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Ideas, knowledge and processes are the most important aspects of most early-stage tech companies, so one of the most important questions facing these companies is how to protect the intellectual property and the business from misappropriation.  When it comes to employees, most tech companies protect their intellectual property through employment terms and conditions, sometimes known as an employee NDA, though more accurately called a proprietary information and invention assignment agreement (“PIIA”).  It is important for a tech company to correctly complete a PIIA for each employee, at the beginning of the employment relationship.  As we have noted in a least one prior post, correctly addressing PIIAs is critical to an eventual exit for the company, as well as due diligence for a financing transaction, since it will provide the most verifiable basis that the company owns its intellectual property.

What should a PIIA contain?

A PIIA contains several terms related to an employee’s services to his or her employer, which are designed to establish and protect the employer’s intellectual property rights.  A PIIA typically covers the following topics:

  • Confidentiality: Since the technology industry innovates rapidly, many tech companies rely on trade secret protections, rather than completing lengthy government filing processes to obtain registered intellectual property protections. In order to create a trade secret, under most states’ laws, an employer typically must show that it took reasonable efforts to maintain the secrecy of its trade secrets.  The confidentiality provision of the PIIA, if enforced by the employer, helps support a trade secret claim (and provides verifiable support in connection with a due diligence exercise) by covering three broad promises or acknowledgements from the employee to the employer: (i) the employer (and not the employee or a third party) owns the confidential knowledge, data or information related to its business, (ii) the employee will not disclose such information, or information related to third parties the employer receives, without the employer’s permission, and (iii) the employee will not improperly use anybody else’s confidential information (including confidential information of prior employers) while providing services to the employer.
  • Assignment of Inventions and Original Works: As noted above, the PIIA is intended to protect the employer’s IP rights.  The assignment of inventions and original works section ensures that the employer owns the intellectual property created for it by the employee by providing an assignment of such intellectual property.  It is important that the employee actually assigns the intellectual property it develops, rather than merely promising to assign such intellectual property.  Many employers also provide a schedule on which the employee can list prior inventions that it is not assigning to the employer.  The list of prior inventions helps the employer ensure that it is not violating somebody else’s intellectual property, avoid costly future litigation about IP ownership claims by bringing the issue to light at the commencement of the employee’s service, and reliably respond to related due diligence requests.
  • Non-solicitation of Employees: Many employers include a provision in the PIIA that requires the employer to refrain from soliciting other employees of the Company for a period, typically ending one year after the employee’s employment termination date. Unlike most of the other terms of the PIIA, the non-solicitation provision does not directly protect the employer’s intellectual property rights.  Instead, it recognizes that, practically, some intellectual property may be lost or misappropriated (or project development may be stalled) if an employee is willing to leave the company and take his or her colleagues to a new employer.
  • Non-competition Agreement: Many PIIAs also provide that an employee may not compete with the employer while employed and for a period of time after employment is terminated. Whether a PIIA should include a non-compete provision varies somewhat in different markets.  While the PIIA provides several mechanisms to prevent an employee from misappropriating an employer’s intellectual property, many of the protections may amount to half-measures if a former employee or its new employer can beat the former employer to market (whether or not done in violation of the other clauses of the PIIA).  The non-competition agreement provides further protection by preventing a former employee from competing for a period of time.  While this is a useful tool, not all non-competition agreements are enforceable – for example, California courts will not enforce most non-competition agreements – so it is important not to include a non-competition agreement that is overly broad.  Most non-competition agreements apply for a limited period of time, to a narrowly defined field and, if applicable, to a defined geographic area.

The specific terms of a PIIA may vary and a single company may create slightly different forms based on the role an employee may serve in the company.  Terms may also vary by industry and the importance of intellectual property rights to companies in that industry.

Recent Changes Under the Defend Trade Secrets Act

As we noted in our recent post, here, the Federal government recently adopted the Defend Trade Secrets Act (“DTSA”).  As we discussed, the DTSA contains certain whistleblower protections and employers must notify employees and consultants of this immunity in any contract or agreement with employees that governs trade secrets, such as a PIIA.  Before using a PIIA, ensure that it has been updated to provide employees with whistleblower protections.

When should my company enter into a PIIA?

Employers should enter into a PIIA upon commencement of an employee’s service to the employer.  In certain states, the terms of the PIIA will not be binding unless there is sufficient consideration other than the mere continuation of employment (meaning, if an existing employee signs a PIIA and all they got for it was keeping the job they already had, it may not be enforceable).  If the employee and employer enter into a PIIA at the time the offer letter is signed, the commencement of employment will avoid payment of additional consideration and ensure that all of the employee’s service is covered by the PIIA.