Business owners who, after an employee dispute or after terminating an employee, have been the victims of intellectual property theft often contact us. Often, the solutions to this problem can be incredibly costly. Here are some quick tips to protect your intellectual property from employee theft before it becomes prohibitively expensive.

1. Employment Agreements. Make sure that your employees have signed an employment agreement. Though the employer owns copyrightable works created within the scope of employment, a well-drafted employment agreement will contain a work made for hire clause that states that any works that cannot be considered a work made for hire will be assigned to the company. A well-drafted employment agreement will also contain a patent assignment provision that states that all inventions, discovery, improvements, innovations, and ideas created within the employee’s employment with the company are owned by, and assigned to the employer, including any resulting patents or rights to royalties. These provisions will also require the employee to execute any documents necessary to obtain registered patents or copyrights.
2. Non-Compete Agreements. Many employers often wish to protect their legitimate business interests through a non-compete clause. Non-compete clauses, which are not enforceable in all states, protect an employer’s competitive interests and investment in an employee. These clauses must often be limited by type, time, and geographic scope.
3. Non-Disparagement Agreements. Many employers also wish to protect their interests by prohibiting ex-employees from disparaging or defaming their business. Though these clauses often run into enforceability issues due to the First Amendment, a narrowly tailored non-disparagement clause can be an effective deterrent to post-employment disparagement.
4. Confidentiality and Trade Secret Agreements. Employers also may want to protect their businesses with confidentiality and trade secret provisions, which may be contained within an employment agreement. These provisions protect against the disclosure of confidential information, such as company strengths and weaknesses, salary information, and marketing plans, which may be of use to competitors. Additionally, these clauses can also protect against the theft of trade secrets, such as recipes or research and development efforts.
5. Non-Solicitation Agreements. These agreements or clauses protect a business from an ex-employee’s attempts to poach an existing employee, customer, or supplier. Though these clauses can have limitations, they can be effect tools to protect an employer’s interest in retaining its employees and customers.
6. Access Controls. A simple way to protect against intellectual property theft is to implement access controls through company policies. Security policies, acceptable use policies, email policies, password policies, and computer intrusion policies can help protect against the theft of company assets, such as software, source code, and domain names. Additionally, the implementation of these types of policies may protect against a third party claim of negligence in the event a rogue employee causes harm to a third party vendor, customer, or contractor.

Of course, the most effective way to protect against intellectual property theft is to regularly audit your intellectual property portfolio and your policies to protect it.

If you would like an assessment of your intellectual property portfolio, contact the intellectual property attorneys at Revision Legal for a risk analysis.

Editors note: this was originally published in October, 2015. It has been updated for clarity and comprehensiveness.

Why Employment Agreements Alone Are Not Enough

The six protective measures described above form a solid legal foundation, but they work only if they are properly drafted, properly executed, and actively enforced. Many businesses discover the hard way that an employment agreement with boilerplate IP assignment language is not the same as a well-drafted, jurisdiction-specific agreement that has been actually signed by the employee in question. Before an IP dispute arises, businesses should verify that every key employee has signed current agreements, not just that forms were distributed at onboarding.

Equally important: the agreements must be supported by actual policies and practices that demonstrate the company treats its IP as confidential. A company that tells employees their work product is proprietary but then stores source code in unsecured shared folders, uses the same passwords for years, and never trains employees on IP protection will have difficulty proving that it took “reasonable measures” to protect its trade secrets — which is a legal element of trade secret protection under both the Defend Trade Secrets Act (DTSA), 18 U.S.C. § 1839(3), and state trade secret statutes.

