Inventing for Start-Up Ventures

Why Confidentiality Agreements Are Crucial

When an employee learns enough on the job to invent a better widget, employers have many ways to make sure the invention belongs to the employer, and to prevent the employee from giving it to a competitor. This is a hazard in start-up companies, where creative employees may get the idea that they don't need corporate help and can make a profit on their invention. Or they may get "poached" by competitors, either those that are already established in the market or other start-ups. A confidentiality agreement will define the duties of everyone involved.

The confidentiality agreement serves two functions: deterrence and compensation. Employees will be less likely to jump ship to a competitor if they understand they are subject to restrictions. And, in the worst case scenario, if the employee takes an invention to a competitor, a lawsuit can include the employee as well as the competitor.

Employers can also claim ownership of the invention in other ways, such as an by having an employment agreement with a California Labor Code § 2870 provision. Even without an employment agreement, the provisions of Labor Code § 2860 establish employer ownership over the invention. This law states that "Everything which an employee acquires by virtue of his employment, except the compensation which is due to him from his employer, belongs to the employer, whether acquired lawfully or unlawfully, or during or after the expiration of the term of his employment."

To some extent, the invention might be a trade secret protected by California Civil Code § 3426 et seq., again owned by the employer. This law establishes and preserves a code of commercial ethics. Taking the invention to a competitor is only permitted if the employee discovered it 1) by independent invention, 2) by reverse engineering an item purchased on the open market, 3) under a license from the owner of the trade secret, 4) by observation of the item in public, or 5) by obtaining the trade secret from published literature.

The "shop right" rule in patent law establishes employer ownership in an invention created on company time using company resources. On the other hand, the employee who independently develops a new invention or product outside of the scope of his or her job duties does not have to give his or her employer any royalty. This is true even if the nature of the employment may have given the employee the chance to conceive the idea, or improved the employee's skills, scientific knowledge, and ideas.

Start-ups can protect their products by requiring a good confidentiality agreement from their workers, and making it clear that legal consequences will befall those who violate the terms.

By Kathleen Smith, Norman Dowler, LLP

Kathi Smith is an attorney with the Law Offices of Norman Dowler, LLP. She advises clients and handles litigation in intellectual property, internet, contract issues, construction, real estate and employment matters. For more information about confidentiality agreements email Kathi at or call (805) 654-0911.

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