What is the difference between an Employee Proprietary Information Agreement and a Confidentiality and Inventions Assignment Agreement?

Trick question.  They are the same thing.  These agreements that protect the companies confidential information and ownership of intellectual property go by several names.  Here are a few names for the same type of agreement:

  • Employee Confidentiality and Inventions Assignment Agreement
  • Proprietary Information Agreement
  • Employee Intellectual Property Assignment Agreement
  • Protection of Company Interests Agreement.

Startup companies should require all employees and contractors to sign a proprietary information agreement that, at a minimum:

  • puts the worker under covenant to keep the employer’s proprietary information confidential and use it only in furtherance of the company’s interests
  • provides that all intellectual property created during the employment is “work-for-hire”
  • assigns to the company all inventions created under the employment relationship.

Other provisions frequently found in worker proprietary information agreements include

  •  a covenant not to solicit company employees and consultants upon termination,
  • recitation of the at-will nature of the relationship,
  • a covenant to return of company materials upon termination,  
  • recitation of company ownership of (and lack of privacy) in emails and other digital communications,

Problems with the Preexisting Inventions List

Most of these agreements have a provision that requires the worker to list personal inventions that shouldn’t come within the scope of the assignment of inventions.  Some of these agreements overreach, in my view, and put an unfair burden on the employee to list all of their inventions, even if they were before the employment with the current employer or unrelated to the current employer’s business.   There is inevitable tension here, because many workers do in fact pick up ideas from the work they are doing. 

Here are three examples:

Example A:  I represent that all matters which I have created or otherwise developed prior to my Relationship with the Company or my signing this Agreement, which may lawfully be excluded from my obligations to the Company under this Agreement, are listed in Schedule 2(a) attached hereto.  If no items are listed in Schedule 2(a), I represent that there are no such matters to be excluded.

Example B:  I am not obligated to assign any Company Invention that qualifies fully under the provisions of the Revised Code of Washington Section 49.44.140 (“RCW 49.44.140”), which is included below.  In addition, I will advise the Company promptly in writing of any Inventions that I believe meet the criteria in RCW 49.44.140 and are not otherwise disclosed on Exhibit A.

Example C: I have attached hereto, as Exhibit A, a complete list describing with particularity all Inventions (as defined below) that, as of the Effective Date, belong solely to me or belong to me jointly with others, and that relate in any way to any of the Company’s proposed businesses, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, I represent that there are no such Inventions at the time of signing this Agreement.

All of these examples have been used by major law firms.  Examples A and B, while protective of the Company, overreach in my view.  Example A probably isn’t enforceable.  It overreaches because everything the Employee has ever created in the past — everything the employee has written, illustrated, coded, snapped with a camera – everything would have to be listed to be eligible to be excluded.  Clearly the employee is not going to list everything they have created in the past, so Example A requires the employee to make a false representation: “If no items are listed in Schedule 2(a), I represent that there are no such matters to be excluded.”

Example B is better, but still problematic.  (For reference see RCW 49.44.140 below.)  Example B has the employee promising to list any Inventions that meet the criteria for exclusion.  All of the employee’s writings, drawings, photos, etc.  not related to the Company’s business and created on the employees own time fit the exception.  (Inventions is always defined broadly to pick up any copyrightable work.)  So Example B has the employee promising to do something they will not realistically do.

Example C is best in my view.  It is fair to the employee and sufficiently protective of the Company.  It requires the employee to list only creative works that related to the Company’s business, products or research.  It’s fair to ask the employee to identify those works and to represent that there are none if not listed. 

Both Companies offering up these documents and employees asked to sign them should review the pre-existing inventions listing requirement carefully for fairness and the employee’s realistic ability to do what is asked or required.

RCW 49.44.140 of the Revised Code of Washington is as follows:

(1)        A provision in an employment agreement which provides that an employee shall assign or offer to assign any of the employee’s rights in an invention to the employer does not apply to an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. Any provision which purports to apply to such an invention is to that extent against the public policy of this state and is to that extent void and unenforceable.

(2)        An employer shall not require a provision made void and unenforceable by subsection (1) of this section as a condition of employment or continuing employment.

(3)        If an employment agreement entered into after September 1, 1979, contains a provision requiring the employee to assign any of the employee’s rights in any invention to the employer, the employer must also, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to an invention for which no equipment, supplies, facility, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer.

