Article by Mr Wayne Condon and Mr Raphael Goldenberg
Imagine that you are the Vice President of R & D in a large pharma or biotech company. A young lab tech named Fred who you employed six months ago as a casual employee barges into your office announcing a major discovery he has made in the lab. This should be the cause of tremendous celebration, or should it?
You call in the marketing manager and prepare a press release. You also make a stock exchange announcement in anticipation of the company share price going through the roof. Then, two days later, Fred quits the company without warning. This need not be a source of panic if some simple procedures and mechanisms are put in place to ensure that your company retains control over the jewels developed by its staff.
Unfortunately though, cases continue to come before the courts which demonstrate that many companies still hold the mistaken belief that the company is automatically the owner of all the intellectual property created by its employees. This view is often held on the basis that the company deserves to own IP since it provided the context for its development. This assumption is not always accurate, and unless companies take measures to retain control over employee generated IP, the scenario above could be disappointing or even devastating. Valuable IP can take many different forms - in the case of bio-sciences, patents, copyright and trade secrets are the core rights.
Fred barges into your office and tells you that he has succeeded in genetically modifying an apple to be seedless. The patent attorneys say that both the process (of genetic modification) and the product (the GM apple) are patentable.
Because of the statutory monopoly patents provide, they are potentially extremely valuable assets and are often the lifeblood of bio-science companies. Thus, it is crucial that companies obtain the fruits of their employees' inventions. Although there is no express provision in the Patents Act 1990 (Cth) making employees' inventions the property of their employers, employers have generally been considered to be included as owners of patents derived from their employees' inventions on the basis that they are persons "entitled to have the patent assigned" to them1. If there is no clear term governing the ownership of the employee's invention, in the absence of an express agreement, a term will be implied by law entitling an employer to ownership of the employee's invention as long as the invention is arrived at in the ordinary course of the duties the employee is engaged to perform2. An alternative basis for this proposition is that an employee who develops an invention in the course of his or her employment owes a duty of good faith to the employer to forego any personal claim to the invention.
Either way, this test requires an analysis of whether the employment relationship suggests that the invention concerned was made in the ordinary course of the duties the employee was engaged to perform. So, if in our example, Fred was instructed by the company to develop a seedless apple, used the company's facilities to do so, and did so during work hours, the invention will have been conceived in the course of the duties Fred was engaged to perform, and will therefore impliedly belong to the company. The position will not be quite as clear if, for example, Fred did the majority of the experimental work at home and outside office hours, using his own facilities. Further, if, for example, Fred was employed as a sales manager, and was not expected to exercise inventiveness or ingenuity to develop new products, in the absence of an assignment of Fred's invention, it would belong to Fred, not the company.3
The better course is to avoid the necessity for these "nice" legal arguments altogether by ensuring that a clearly expressed employment agreement is in place. That agreement should, at the very least, include terms dealing with the ownership of inventions, the assignment of patent rights arising by employee activity to the employer (requiring the employee to execute a deed of assignment of any invention to be the subject of a patent application) and an obligation on the employee to promptly disclose all inventive ideas to the employer. It should also require the employee to keep an up to date and comprehensive work or laboratory book and to assist the employer in applying for any patents.
However, companies should be careful not to overstep the mark by drafting these clauses too broadly, as courts may be reticent to enforce them for being unreasonable restraints of trade. To prevent this, the following types of clauses should be avoided:
- clauses requiring an employee to assign to his or her employer any invention made in the future (as this could prevent the employee undertaking skilled work for another employer); and
- clauses which apply to all employees, regardless of their position. For example, a standard clause requiring all employees to assign their inventions to their employer was held not to require a storeman to assign an invention he developed outside of office hours to his employer4.
In Australia, copyright automatically vests in certain types of original works (such as literary, artistic, musical or dramatic works) upon their creation - unlike trade marks and patents, it is not an intellectual property right which is capable of registration. Common examples of copyright works developed in the course of a pharma or biotech company's research activities which are potentially extremely valuable are computer software (which may be protected by copyright by virtue of being a "computer program" under the definition of literary work"), databases (which may be the subject of compilation copyright), drawings or diagrams (which may be copyright works by virtue of being original "artistic works"), written specifications or experimental techniques.
The general rule is that the owner of copyright in a literary or artistic work, is the author of that work. An exception to this rule arises if the work is made by an employee pursuant to the terms of his or her employment. In this case the employer owns the copyright subsisting in the employee-generated work. While this is some comfort for an employer, it is not always clear when a copyright work is created by an employee pursuant to the terms of his or her employment.
To illustrate this point, let us return to Fred. Imagine Fred developed software that allowed a huge database of DNA sequences to be sorted and analysed for the presence of a disease-causing gene. This software reduced the time it previously took to analyse an equivalent number of DNA sequences by a factor of 10000. The software Fred developed is protected by copyright as an "original literary work", and if commercialised intelligently and strategically, could lead to seven figure annual licence revenues for the company. However, Fred was employed by the company to conduct traditional "wet lab" work and not as a software developer. To further complicate matters, although Fred used the company computers to develop the revolutionary software, all the development work was done after 7.00pm or on weekends i.e in Fred's, not the company's, time.
