Canada: The Hazards Of Intellectual Property Issues In Employment Agreements

Businesses of all sizes are increasingly becoming aware of the strategic and commercial value of intellectual property (IP). Startups which are just getting off their feet; scaling businesses which are growing in both revenue and size; and mature, sophisticated ventures which have established positions in their respective markets all recognize that their IP and technology may be used for a variety of reasons, including: 

  • to attract investment or financing;
  • to be used as collateral for debt financing;
  • to obtain a competitive advantage in the market,
  • to be used as a defensive tool against competitors or non-practising entities; or
  • to be used as a piece of property which may be sold or licensed to directly generate revenue.

However, as businesses develop sophisticated strategies to achieve some or all of these objectives, it is critical to recognize and consider the relationship between the generation of IP and the employees who create it. This entails careful consideration of the intersection of employment law, contract law and IP law.

Accordingly, ventures of all types as well as their employees must be aware of potential risks arising from this relationship, and implement cohesive, forward thinking and enforceable strategies that accommodate and protect against these risks.

Take, for example, the relationship between founders in a startup.  As the founders develop their initial ideas into actual technology, patentable subject matter, copyrighted materials or trade-marks, it will be critical for the ongoing survival of the company to ensure that all ownership surrounding the IP and technology resides exclusively with the formed company. If ownership of IP, for example a patent application that is the foundation of the company, hasn't been assigned to the company by virtue of an assignment agreement, and a fracture in the relationship between founders develops, a disagreement over who owns what may follow.  If a founder seeks to leave the company, will they take what they perceive to be their IP with them? If they do, would the company's current or future products then be vulnerable to a suit for patent infringement? Would a competitor be able to acquire and use the technology? How would investors react to such a risk?

In another example, a scaling or mature business employs an individual or team of individuals who are involved in R&D.  If some or all of those inventors leave the company, only to begin working on products with a new employer that are closely tied to their duties for their former employer, what recourse does that first employer have? Could that second employer take steps to mitigate against any potential litigation arising from hiring these employees?

If the individuals' respective employment agreements do not adequately delineate ownership, assignment obligations and even the scope and subject matter of the employer's business, then both employers may find themselves in a very difficult situation.

Many more examples can also be readily brought to mind. What ties them all together, however, is that businesses who do not consider these issues up front are putting their significant R&D investments, product portfolios, investor appeal and perhaps survival at risk.

Ownership and assignments

One of the larger concerns facing businesses may be summarized simply as "who owns the IP?" Employment agreements must address this issue by definitively requiring employees to assign IP created during employment, and also defining other specific matters:

  • The employment agreement should set out the nature, subject matter and related fields of the business, and require that IP and technology created related to the existing or even future operations or business of the employer are assigned and owned by the employer.
  • Ensuring, where appropriate, that prior inventions related to the existing or future business of the employer are also assigned, if those rights are indeed still owned by the employee. This is critical in the case of a founder or inventor joining a startup if technology or IP was created before joining the company or before the company's inception.
  • Prohibit employees from signing any IP assignments or agreements incorporating IP assignments with third parties in the course of the employment without first obtaining the consent of the employer. This is particularly relevant in the case of the startup community, where individuals may work with a host of companies.
  • Addressing moral rights of employees by waiver. Moral rights are rights of the initial author of copyrighted works, for example program code, or potentially APIs, that grant to the author the right to be attributed as author, and the right to stop or prevent any modification, mutilation, distortion or use of the work in association with a product/service/institution that is prejudicial to the honour or reputation of the author. Moral rights cannot be assigned, however, at least in Canada, they may be permanently waived by the author.

Future assistance for examination

In order to obtain an IP right, it is often required that the business owning the rights to the IP go through an application and/or examination process conducted by an intellectual property office, for example the Canadian Intellectual Property Office (CIPO) or the United States Patents and Trademarks Office (USPTO).

The examination process usually comprises back and forth correspondence, resembling in many ways a negotiation, between the applicant and the respective intellectual property office, ensuring that the rights being granted comply with statutory requirements. This process therefore requires of the applicant an intimate knowledge of the right being sought and the underlying value to the applicant, such that arguments may be put forward ensuring the right granted is broad, covers the applicant's current or future products/services, and is of potential commercial or strategic value to the applicant.  This therefore entails strong evidence pertaining to the IP right. In the case of a patent, this may, as an example, take the form of documents, experimental data, statements of the inventor(s), original drawings speaking to the novelty, inventiveness and subject matter of the alleged invention. Further, various documents of an administrative nature are often required during examination, including evidence of a formal assignment from the inventor (i.e., an employee) to the applicant (i.e.,  the employer).

For patents, the examination process can take anywhere from 3 to 10 years, or more. It is therefore critical to ensure that:

  • Employers own and have access to all work product (i.e., notebooks, drawings, experimental data, code, mockups, prototypes) created by employees.
  • Employers have in place, and consistently enforce, policies requiring employees to document, record and retain their work relating to IP, for example: innovative ideas, meeting notes between members of an inventive or research orientated team, or brainstorming sessions or documents on potential inventive concepts.

Prior inventions

There are circumstances where a business is seeking to employ an individual who, either individually or during employment with another business, has previously created IP or technology in the same field or industry as that business. In such situations, the employee may have already assigned their previously created IP or technology to an earlier employer, and consequently the business now seeking to employ that individual may face the risk that this new employee knowingly or unknowingly incorporates that technology or IP into the products of that later employer.  In some cases, this could lead to potential infringement suits that result in damage awards or even an injunction against the sale of products or services incorporating that expropriated IP.

There are mechanisms to mitigate these risks. For example, obligations may be drafted into the agreement requiring that the inventor disclose any previously created IP, also accompanied by representations and warranties that the inventor will refrain from incorporating any such IP into their work product or technology in the course of employment with the new employer.

Being able to consider the prior technology or IP of the employee (perhaps created while working for a competitor) will enable businesses to manage the employee's work such that the prior IP doesn't infect the business of the new employer with potential IP infringement or ownership concerns. This may be achieved through specifically managing the projects that the employee is involved with to avoid those overtly similar to the subject matter of their prior IP/technology, or erecting information barriers between that employee and other teams working on projects that may be similar to the prior IP/technology.

Confidentiality

Employment agreements must also address the confidentiality of the IP, work product, or technology created, such that the risks of intentional or unintentional public disclosures is mitigated. Public disclosures may in some situations risk patentability, notify competitors of market or technology strategies, or disclose trade-secrets among other concerns. A strong non-disclosure obligation, extending past termination of employment, must therefore be included in such employment agreements.

Interaction with contract law

As with all agreements, an employment agreement must also be mindful of general principles of contract law, for example the need for consideration. Therefore, these agreements must be carefully drafted to ensure they remain enforceable in the future by ensuring that they meet the requirements of both provincial/state laws and federal law. Highlighting this point is the increasing amount of litigation wherein former employees contest the validity of employment and assignment agreements executed with former employers on the basis of a lack of consideration. This can inflict serious damage to a business through the loss of rights to use or otherwise commercialize key IP or technology.

Solutions to the issues presented above, as well as the multitude of other challenges that may arise, vary greatly from circumstance to circumstance. Therefore, when faced with some of these obstacles, businesses should consult  our professionals to obtain comprehensive, personalized advice.

Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global legal practice. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

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Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

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.

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