Wednesday, March 19, 2008

Innovation, non-competes and the value of intellectual property [Practice Notes]

Outlawing non-competes in any jurisdiction is highly controversial because the state is also trying to attract larger employers who, as a rule, use non-competes in their hiring practices. Those that are against outlawing non-competes make the points that these agreements are necessary to protect property and investment, and that courts in general don’t want to enforce them anyway.

The impact of non-compete agreements on business is mostly hidden but nevertheless very real and harmful. Non-competes are not about enforcement but about intimidation. And they provide a blunt, destructive weapon for keeping intellectual property out of the hands of others.

There are more honest and positive ways for companies to protect their interests without adding to the unemployment figures or killing innovation in American business. They are not necessarily expensive, can drive improvement in overall management, and work equally well for large and small companies.
Companies can start by writing employment contracts that agree to pay commissions to employees who find licensees for work-for-hire products and ideas.

The licensees receive the license grant from the employer as the employer’s intellectual property. In essence, the arrangement is a referral sales program with employees acting as the channel sales agents for their employer. This arrangement reduces the incentive to change jobs to secret away proprietary or confidential info, and it acknowledges the collaboration that goes on within technology communities, whether geographic or virtual, that is necessary to fuel economic growth.

Companies can also restructure employee compensation from a strict salary basis to a project completion basis. Employees receive a portion of their compensation at the end of the project, after the employer has had the opportunity to initiate procedures for establishing intellectual property protections and is in a position to go to market and exploit the work product. Non-competes become an issue mostly when an employer feels exposed because an employee is leaving before the product has been commercialized. Most employees depend on a regular pay cheque, so restructuring pay is best limited to higher compensation, key employees.

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