As a result of a recent Victorian Supreme Court decision5, Fred, not the company, would be the owner of copyright in the valuable new software (in the absence of an express agreement to the contrary), and, provided that the software did not contain any confidential information of the employer, he would be free to commercially exploit the software on leaving the company. This is the key point - the company should protect itself against this eventuality by having a clearly expressed agreement in place with Fred which makes unambiguous provision about the ownership of employee-generated IP however and whenever created. There is no magic to this - it can be as simple as including a clause in the employment contract assigning to the company all copyright in works created while the employee remains employed by the company. It is also worthwhile defining the employee's duties as broadly as possible in the employment contract, as this will increase the likelihood that copyright works developed by the employee will be deemed to be created pursuant to the terms of employment (and hence belong to the employer company).
Confidential information, trade secrets and know-how
In industries which rely on the conduct of research, a company's confidential information, know-how and trade secrets, although not registrable, can be extremely valuable. This is demonstrated by the loss of profits a company can suffer when commercially sensitive information is made public, enabling competitors to exploit it.
The courts have consistently held that confidential information created in the course of an employee's employment belongs to the employer. Once again, this raises questions over what is meant by the term "in the course of employment". Unlike copyright works and patentable inventions where ownership of the IP is important, the key issue with confidential information is how to keep it confidential during and beyond an employee's term of employment. The prevailing view from the courts is that while it is legitimate to restrain an employee from disclosing the processes of an employer that are genuinely the employer's property (subject to this restraint not being unreasonable), it is contrary to public policy for an employee to promise not to use the general skill, knowledge and experience gained with one employer for the benefit of a new employer or for his or herself. Unfortunately, the distinction between an employee's knowledge, skill and experience and the confidential information belonging to the employer is often very difficult to draw.
Then how to effectively restrain Fred from using all your valuable experimental protocols for the benefit of a future employer? Well, the starting point is for the company to treat the protection of information seriously and consistently, as a court is then more likely to infer that the information is confidential and to provide a remedy in the event that a former employee misuses the information. The following steps by an employer will help give rise to this inference:
- clearly identifying the information which is important to the company and restricting access to it e.g not leaving documents lying around the office for anyone to view and restricting access to the premises for non-employees;
- warning employees that particular information is sensitive and should be treated as confidential and explaining the serious implications to the company of any misuse;
- requiring employees to sign confidentiality agreements. It is probably better practice to require only those employees who have access to confidential information to sign these agreements. These agreements need to be balanced and reasonable - they should not go too far in restricting future use of confidential information as this could result in their being void for being unreasonable restraints of trade. For example, the restraint should probably not be of unlimited duration and should specifically provide that it will no longer apply once the relevant information becomes generally publicly available6; and
- desirably any confidentiality agreement should include a post employment competition restraint which must be drafted carefully to protect no more than the employer's legitimate business interests.
"Employee" versus "independent contractor"
While it is fair to say that as a general rule, a company will own the IP developed by an employee in the course of the duties he or she was engaged to perform, this is not the case with respect to IP developed for the company by an independent contractor, which rights will, in most circumstances, be owned by the independent contractor, and not the company. For the company to own this IP, it will need to have the independent contractor expressly assign its rights in the IP to the company. This is something which can and should be incorporated in the agreement by which the contractor is engaged. From a copyright perspective, it is particularly important that this assignment be in writing and signed by the independent contractor, since an assignment of copyright will not have effect unless is in writing and signed on behalf of the assignor7. Likewise, an assignment of a patent must be in writing and signed by or on behalf of the assignor and assignee8.
Common examples of independent contractors are contract research organisations or external experts hired to carry out particular projects.
The primary asset of any bio-sciences company is its intellectual property and proprietary information. For a company to protect these assets, it is vital that the scope of its employees' duties is clearly defined and that the employment documentation ensures that the employer retains control of these assets. In preparing this documentation care should be taken not to draft assignment or restraint clauses too broadly to prevent the possibility of their being deemed void as unreasonable restraints of trade.
1s15(1)(b) Patents Act 1990 (Cth)
2Sterling Engineering Co Ltd v Patchet  AC 534.
3Spencer Industries Pty Limited v Anthony Collins and B & J Manufacturing Company  APO 4 (18 January 2002)
4Electrolux Ltd v Hudson  FSR 312.
5Redrock Holdings Pty Ltd v Hinkley  VSC 91, 4 April 2001.
6Maggbury Pty Ltd v Hafele Australia Ltd (2001) 185 ALR 152
7s196(3) Copyright Act 1968 (Cth)
8s14(1) Patents Act 1990 (Cth)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.