Analyzing the Risk: Will My Current Employer Claim Rights to My Startup’s IP?

Many entrepreneurs aren’t rich enough to quit their day jobs before starting to create the business of their dreams—the business that will hopefully give them more control, freedom and cash.

Starting a business while employed by another company, however, poses a risk to the new business.  Your current/former employer may claim ownership to the intellectual property (“IP”) that you create for your new startup.

Analyzing the degree of risk to your new business IP is very complex and heavily based on your factual situation.  A full legal analysis would analyze the specific facts and related contracts in the context of a variety of laws.  This type of in-depth legal analysis is very difficult and complex.  Even a general description is far beyond the scope of an educational blog.

But from the perspective that I’ve gained from doing this type of risk analysis and IP litigation for over a decade, I can give you some big picture considerations so that you can gauge the general degree of risk.  I can help you learn how to identify the BIG RED FLAGS that lead to  IP litigation.

With some knowledge about IP law and precautions, you can avoid some of the worst mistakes and minimize the risks to your startup’s IP.

DISCLAIMER:  THIS IS A BRIEF, EDUCATIONAL OVERVIEW OF SOME OF THE POTENTIAL ISSUES.  IT IS NOT A SUBSTITUTE FOR LEGAL COUNSEL.

Further warning! This post is long and somewhat boring. I’m sure that some Blog Gods would say that it is way, way too long.  But if you learn how to identify and avoid BIG RED FLAGs, it could save you millions if your startup is successful.

STARTUP IP RISK ANALYSIS

You can use the following eight point analytical framework to identify the general degree of  risk to your startup’s intellectual property from your current/former employer.

The more BIG RED FLAGS that you identify, the higher the risk.

1.  Business Comparison.  It’s critical in your risk analysis to compare the type of business that your current employer does with the type of business you are creating. If the businesses are similar and potential competitors, there is a higher risk of IP ownership claims.

This is a BIG RED FLAG.

In contrast, if the businesses are wildly dissimilar, the risk may be minimal.

Ask yourself:

• Will my startup sell similar types of goods or services?
• Will my startup do something that my current employer has considered doing?
• Will my startup be in direct competition with my current company?
• Will my startup seek the same customers or advertisers?

A YES to any of these questions means a BIG RED FLAG.

2.  Scope of Your Current Employment Duties. It is also critical to determine the scope of your current employment duties and compare them to the activities that you are doing for your new business venture.

Ask yourself:

• What am I paid to do?
• What am I being paid to create?  Anything?
• Is the creation of IP part of my current job duties?
• Am I doing similar activities for my startup?
• Is what I am doing for my startup suggested by my current work?

If what you are doing for your new startup is within the scope of your current job responsibilities, you may have some serious issues and a BIG RED FLAG.

For example, if you are being paid to develop software for a game company while you are developing code for your new game company on the side, this is very risky business.  You better live in California and take all of the proper precautions.  (See the next post about statutory protections.)

In contrast, if the IP you are creating for your startup has nothing to do with your current job responsibilities, your risk in lower. It isn’t zero but it’s lower. For example, if you are a manager who doesn’t have the responsibility for creating IP and you are writing software code on the side for your new business, it would be more difficult for your current employer to claim ownership based on the fact that writing code was within the scope of what you are being paid to do.

Some courts don’t think it’s fair for an employer to claim the rights to something they didn’t pay you to do.

But you also need to think about this question in context of the business type comparison.  If your new startup will compete with your current employer or be a threat in any way to its revenue, your IP may be at risk.

3.  Assignment Contracts. Watch out.  It’s very important to determine whether you have signed any contracts that assign the intellectual property rights to what you create during the term of your employment to your current employer.