What Employers Own — and What They Don’t

The “work made for hire” doctrine under 17 U.S.C. § 101 automatically vests copyright in works created by employees within the scope of their employment in the employer — without any written agreement. This covers code written during work hours, marketing materials prepared as part of the job, and internal documents created in the course of employment. However, there are important limitations:

• Work created outside the scope of employment — on personal time, using personal equipment, in areas unrelated to the employee’s job duties — does not belong to the employer under the work-for-hire doctrine. Without a written assignment clause covering off-hours work related to the company’s business, the employer may have no rights.
• Independent contractor work is not work for hire unless the work falls into one of the nine specific categories listed in 17 U.S.C. § 101 and a written work-for-hire agreement is executed. For all other contractor work, copyright vests in the contractor by default, and the company needs a written assignment to own the copyright.
• Inventions and patents do not vest in the employer automatically. Patent rights belong to the inventor unless there is a valid written assignment. Employment agreements for engineers, researchers, and product developers should contain explicit patent assignment clauses covering all inventions relating to the company’s business, whether made during or after working hours, including within a specified period after employment ends.

State Law Limits on Employee IP Assignments

Employment agreement IP assignment clauses are subject to state law restrictions that many employers overlook. California, Delaware, Illinois, Minnesota, North Carolina, and Washington have statutes that limit the scope of IP assignment clauses to work related to the employer’s business. Under California Labor Code § 2870, an employment agreement cannot require an employee to assign rights in an invention that: (1) was developed entirely on the employee’s own time; (2) does not relate to the employer’s current or demonstrably anticipated business; and (3) did not result from work performed for the employer. Similar provisions exist in other states.

Employers who use broadly worded “assign everything” clauses — particularly with California employees — may find those clauses unenforceable as written. More importantly, employees who want to preserve rights to their personal projects need to document that those projects were developed on personal time using personal resources, have no relationship to their employer’s business, and did not result from employer-provided resources or information.

Trade Secrets: The Inevitable Disclosure Doctrine

When a key employee leaves to join a direct competitor, some courts recognize the “inevitable disclosure” doctrine — the principle that even without a non-compete agreement, injunctive relief may be appropriate when the employee’s new role would inevitably require them to use or disclose the former employer’s trade secrets. The doctrine was accepted in PepsiCo, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995), and has been adopted in some form by courts in Illinois, New York, Texas, and other jurisdictions.

However, California courts have refused to adopt the inevitable disclosure doctrine because it effectively operates as a non-compete clause — preventing an employee from working for a competitor — and California Business and Professions Code § 16600 makes such restrictions generally unenforceable in California. Companies with California operations cannot rely on inevitable disclosure; they must instead focus on robust trade secret identification, access controls, and monitoring of departing employees.

Responding to Employee IP Theft: A Step-by-Step Approach

When an employer suspects that a current or former employee has misappropriated IP, the response must be both swift and methodical:

• Preserve evidence. Before the employee is confronted or terminated, preserve all relevant electronic evidence — email, file access logs, USB device logs, cloud storage activity, and downloads. Forensic preservation should be done by or under the supervision of experienced counsel to ensure the evidence is preserved in a form admissible in court.
• Assess the scope of the theft. Work with IT and legal counsel to determine what was taken, when, and how. The scope of the theft determines the appropriate legal response — a demand letter for a minor incident versus emergency injunctive relief for a major misappropriation.
• Consider emergency relief. Under the DTSA, 18 U.S.C. § 1836(b)(2), a court may issue an ex parte seizure order in extraordinary circumstances to prevent the propagation or dissemination of misappropriated trade secrets. Where the employee is about to use or disclose stolen information imminently, emergency injunctive relief may be the most effective remedy.
• Evaluate criminal reporting. Trade secret theft above certain thresholds, particularly when involving foreign beneficiaries, may warrant referral to the FBI or local law enforcement for prosecution under the Economic Espionage Act (EEA), 18 U.S.C. §§ 1831-1839, or the DTSA’s criminal provisions.

Talk to an Attorney

Protecting intellectual property from employee theft requires both preventive measures — the agreements, policies, and access controls described above — and a rapid, well-coordinated response when theft occurs. Revision Legal’s intellectual property attorneys conduct IP audits, draft employment and contractor agreements, and represent clients in trade secret litigation under the DTSA and state law. Contact us for a risk analysis of your current IP protection program.