Employers seek to ensure that the results of the employee’s efforts made on company time belong to the employer (the “work for hire” doctrine) and the overwhelming majority of employment contracts provide for precisely that right. As one employer put it, “If he makes it on my dime, it’s mine.” The law supports that concept and the courts have rendered such decisions on a regular basis.
The question necessarily arises, especially in high tech companies, as what is meant by “developing” a product or idea since quite often the concept will arise during working hours but the employee will seek to exploit it or develop it on his or her own time. Who owns it? If the employee indicates the idea came to him or her during weekend hikes and was developed at home at night, can the employer still claim rights?
Whenever the law is vague most businesses and their attorneys seek to clarify rights in contracts which specify, often in excruciating detail, what rights to ownership each party may claim. In California, however, firm restrictions exist in this area of drafting which is the subject of this article.
The Law:
The reader should first review our articles on Contracts and Arbitration.
The relevant law on this topic is found in statute, namely
CALIFORNIA CODES, LABOR CODE SECTION 2870-2872:
2870. (a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed 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:
-
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
-
Result from any work performed by the employee for the employer.
(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.
2871. No employer shall require a provision made void and unenforceable by Section 2870 as a condition of employment or continued employment. Nothing in this article shall be construed to forbid or restrict the right of an employer to provide in contracts of employment for disclosure, provided that any such disclosures be received in confidence, of all of the employee's inventions made solely or jointly with others during the term of his or her employment, a review process by the employer to determine such issues as may arise, and for full title to certain patents and inventions to be in the United States, as required by contracts between the employer and the United States or any of its agencies.
The above law essentially voids provisions in a contract that conflict with the statute and does not allow waiver of the protection of these provisions by the employee (which would otherwise be probably required in any employment situation, of course.)
The important point for employers to note, however, is the broad protection given to them by the exceptions at 2870 (a) 1. and 2. First, if the employee at home or outside the office merely develops a product or concept that “relates” to the employer’s existing business, the employer owns it if the employer can prove it. Further, if the employee is working on a project or concept that results from any work performed by the employee for the employer, the employer owns it.
A close reading also brings another critical “loophole” to the protection of the statue to light. Note that if the product or concept stems from a “trade secret” of the employer, then the employee is using it and, much as with using employer’s facilities or supplies, the employer owns it.
Thus if the employee, on his or her own time, using no equipment of the employer, still utilizes trade secrets of the employer, such as methods, concepts, confidential business contacts, etc…the employer may own the results.
Practicalities:
As with so much in law, practical cost benefit becomes vital in analyzing rights and remedies.
Any employee who develops a variation of a product or business of an employer must assume that unless the concept or idea is in an unrelated and unanticipated field and was not part of a larger project assigned by the employer, the employer is likely to claim ownership rights. While working at home using one’s own equipment and supplies is a necessary obvious precaution, it is not enough if it can be later claimed that the concept derived from trade secrets or was a variation of the existing product, concept or business.
And recall that during a start up time most new businesses can not afford the likely cost of litigation that such a claim will entail and the employer, knowing that waiver of rights accrues if aggressive action is not taken, will be quite tempted to immediately seek relief while the new company is weak.
It also means that every company hiring an employee must be careful that a claim for violation of the “work for hire” rule is inherent in the hiring of a new employee. Any company hiring from a competitor should carefully restrict the activities of the new employee to make sure the competitor cannot join both the new employee and the company as defendants in an action for theft of trade secrets.
Above all, both employer and employee should realize that anything developed by the employee, regardless of where and when, if related to the employer’s business is likely to be scrutinized closely by an employer losing the employee and efforts to clarify definitions of what is produced when and where in the contract are not necessarily going to be useful in light of the above statute.
But a very experienced business owner known to the writer perhaps put it best when told that an ex employee was now the key engineer at a competitor and might use trade secrets to help develop a new product for the competitor. “If he’s going to cheat, he’ll cheat and I will know it. If he really develops something new, more power to him. He knows I’m looking. I know he knows. His boss knows he knows I know. I’m not too worried…and if he does something obviously stupid, like steal my idea…well, statute or not, no court is going to protect him.”
He was right.