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.

Wow!  That was fast.

I”ve been running my own law firm for over a year.  It’s been a blast and I’ve been very fortunate — quite a bit of exciting and interesting work came to my door last year.

Some of the highlights include:

• Managing a dispute from initial demand letter to arbitration award — on my first day running my own firm, one of my clients received a cease and desist letter which we believed was invalid.  We pitched the case to litigators, hired them, and I was able to act as in-house counsel for the 7 month JAMS arbitration: editing and adding factual clarity to filings, attending all depositions and hearings, and eventually delivering the news after judgment.  In general, this is not my day-to-day practice, but it was very educational and modified my perspective on how contracts should be drafted and disputes relating to contracts should be approached.
• Acting as on-site in-house technology counsel one day a week — sitting in the legal department of one of my larger clients gave me a very different understanding of the role that attorneys play within an organization.  I supported the third party inputs to software (reviewing both open source and third party proprietary licenses) and the enterprise licensing division and often witnessed first-hand the delicate balance that must be maintained between legal risk and business risk within a corporation.
• Negotiating against the big guys — it’s part of the typical start-up experience.  Sure, you often negotiate and partner with other start-ups, but at some point, you will need something from one of the big established players.  It may just be Internet connectivity.  Or, large companies may be your sales targets.  Regardless, negotiating against a large company who insists that *we never change our forms*,  *everyone signs this without edits* and *this is completely standard* requires the expertise of someone who has seen many *standard* offerings in the applicable industry.  Over the years, I’ve dealt with Fortune 100 and Fortune 1000 companies in almost every industry, and this year was no exception.  Examples from this year include: Advertising Agencies, Amazon, Barclays, Blue Cross Blue Shield (of America and of various States), Bank of America, Chubb, Credit Suisse, CUNA Mutual Insurance, Discover, DOE Pacific, Earnst and Young, Experian, Facebook, Fidelity, Google, Honeywell, Horace Mann, Humana, JP Morgan Chase, KPMG, Lloyds, Lockheed Martin, Mass Mutual, Microsoft, Morgan Stanley, NBC Universal, Nationwide, PWC, Safeway, Samsung, State Farm, T-Mobile, Toys R US, Viacom, Walmart, and Warner Brothers.
• Setting up the legal side of the business (forms) — a large portion of my job is limiting the amount of work I do.  I try to get my start-up companies into a position where their internal IP creation departments, online systems, sales forces, and business development teams can function with minimal legal input.  This involves an up-front investment of time to create forms that are correct for their business models.  I talk to my clients and truly understand their businesses before drafting, which avoids the extra legal fees companies often incur when their attorney starts with a square hole for a round peg.  Examples include:  Enterprise license agreements, Software-as-a-Service Agreements, trademark license agreements (branding/endorsement/certification programs), software development agreements, click-throughs (standard terms, privacy policies, API license agreements, payment obligations, revenue share, and more), commission agreements, reseller agreements, professional services agreements, master purchase agreements, NDAs, partner program agreements and technology assignment agreements.
• Open Source — I went to law school because I was fascinated by the legal rights issues in Open Source Software.  I even wrote an award winning student note on the topic.  This year, I continued my commitment to Open Source legal issues with projects in several areas:  (i) aided a client in cleanly open sourcing a proprietary language they had developed (open source license evaluation and selection, branding issues, IP contribution agreements); (ii) performed open source audits of client codebases with the engineering teams and cleaned up any issues found; (iii) acted as special open source counsel in an Asset Purchase and Leveraged Buy-Out to help the acquirors become comfortable with the state of my clients’ open source uses; (iv) represented (and continue to represent) two clients whose business models are built around open source software projects that they manage (with monetization through professional services, support, maintenance, priority bug fixes, and bespoke development); (v) aided clients in the development of open source policies and approval processes to maintain the codebase in the proper state.
• Everyday advice, counseling and communications — this catch all category is where the most surprises come.  Sometimes it’s just a phone call asking for a sanity check — Can we do this?  But sometimes there are more exciting issues such as requests from law enforcement, lawsuits that have been filed against clients, high level discussions about IP strategy (should we talk to patent counsel?  Should we file a TM?), letters hinting that lawsuits may be filed, formal letter writing in response to unfortunate situations, termination of contracts, privacy concerns, and much more.

Overall, last year was a great year full of good work, great learning opportunities and wonderful clients.  I can’t wait to see what this year brings.

I’ve decided to start my own law practice.

I’ve given notice to the firm and have set my last day, but in the meantime, there are a ton of details to manage and things to do and learn. First, there’s leaving while preserving as much goodwill with the firm as possible. I’ve been pleased with how well this has been going, and have been impressed, yet again, with what a great group of attorneys I work with — they have been very encouraging and supportive. Then, there’s transitioning my existing clients to other attorneys at the firm who will replace me in a manner that is professional and leaves them with a good impression of me. And then, in the background, there’s all the stuff I need to get in place to actually get my own firm up and running…

Given that I need to have a digital social network in place to help recruit clients once my firm is up and running, Biting Tongue has finally ceased to be the main outlet for my written thoughts.

These days, I’m adopting a multi-pronged approach with Facebook, Twitter, and this professional blog as well.