers must also be aware that some states limit the enforceability of employment agreements, typically rendering such agreements ineffective to assign inventions made on employee’s own time without use of employer resources unless they relate to the employer’s business. See Cal. Labor Code § 2870; 19 Del. Code Annotated § 805; Ill. Rev. Stat. Ch. 140, §§ 301-303; Kan. Stat. Annotated §§ 44-130; Minn. Stat. Annotated § 181.78; N.C. Gen. Stat. §§ 66-57.1, 66-57.2; Utah Code Annotated §§ 34-39-2, 34-39-3; Was. Rev. Code Annotated §§ 49.44.140, 49.44.150.

Employers should also strongly consider consulting both intellectual property and employment attorneys in drafting an employment agreement. Exemplary language in such an agreement may resemble the following:

  1. The employee hereby assigns now all present and future rights to all inventions, improvements, ideas, and work product of any kind that arise on or after this date relevant or relating in any way to any business of the employer to employer in consideration of being hired.
  2. The employee agrees that as of today and for every day hereafter, any expression made in a tangible form, whether transitory or permanent, are works for hire, and owned by employer, in consideration of being hired.
  3. The employee hereby waives any ownership rights in any invention, improvement, ideas or work product of any kind that arise on or after this date relevant or relating in any way to the business of the employer to employer in consideration of being hired.
  4. This contract is governed by the laws of ____________________ without regard to its conflicts of laws rules. Should any prior, present or future law of the United States or the State of ____________________ conflicts with any provision of this agreement, then this contract is automatically amended to modify any provision to the minimum extent necessary to comply with the law.

These steps may feel like a hassle. But if they prevent an unnecessary dispute with an employee, they are but a small effort that can make a significant difference.

Author: Matthew Berntsen

The opinions expressed are those of the authors on the date noted above and do not necessarily reflect the views of Fish & Richardson P.C., any other of its lawyers, its clients, or any of its or their respective affiliates. This post is for general information purposes only and is not intended to be and should not be taken as legal advice. No attorney-client relationship is formed.

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