People are often surprised to learn that employers sometimes try to claim ownership in an employee’s intellectual property for inventions that are not related to their job.

Like many attorneys who work with startup companies, I am a huge fan of California Labor Code 2870.  This law says that an employer in California may not require an employee to assign IP created by the employee during the time of that employee’s tenure if it’s created on the employee’s own time, without using the employer’s resources (use your own non-company owned computers and network connectivity, people!), and so long as it is not related the company’s research and development.

An untold number of start-up companies have been created by founders in California who did the initial IP development on the side while holding down a salaried job with an employer.  Statutory protection of inventor rights in independent inventions (alongside a prohibition against most post-termination non-competes) is often cited as one of the reasons the vibrant startup ecosystem in Silicon Valley and throughout California exists.

Unfortunately, I’ve seen many contracts where employers purported to own all (or much more than California allows) of the intellectual property created by the employee during their employment.  Thanks to California Labor Code 2870, the overreaching portions of those contracts are unenforceable in California.  In California, founders who create IP for their next startup (or FOSS developers who work on unrelated FOSS projects) can feel comfortable that the IP created in their moonlighting, hobbies, side hustles, etc. are their own property if they follow the rules.

I knew that a few other states had similar inventor rights statutes on the books, but it had been a while (let’s be honest, probably a decade) since I’d looked into it generally.  So, in preparation for a lecture I was giving to new engineering graduates (with job opportunities all over the United States), I did some Internet searching.

I was very surprised to learn that Delaware has an inventor rights statute.  How had I not heard about/internalized this before?

As you may know, Delaware has more corporate entities than people.

According to the Secretary of State’s 2016 Annual Report, there were more than 1.2 million corporate entities registered in Delaware, and at that time, more than 2/3 of the Fortune 500 were Delaware corporations.

In other words, Delaware is the most popular US state for corporate formations and many, many companies (especially big public companies) that employ lots of people are Delaware corporations.

Because of this, many of the contracts with overreaching IP terms I’ve reviewed in the past were with Delaware corporations.  Most of those employees were not working *in* Delaware, and I’ve always looked to the labor code of the state in which the employees were employed.  However, if a company chooses to avail itself of Delaware law by incorporating there, it is subject to Delaware law, public policy, and jurisdiction.  I don’t know why it hadn’t occurred to me that all employees who work for a Delaware corporation can point to  19 DE Code § 805 (2017) :

Any provision in an employment agreement which provides that the employee shall assign or offer to assign any of the employee’s rights in an invention to the employee’s employer shall not apply to an invention that the employee developed entirely on the employee’s own time without using the employer’s equipment, supplies, facility or trade secret information, except for those inventions that:

(1) Relate to the employer’s business or actual or demonstrably anticipated research or development; or

(2) Result from any work performed by the employee for the employer.

To the extent a provision in an employment agreement purports to apply to the type of invention described, it is against the public policy of this State and is unenforceable. An employer may not require a provision of an employment agreement made unenforceable under this section as a condition of employment or continued employment.

Those of you who know California Labor Code 2870 will find this language very familiar. The Delaware version is just a slightly different version of the same law.  In general, I think the Delaware drafting is slightly tighter, although I don’t like the lack of the “at the time of conception or reduction to practice” limitation. I do, however, love the clear final sentence, which I will be using to argue against over-reaching IP provisions in Delaware corporation employment agreements.

Sure, a greedy corporation could claim that even though Delaware won’t enforce an egregious IP assignment, perhaps another state where the employee is working will.  But it’s not a good look for the employer to intentionally go against the public policy of the state where they are availing themselves of corporate protection.  Most employers don’t sue to acquire employee IP, but rather point to contracts and demand assignment from employees who are scared to incur legal fees.  I suspect they’ll be even less likely to sue if they realize their employee is aware of a public policy of Delaware that specifically prohibits the contractual term they are trying to enforce.

California adopted Labor Code Section 2870 in 1979.  Delaware adopted Labor Code Section 805 in 1984.  I’ve confirmed that as of today, at least the following states (I need to do a 50 state survey) have an inventor rights statute:

Including the weight of all of the Delaware corporations plus employees working in and corporations incorporated in all of the other green states above means that inventor rights statutes are not a leading-edge policy that only applies to a few select states and companies.  Inventor rights is actually a legal norm that applies across the majority of large technology employers in the United States, and even employers who are not expressly required to respect them should consider that failing to do so is likely to cause them to lose out on top talent in their employment pool.

For more information, see the redline below for a detailed display of the differences between California’s and Delaware’s statutes, or click on the links to see the specific statutes for each state.

