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.

No Public Use with General Understanding of Confidentiality from Observers

In American Seating v. USSC Group (January 29, 2008) the Federal Circuit affirmed a jury finding of no invalidity for public use where

. . . As they improved the invention, on several occasions Ditch and Razavi placed evolving prototypes in an out-of-service bus for the purpose of soliciting feedback from friends and colleagues who to varying degrees assisted in the invention’s development.Contrary to USSC’s argument, the fact that the inventors revealed the prototype to a select group of individuals without a written confidentiality agreement is not dispositive. When access to an invention is clearly limited and controlled by the inventor, depending upon the relationships of the observers and the inventor, an understanding of confidentiality can be implied. Id. at 1381; Moleculon Research Corp. v. CBS, Inc., 793 F.2d 1261, 1265-66 (Fed. Cir. 1986). In this case, the jury was entitled to conclude that Ditch, Razavi, and the limited number of people permitted to view the tie-down restraint system prototype shared a general understanding of confidentiality. Ditch demonstrated the prototype on an out-of-service bus, solicited feedback, and removed the invention to store under his control. There was no evidence that the prototype was placed in service before December 1995, and no evidence that an unrestricted number of people unconnected with the development of the invention observed the invention in use. The district court properly confirmed the jury verdict that the ‘038 patent is not invalid for public use.