Your employer may have rights to the IP that you create during your personal time despite the fact that you new company is not related to the business of your current employer.  For example, there was a dispute over IP ownership in a case where a computer programmer was employed to write code for a company doing work for oil wells.  He had a side business with his brother where he wrote code related to broadcasting information from a baseball game.  During litigation (“Baseball Case”), the question of whether his former employer owned the related patents pursuant to an invention assignment contract was a major issue.  (DDB Technologies, Inc. v. MLB Advanced Media, L.P., 517 F.3d 1284, 1290 (2008))

However, it may not matter whether you prevail in a dispute with your former employer.  The threat alone from your employer may harm your startup and scare away potential investors.  No investor wants to fund a lawsuit.

Invention assignment terms in contracts give the rights to what you create to your employer.  These clauses usually say that you “assign all rights, title and interest” blah, blah, blah, and then list examples of what you are assigning away which includes a laundry list of intellectual property that you might create.

Unless your employer is clueless or lax, you should have signed some type of assignment agreement when you were first hired.

It may be called an employment agreement or an intellectual property assignment agreement or a confidentiality agreement or an independent contractor agreement.  It will be something you signed that likely had a contract term titled, “Invention Assignment or Intellectual Property Assignment.”

Ask yourself:

• Have I signed any type of agreement with my current employer or former employer that has an IP assignment provision?
• Did I sign any other contracts that are related to my employment like an independent contractor agreement?
• Have I signed any NDAs that had provisions related to intellectual property creation?
• Have I signed a joint development or collaboration agreement with an IP assignment provision?

If you can’t remember signing anything, ask your employer’s HR department to see if there is a contract in your employee or independent contractor file.  If they have any contracts in your file, get copies.

It is very, very important to read any contracts carefully and determine the broadness of the invention assignment language.

Does your current employer try to claim all potential ideas and inventions and IP that you create at any time in any place?

If your answer is YES, you get a BIG, BIG RED FLAG.

Are there any carve outs for IP that the company doesn’t claim in the assignment provision of your contract?  Such carve outs are now required in California. The California legislature thinks that allowing employers to claim all of the IP created by their employees at all times is a violation of public policy.

You may need to go back and try to identify whether your work relates to what you have done on the job or whether it is based on anything you have done for your current employer.

Invention assignment contract terms vary widely and some are poorly drafted creating big loop-holes. Even Stanford University had a big hole in its assignment contract.  Millions of dollars can ride on a few words in an assignment contract term.  (Stanford University v. Roche (Fed. Cir. 2009)).

As a side note, depending upon where you live, it is also important to determine whether there are any restrictions on future competition with your employer.  Unless you live somewhere like California, you may have a non-compete agreement that limits your future activities for a specific period of time in a particular location.  Even my hair dresser in Texas signed a non-compete agreement.

Because there are default rules for different types of IP law related to your relationship with your employer, the scope of an assignment clause isn’t the last word but it can be critical in the event of a dispute.

Again, just because you didn’t sign a contract, it does NOT necessarily mean that you own the IP that you create while you are employed.

IP ownership may depend on what type of IP you create and your employment status — whether you are an independent contractor or a real employee.  This is where companies make classification errors and the default rules for IP law get very confusing and complicated. If this is your situation, it will probably take an IP lawyer to sort it out for you.

4.  Permission. Interestingly, one way to avoid ownership claims by your current employer is to give your current employer notice of what you are doing and get their permission to do it.  Some employers are supportive of their employee’s outside projects, some give explicit permission, and some decline ownership of the startup’s IP.

In the previously cited Baseball Case, the court found that the former employer didn’t own the IP that was created during the software programmer’s personal time because he had disclosed the baseball-related invention to the company’s patent counsel pursuant to his contact’s terms and the employer had declined to assert ownership of the personal project. (DDB Technologies, Inc. v. MLB Advanced Media, L.P., 517 F.3d 1284, 1290 (2008); see Memorandum Opinion and Order, August 18, 2009, page 22.)

If you have concerns that the IP you are creating falls within the terms of your employment agreement, you may want to seek permission from management to maintain ownership of the IP you are creating.  Get this permission in writing.  Keep any emails from your bosses telling you that you can own the IP for what you create at home during your off hours for your new business.