California https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=2870

Washington http://apps.leg.wa.gov/rcw/default.aspx?cite=49.44.140

Nevada https://law.justia.com/codes/nevada/2010/title52/chapter600/nrs600-500.html

Utah https://le.utah.gov/xcode/Title34/Chapter39/C34-39_1800010118000101.pdf

Kansas https://law.justia.com/codes/kansas/2006/chapter44/statute_18289.html

Minnesota https://www.revisor.mn.gov/statutes/?id=181.78

Illinois http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2238&ChapterID=62

North Carolina https://www.ncga.state.nc.us/EnactedLegislation/Statutes/PDF/ByArticle/Chapter_66/Article_10A.pdf

Delaware http://delcode.delaware.gov/title19/c008/index.shtml

I regularly consult with companies who need help with their open source software policies, procedures, or releases (both commercial and open).

I am lucky enough to have several law firms that refer me this work when it becomes a bit too time consuming and complex for a general law firm to be the right fit.

Recently, one of those firms asked me to give a presentation — just a general overview on Free and Open Source Software as well as a discussion around current commercial best practices.

So, in the interests of sharing — here are the slides from my presentation.

(Warning — the last 2 slides have *real* world language, from *real* world programmers, which means there are some curse words).

Enjoy!
FOSS 2014.03.04 FINAL

In the last two months, I’ve received two calls that reminded me that start-up founders, employees, and the self-employed have huge legal issues outside of traditional start-up law.

So, I’ve decided to make a Public Service Announcement:  If you are self-employed or involved in an early-stage start-up, consider the following issues and seek the appropriate professionals to address them if appropriate.

1. LIFE INSURANCE. If you are:

a) an American citizen who is a start-up founder, an early stage start-up employee, or self-employed;

b) not financially independent (Note: you are financially independent *only* if you work because you want to, but you don’t have to, and you won’t have to work anytime in the future, either);

c) and you have dependents;

then you need life insurance. Period.  Unlike many more traditional careers, these groups don’t have any form of pre-negotiated survivor benefit plan. If you are a major financial contributor to your dependents’ needs, then even if you are fully vested into social security, unfortunately, it is almost certain that SS survivor benefits will not be sufficient to support your family if you die.

2.DESIGNATED DECISION MAKERS.  You need a designated decision maker who can manage things for you if you become incapacitated or die.  Yes, thinking about this is not pleasant.  But many of the individuals I work with do not have estate plans and are unmarried.  In the event something happens to them, their next of kin will be involved in all aspects of their life (including their business).  If you are not absolutely certain that every state/country where you have assets, business, contracts, or potential health issues recognizes the person you want as your next-of-kin decision maker, then you *need* to visit an estate planning attorney to figure out what documents are necessary to ensure that the person you want in charge is able to make decisions (either financially, health-wise, or both).  Founders, in addition to seeking input from an estate planning attorney, you should discuss this potential issue with your corporate attorney to understand what provisions already exist in your corporate formation documents regarding exercise of a founder’s voting rights in the event of a Founder’s death or incapacity.

3.  CENTRALIZED DOCUMENT/ACCOUNT MANAGEMENT.  In the event of an emergency, you need one location where your decision maker knows to go that outlines where and how to access all important online and physical bank, investment, credit card, billed accounts, title documents, health documents (advance care directives!), insurance policies, and anything else that may be critical.  The actual rights and responsibilities that your decision maker will have with respect to the information you store varies in each situation (again, see an estate planning attorney), but if you don’t have the information in a location where your decision maker can access it, they will be completely unable to act on your behalf.

4.  HEALTH INSURANCE AND DISABILITY INSURANCE.  The self-employed often struggle with health and disability insurance as it is can be very expensive outside of the guaranteed issue employer market (try large industry organizations or NASE). Some early stage start-ups don’t offer medical insurance due to budget constraints and many early stage start-ups don’t offer disability insurance.  Much like life insurance, if you have dependents, you should seriously consider whether you need one or both of these insurance products before you are working the start-up or self-employed sprint and unable to focus on anything outside of the business’s growth trajectory.

**NOTE:  I do not practice estate planning law, insurance law, or corporate law outside of technology transactions.  This post, like all of my posts, does not contain legal advice and I did not become your lawyer solely because you read it.  It is very possible that your situation is unique and that all of the issues I raised for consideration above do not apply to you.

The second year of running my own private law practice was similar to the first. Fast, furiously busy, and over before I knew it.

The biggest change is Tech Law Garden has added a part-time Junior attorney! She does great work. It’s exciting to have someone to collaborate with, and the clients get a better value when she’s a good fit as I’m able to bill her out at a lower rate than myself. I’ve also hired someone to do all of my bookkeeping, which is a huge relief and allows me to focus more on my practice.

As for the actual practice of law, more than half of last year’s work was the typical internal legal work all growing technology businesses need: click-through agreements associated with product launches, standard form sales agreements, NDAs, privacy policies, terms of use, API click-through agreements, revenue share agreements, co-marketing agreements, publishing agreements, security policies, open source policies, trademark guidelines, and negotiating deals from the companies’ standard forms.

About 10 – 15% of the work was internal diligence and summary of (i) existing contracts held; or (ii) open source software used by companies in order to help them prepare for a product launch, sale, lawsuit, or IPO filing.

