Small businesses and startups, especially those that develop proprietary products, services, works, or processes, should take steps to protect their hard-earned intellectual property and trade secrets. In addition to taking actions such as registering trademarks and filing for patents, contracts clearly laying out terms that protect the business and its trade secrets should be drafted and used when entering into agreements with third-parties.
Although agreements should be tailored to the specific situation, a few of the more common agreements small businesses and startups should familiarize themselves with include Confidentiality Agreements, Licensing Agreements, Non-Compete Agreements, and Invention Assignment Agreements.
Confidentiality Agreements are one of the most important tools startups can use to help protect their intellectual property throughout all phases of a startup’s life. As the name implies, Confidentiality Agreements are contracts between parties that help facilitate the sharing of information by providing assurances to the disclosing, or sharing, party that the information being shared with the receiving party will be protected and kept confidential. Although Confidentiality Agreements may be referred to by other names, such as “Non-Disclosure Agreements” or “NDAs,” Confidentiality Agreements all serve the same general purpose. Whether a startup is pitching an idea to a potential investor, hiring an employee, signing a licensing contract, or entering into any other arrangement or agreement that might require sharing the startup’s proprietary information, a Confidentiality Agreement should be involved as either a stand-alone agreement or incorporated into another contract.
When drafting Confidentiality Agreements, special consideration should be given to the scope of the agreement, including the definition of what is considered “confidential information.” The agreement should also clearly spell out who the confidential information may be shared with and also speak to how the information may be used, define the length of the agreement, and lay out the potential recourses in case of a breach of the agreement by either party or by a third-party with whom information was shared.
For startups, entities, or individuals who need to provide their proprietary information, services, technology, or other materials to third-parties such as customers and other businesses, a Licensing Agreement governing the third-party’s use of such material may be advisable. Examples of situations where a Licensing Agreement may be appropriate include the licensing of software, creative works such as artwork or music, and franchise arrangements. In any event, a Licensing Agreement should lay out the rules and parameters in which the receiving party (the licensee) may use the supplying party’s (the licensor) property. Key considerations in Licensing Agreements include the number and scope of licenses granted, whether a one-time or periodic fee will apply, whether royalties are owed, whether the license is transferable, the length or term of the agreement, and what remedies are available to the parties in the occurrence of a breach of contract.
An Invention Assignment Agreement is a contract that vests or assigns ownership of intellectual property developed by a company’s employees or independent contractors in the company itself. Invention Assignment Agreements are essential to ensuring a company’s proprietary designs, systems, or inventions remain the property of the company itself. Without such agreements in place, an employee or contractor could potentially claim rights to such inventions when leaving the company—taking with them the use and ownership rights to an invention in the process. Although an invention assignment provision may be included in another contract, such as a confidentiality agreement, it is often best to draft an Invention Assignment Agreement as a separate, stand-alone contract.
When drafting an Invention Assignment Agreement, special attention should be paid to the scope of the agreement—for example, the agreement should clearly describe whether inventions developed by an employee outside of work, but related to the company’s business, are considered inventions covered by the agreement. Attention should also be paid to whether the agreement includes or excludes inventions previously designed by the employee. Certain states, such as California, may also require that an employer furnish to an employee written notice regarding the employees’ rights when entering into any Invention Assignment Agreement[1].
A Non-Compete Agreement is a contract that restricts an employee or entity from joining or starting a business that directly competes with its former employer. Non-Compete Agreements serve to protect a business’ trade secrets by restricting former employees with knowledge of confidential information from using that knowledge to compete against the business itself. Like an invention assignment agreement, a Non-Compete Agreement may be a stand-alone contract or included as a provision in another agreement. Although Non-Compete Agreements can significantly help to protect a business’ confidential information and trade secrets, Non-Compete Agreements are considered unenforceable in some jurisdictions. Even where allowed, Non-Compete Agreements are often only allowed in limited circumstances and must be significantly restricted in terms of duration and scope. For example, in Colorado, Non-Compete Agreements are only valid where they concern either (1) the protection of trade secrets, (2) the sale of a business or its assets, (3) the recovery of employee education and training expenses, or (4) restrictions on executive and management personnel [2]. Accordingly, it is important for Non-Compete Agreements to be carefully tailored to comply with specific jurisdictional requirements to ensure such agreements remain enforceable.
Sources:
[1] See Cal. Lab. Code § 2872.
[2] See C. R. S. 8-2-113.
