Tips for strengthening the enforceability of employee intellectual property agreements

January 22, 2013

Westlaw InsiderEmployees are heavily involved in the creation and use of the intellectual property rights of any business and it is imperative for companies to have strong and enforceable agreements with their employees regarding intellectual property rights, a process that generally involves preparing and signing a confidentiality and assignment of inventions agreement.  While this type of agreement must be carefully drafted one issue that is sometimes neglected is that it must, as with any other contract, always be supported by adequate consideration from the employer.

In order to be sure that there is adequate consideration to support the agreement, it should be executed at the time that the employee begins employment.  Even if the agreement is entered into at the inception of employment, separate consideration may be required.  Since an agreement which is made an explicit “condition of employment” is supported by adequate consideration, any offer letter used in the course of recruiting new employees should refer to such an agreement as a condition of employment.  If the agreement is not contained in the employment contract and is entered into at some time subsequent to the signing of the employment contract, continuation of the employee’s employment, where that employment has already been bargained for, may not be sufficient consideration to support the agreement. Courts have also held that continued employment or compensation may not be sufficient consideration if other similarly situated and similarly compensated employees are not also required to execute the agreement.

Continuation of an “at-will” employment relationship has been deemed sufficient consideration for a confidentiality agreement; however, supporting an agreement with consideration associated with “continued employment” may actually undermine the company’s position that the employment relationship is “at-will.” Accordingly, in cases where the agreement has to be executed after employment has begun, it may be prudent to provide for additional cash compensation, perhaps in the form of wages or other valuable benefits, as consideration for the covenants in the agreement.  Forgiveness of debt has also been found to be adequate consideration for a non-disclosure agreement.  However, sufficient consideration may be lacking if the employer fails to follow through on some of the promised compensation.

Next time we’ll discuss another issue that doesn’t get enough attention: making sure that the agreement includes a specific acknowledgment by the employee that information covered by the agreement is indeed confidential to the employer.  For further discussion of the issues raised in this article, and examples of forms that can be used to strengthen the enforceability of employee intellectual property agreements, see Employee Confidentiality and Innovations Assignment Agreements (§§77:1 et seq.) and Confidentiality and Nondisclosure Agreements (§§85:1 et seq.) in Business Transactions Solutions, which is available on the West Web site and through Westlaw Next at Business Counselor.