Another 10% is general advice and counseling on all the issues that can arise in the day-to-day life of a small technology company (and in a few cases, IP/tech advice and counseling for individuals). Some of this is easy to predict: for example, privacy and security are always an issue. But I particularly enjoy this portion of my practice because I can never guess what surprise might be next (need to file for an export license? a need for a DUI referral for an executive’s relative? a subpoena? an unexpected image of porn displayed in user generated content? a discovery of a serious bug that has privacy implications? an employee who’s developing a competing product? a desire to implement a laptop gifting program? a co-founder with addiction issues? an individual who’s trying to start a new venture while employed at his/her old job?).

And, the remainder, of course, is negotiating deals with other companies. Typically, other small and medium companies are fairly nimble and my clients can close those deals on a fairly short timeline. Manufacturing agreements, distribution agreements, and other specialized service agreements can take a little more time, but generally don’t take more than a month (unless you’re dealing with regulated manufacturing or super-secret technology, in which case all bets are off).

However, as you’d expect, almost all of the usual suspects in the Fortune 500 want to work from their forms (*not* my clients’ forms). In some cases, my clients and I have been able to convince big companies to use my clients’ forms. (I’ve never seen a University licensing department agree to anything except their own forms). But, in most cases, to do a significant deal with a big company or university, technology startups have to start with a long, extremely big-company-favorable (or university-favorable) form.

With these folks, if you are a small startup, unless you have quite a bit of leverage, it is common for it to take at least a month, and often *many* months, to get a deal to closure. It can be a painful exercise, and I think this is one area where a good attorney can add quite a bit of value for a startup (to help the startup (i) understand exactly what the risks of the deal are; (ii) focus on what they really want and need from the deal; and (iii) hold the line).

In year 2 of Tech Law Garden, the longest, most drawn-out deals awards go to:

• Amazon
• Apple
• Advertising Agencies (When they represent big brands, they expect to be treated like a big company, no matter what size they are.)
• Facebook
• Google
• Microsoft
• Samsung
• Universities (Academic time is a completely different concept from business time. Think holidays.)
• Zynga

Finally, because I’m a data nerd, here are some data points from my practice, thus far:

• I have done invoiced (including pro-bono) work for exactly 60 clients since I started the practice, a little over 2 years ago.
• The first month of my practice, I invoiced 2 clients.
• In a typical month in year 2, I invoiced 11-12 clients.
• In my busiest month in year 2 (September), I invoiced 17 clients.
• In addition to the clients who’ve engaged me, I’ve also met with, or taken phone calls from over 30 potential clients where the correspondence was significant enough to create a folder for the correspondence, but (for whatever reason) we have not engaged in an ongoing attorney-client relationship at this time.
• I’d estimate I’ve met with or taken phone calls from at least another 60 entities or individuals who needed an attorney, but it was very clear that they did not need someone like me. I’m always happy to talk with folks and make referrals to other attorneys as a regular part of my practice.

In short, my practice has very little predictability. I have a few clients for whom I do work every month. But the majority of my small startup clients and individuals only need help a few months of the year. It is not uncommon for a client to need help one month and then for them to be silent for 6 months. It is also not uncommon for me to meet with a potential client in one month and for them to wait 6 months until they engage me.

I’m excited to see what year 3 will bring!

In the last two weeks, I’ve seen a surprising glut of Non-Disclosure Agreements that were exactly the *opposite* of what my clients expected to see.

What to do I mean?

I mean, these NDAs all had express permissions for the receiving party to use or disclose the information they receive in the course of their business. In other words, these contracts had the standard confidentiality obligations one would expect to see in an NDA but then also included some carve-outs. However, the effect of the carve-outs was so big that they turned the NDA on its head.

Essentially, August 2011 has been the month where the big company form Non-Dislcosure Agreements I received morphed into a Permission to Compete With My Client (By Using Their Disclosures) Agreement.

In several cases, given the business realities and the difficulty of getting big company legal time to review my edits, I recommended that my clients refuse to sign and limit their disclosure to only those things they’d feel comfortable disclosing without an NDA.

Thankfully, this approach worked against several large companies. Apparently, the message that’s been conveyed to the random middle/high-level project/product manager at several Fortune 50 Companies is: “Get ’em to sign our terrible form if you can. If not, don’t sign anything, but have a limited meeting anyways.”

This is a shift for me. Historically, my experience with large companies was that they wanted you to sign their form before the meeting, no matter what. Several years ago, however, their forms weren’t draconion permission to compete agreements with free perpetual non-assert clauses (I’m not exaggerating, one form I received included an non-assert clause for all IP rights associated with everything disclosed by my client in connection with the agreement).

Moral of the story? NDAs, while typically boilerplate and uninteresting, can occasionally contain provisions that give up the ghost. My August clients are very happy they were safer rather than sorrier (and several reported back with entertaining tales of embarrassing their business counterparts at the big companies when they pointed out why they just couldn’t sign the new version of Fortune 50 company’s NDA)