It is also possible to negotiate ownership of IP that is separate from your job responsibilities.  For example, if you are an independent contractor, you may have a broad IP assignment provision for work that you do for a company.  It may be possible, however, to negotiate carve outs for IP ownership for specific work and projects.  You might want to hire an IP lawyer to help you.  I’ve negotiated IP carve outs successfully in situations where it was a win/win for everyone.

5.  Work Hours.  As a general rule, if you are creating IP that is related to your current job and your startup may be in competition with your current employer, do NOT do work for your startup during regular work hours.  Your current employer may claim that all work that you perform during work hours is owned by them, particularly if it is within the scope of your job responsibilities.

Doing work for your competing startup during normal work hours for your current job is a BIG RED FLAG.

6.  Use of Employer Facilities, Equipment, and Staff. As a general rule, if you are creating IP that is related to your current job or your startup may be in competition with your current employer, it will be critical that you don’t use your Employer’s computers, network, technical resources, or other equipment and supplies.  Also, don’t use the help of co-workers. (See my last post on the BRATZ doll case.)

Ask yourself:

Have I used anything belonging to the company to work on my startup?

If you answer YES and you are developing a competing business, it is a RED FLAG.

The next post in this series will discuss statutes that allow you to maintain ownership of your IP if you follow certain guidelines that include not using your employer’s facilities and equipment if you live in California or Washington.

7.  Your Relationship with Your Employer’s Management. Whether your current employer will assert rights to the IP that you create for your startup will in large part depend upon your relationship with your employer’s litigation decision makers.

Ask yourself:

• Am I on good terms with management?
• Does my boss like me?
• Does my boss’s boss like me?
• Does my boss want me to succeed?
• Is my boss supportive of my personal activities?

If you answer NO to any of these questions, it is a RED FLAG.

Not surprisingly, your ability to maintain a good relationship with your boss and his or her superiors may save you from future claims.  Don’t leave on bad terms if you can help it.

8.  IP Contamination. Most critical of all, don’t incorporate any work that you have been paid to create specifically for your current employer or other former employers into your new company’s IP without explicit written permission from the relevant employer.

By mixing IP owned by different parties, you can “contaminate” your IP and give former employers a basis for suing you and claiming the new stuff.  For example, if you have included code that you wrote for your former employers into your new software product, you have created an IP mess that can lead to numerous claims by your former employers including trade secret misappropriation and copyright infringement.

Worse yet, IP contamination will scare off potential investors.  Before most investors make a significant investment in a company, they conduct due diligence, which should include a review of the ownership rights to core IP.

Surprisingly, when asked, some software programmers readily admit including code from former jobs, in large part because they don’t understand the implications.

Ask yourself:

• Have I used any intellectual property from my current job for my startup?
• Have I used old code that I wrote somewhere else?
• Have I used any confidential information from my current job for my startup?
• Have I created new work for my startup that was suggested by my current or previous work for an employer?

If you answer YES to any of these questions, you get a BIG, BIG, BIG RED FLAG.

By thinking through the above analytical framework you can generally evaluate the degree of risk to your new company’s intellectual property.

You can gauge the temperature of the risk:  Is it hot or cold?  The more BIG RED FLAGS you identify, the hotter the water.

I realize that fully evaluating your potential risk may be daunting.  Just realize that your IP is most at risk if your new business is wildly successful or your current/former employer sees you as a big threat to their business. Also, if you leave on bad terms, you are more likely to be sued.

Mad people are the ones who sue.  It’s often personal.

But remember your former employer will usually have to pay a lawyer to evaluate whether they have a potential case against you.  Attorney fees alone are a disincentive to claiming ownership of your startup’s IP.

If you are creating something that has the potential to make a large amount of money, you may want to retain an intellectual property lawyer early on in the process.  There are thousands of highly qualified professionals who can help you minimize the risk for your startup and keep your IP safe.