Why You Need Proprietary Information and Inventions Assignment Agreements

By Daniel Marden

Protecting your company’s intellectual property rights is essential during all stages of your company’s growth.  One of the first steps you can take to protect your company’s intellectual property rights is to have all advisors, consultants, contractors and employees of your company enter into Proprietary Information and Inventions Assignment Agreements (“PIIAs”), also known as Confidential Information and Inventions Assignment Agreements. 

In the rush of starting up a new business and bringing on your initial set of consultants and employees, it may be easy to overlook the importance of properly documenting the company’s relationship with these individuals related to ownership of intellectual property.  However, as your company grows and attracts new investors, strategic partners and potential buyers, these other third parties will want you to be able to demonstrate that your company clearly owns its intellectual property and will ask if your advisors, consultants, contractors and employees have signed PIIAs.

The fact that an invention is created during the course of an individual’s employment with a company does not, in and of itself, give the company the right to all intellectual property related to such invention.  In its Stanford v. Roche decision in 2011, the Supreme Court confirmed the general rule that the original inventor owns the inventions they make, unless the inventor makes an express assignment of those rights to another individual or entity. 

In light of this, failure to have PIIAs in place represents a risk of potential intellectual property ownership disputes and can negatively impact your company’s ability to raise capital.  Investors may also require you to go back to any current employees and have them sign a PIIA if it was not executed when the employee joined the company.  Requiring an employee to sign such an agreement after he or she has already been with the company for some time can create a situation in which the employee has leverage to ask for something additional in return.

As indicated by its name, PIIAs address two main concerns: (1) confidential treatment of proprietary information and (2) ownership of inventions/intellectual property.

Confidentiality:

PIIAs typically require an individual to agree to keep all proprietary information confidential and to treat such information as the exclusive property of the Company.  “Proprietary Information” includes information or material related to the company which has not been made generally available to the public, such as:  (a) corporate plans, strategies, methods, or policies; (b) marketing information, including customer/prospective customer information; (c) financial information; (d) operational and technological information, including software, designs, procedures, formulas, discoveries, inventions, improvements, concepts and ideas; and (e) personnel information. Depending on your industry, there may be different types of information you may want your employees to keep strictly confidential and you should seek to tailor the definition of “Proprietary Information” in the PIIAs to fit your company’s circumstances.

Ownership of Inventions:

A PIIA should include an express assignment by the individual to the company of all right, title and interest in and to all “inventions”, including discoveries, designs, developments, methods, algorithms, formulae, techniques, trade secrets, know-how, software code and other works of authorship made or conceived by the individual (alone or with others) during the course of the individuals employment with the company and all patent, copyright, trademark, trade secret and other intellectual property rights and other proprietary rights therein. 

It is important that the assignment of rights in the PIIA cover both an assignment of any current rights to such inventions and an agreement to assign such rights in the future when any additional inventions are made or conceived. 

Carve-Outs:

Some employees may have preexisting inventions (which they created prior to joining your company) they want to specifically exclude from the assignment of intellectual property to the company.  Thus, PIIAs often include a carve out provision which allows an employee to specifically exclude such preexisting inventions from the PIIA.  When an employee seeks to carve out an invention from a PIIA you should seek advice from counsel to ensure there is a clear delineation between prior inventions and the type of intellectual property that may be produced by your company and that your company has any license or other applicable rights in place related to such preexisting inventions if they may be used by the employee in his or her work with the company.

Other Considerations:

Some states have placed statutory restrictions on the scope of PIIAs.  In California, for example, PIIAs are not enforceable with respect to inventions developed by an individual entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer or (2) result from any work performed by the employee for the employer (California Labor Code, Section 2870). 

PIIAs are also sometimes included as part of a larger employment related agreement and thus may also include non-solicitation and/or non-competition provisions, however such considerations are outside the scope of this article. 

Similarly, some consulting agreements may also cover the terms of a PIIA, however you should be careful to ensure that the terms of any consulting agreement cover the full range of rights addressed in a standalone PIIA, to the extent applicable, if the consulting agreement will take the place of the PIIA.

Conclusion:

PIIAs are a critical tool for your company to protect its intellectual property and remain important throughout all stages of a company’s growth and thus should not be overlooked as part of the onboarding process with new employees or consultants.  New companies should therefore seek to have a form PIIA in place that they can use with all new hires and consultants.