It is becoming increasingly common for employers to ask new employees to sign a non-disclosure agreement or NDA, with the aim of protecting the business’ intellectual property. Non-competition terms, preventing the employee from working in too similar a job should they decide to leave can also be included in such a document.
The reason for the increase in use is a reflection of the change in how value in a business is created. Particularly for technology companies, whose products and services take time to bring to market and thus which have little revenue, much of the valuation of the business is based in the IP.
NDAs are not, however, a failsafe solution to protect ideas.
Many venture capital firms refuse to sign a confidentiality agreement before considering investment in a company. Although disconcerting to the business owner, the VC firms are correct - agreements take time and expense to put in place, for little protection.
Copyright exists under statutory law
In respect of work in which there is copyright, such as a design, an image, a musical score or a film, there is no legal requirement to register or assert those rights. The rights holder has automatic protection under statutory law. All rights are already reserved.
So there is no additional benefit of signing an NDA to be able to enforce a claim against someone who uses created work.
An NDA therefore should protect an idea, not existing IP.
Few ideas are new
However, few ideas are actually new. Rather, one idea builds on the work of another, or commonly, brings together existing knowledge in a new way. Innovation is the process of building on prior knowledge.
If this argument has weight, then it continues that there is no little new IP that an NDA can protect. An investor cannot steal ideas that are already in the public domain.
Who owns the idea?
Then there is a question of whether the business owns the idea, or the employee.
The usual default legal position is that IP developed outside of work remains the property of the employee. Only ideas created at work belong to the employer.
Practically, it is very difficult to prove in court where and when an idea was created, and whether that moment and place was 'at work'. In their office, an employee might think of a different application of a piece of software technology that has been developed by their employer, go home and write code from scratch on their own computer and create something much more valuable than the employer owns.
It is difficult to prove breaches of confidentiality
When ideas are leaked, it is often at informal events, outside of work. Proving who said what, when is difficult again.
Talking to an interested friend of a friend you have only just met about what you do for work whilst at a bar on a Friday night, you are likely to have your guard down about what you say. You’re unlikely to remember what you said, let alone have someone else be able to prove what you said.
The probability is that the person to whom you’re talking is unlikely to do anything with what you say, but nevertheless, such talk does breach confidentiality.
Litigation is expensive
Hiring intellectual property lawyers is expensive. Moreover, even if you do win, the financial outcome is unlikely to reflect your valuation of the property. IP is very difficult to value. A non-expert judge is unlikely to come to the same conclusion as to the value of the property as you are. The employee will have limited funds to repair the damages.
Litigation is costly in other ways for which you cannot be compensated. It is more expensive in time and stress. Most young businesses – typically those exploiting IP – need to be able to move fast. If senior management is tied up with litigation, the business is likely to suffer.
Non-competition terms have to be reasonable to enforceable
An employer cannot prevent a former employee working for a competitor. An employee is valuable because of skills, experience and knowledge. To stop an employee from capitalising on these traits is contrary to national policy.
To be effective, no-competition terms must not be unreasonable. Like many aspects of law, reasonableness is subjective and depends on the circumstances. It applies to the type of work, the duration of the restriction and the geographical extent of restriction. A document that bans the employee from starting a business that operates in the same industry would probably be deemed unfair. A prohibition on joining a direct competitor in the same geographical market in a similar senior management position for three months might be deemed to be fair.
How to protect your IP
Firstly, just because NDAs aren’t bulletproof, doesn’t mean you shouldn’t use them. They do give some legal support. They also act as a deterrent. Employees are more likely to be aware that what they work on is confidential and that you are likely to pursue them or their next employer if they break the terms of the agreement.
You can create a culture of confidentiality, through employment policy documents and informally, encouraging employees not to discuss their work outside of the workplace. A culture of not taking work home is a good way to make sure that ideas are protected, as well as making staff happier.
Lastly, to return to VC firm thoughts, good businesses succeed because they are strong at execution. Having an idea is one thing, making it a commercial reality is another. If you can be first to market with the outcome, it becomes less important if others have similar IP.
Related documents
Having read this article, you may want to update your employment contracts or directors service agreements so that IP protection is stronger. Alternatively, you may wish to have your employees sign separate non-disclosure agreements.