How do I protect IP created by contractors and volunteers before I incorporate?

Before any start-up is formally incorporated, there is always a period when the founders have developed intellectual property in the form of market research, the business plan,  perhaps trademarks, and often software code.   Sometimes formation of the business entity is delayed too long, creating unintentional claims on the ownership of the business or its assets.  But even when transition to the state-organized entity is timely, care should be taken beforehand not to create unintentional ownership claims on your intellectual property or your business itself.

First Caution: Don’t form an unintentional partnership. Unlike a corporation or a limited liability company, a partnership does not need to be formally organized with the state to exist as an entity.   Under Washington law, a general partnership is formed anytime two or more people associate as co-owners to carry on a business for profit, whether or not they intend to form a partnership.  A formal written agreement is not necessary.  See RCW 25.05.055.  As a founder, you will probably seek input and advice from many people as you are starting to form your business concept.  Friends and family may help you work on your business plan, create a web site, or even assist with writing code.  You may think they were donating their effort.  But they might think they were your partners.  Moreover, they will own the copyright to any work product , unless they assign it to you or the business.  A frequent issue arises when two friends start work on a project, but one loses interest and stops contributing.  The other keeps going but the relationship between them was never settled.  Then when the business grows and becomes valuable, the non-contributing partner comes back and wants a share of the business.  These kinds of situations are not unusual.  Indeed, the majority of start-ups probably experience them to some degree.

So what are your available strategies at the pre-formation stage?

  1. Don’t take any help.  (Not optimal and sometimes not even practical.
  2. Take help from only family members and close friends who you trust completely.  (Without taking further precautions, this strategy risks damaging relationships.  Any lawyer can give you examples of family members and friends whose relationships have been destroyed over business disputes.  If you do need to do business with family and friends, I advise more documentation rather than less.  Having an agreement in place beforehand can keep minor dissatisfactions from festering into real problems.)
  3. Use an independent contractor agreement with an IP assignment (see below), and pay the contributor a small amount for their work (even if payment is in something other than cash).
  4. In all cases, be very clear in your emails and other communications.  If you decide not to pay them for their work, state clearly in a written document that the contributor is donating the work to your project without expecting anything in return.
  5. Actually make them a partner.  If you do decide to make a contributor a partner, it may be a good time to consult an attorney or at least an experienced business person.  You should have a written agreement in place.   There are a host of issues that go into a forming a business with co-founders, not the least of which is how to divide up percentages in a fair way that leaves breathing room to issue stock in the future to financial investors, key employees, and other employees.  Other issues to work through are control, tax strategies, salaries and distributions, terms of departure, and so forth.  If you are ready to take on a partner, it’s probably worth the investment to consult a lawyer or accountant on entity choice.

Second Caution: Use Independent Contractor Agreements, even if you are not incorporated yet.   If you pay someone to develop software, you own the code, right?  Not necessarily so.  Non-employees (i.e., independent contractors), retain the copyright of works they create unless the work product falls into certain designated categories that qualify it as “work made for hire”.  17 U.S.C. § 101  Most software development projects don’t fall into one of the enumerated categories for work made for hire, which is why you should have the developer (or logo designer, etc.) sign an independent contractor agreement.   A well-drafted independent contractor agreement will have a work made for hire clause, and just to be safe, a backup clause that assigns the work product to the hiring entity.  If you are a founder who has not organized a business yet, you are the hiring entity.  The form of Independent Contractor Agreement that we have made available for downloading can be adapted to individuals who haven’t formed an entity yet.

Third Caution:  When you do form an entity, assign the assets and contracts to the entity.  One thing I see over and over again is that founders forget to assign their assets and contracts to the entity after it has been formed.  It is a fairly simple process to go to the Secretary of State website, set up a corporation or a limited liability company, get your business license, and start doing business.  But none of what you have created or produced before the company was formed is owned by the company unless it has been assigned to the company.  When it comes time to raise capital, sophisticated investors will look back to all of your material IP to see when it was created and by whom.   You will need to be able to show that it was created by employees of the company, or assigned by independent contractors to the company or to the founder, who in turn assigned it to the company.  Usually the founder assigns all of the IP of the business to the company at the time it is formed and initial stock is issued.   In addition to the business plan, market research, logos, trademarks, software and other IP,  other assets such as account balances, computer equipment, contracts and leases need to be assigned to the company at the time it is formed.