Entrepreneurs launching a startup company need to be proactive and decide upon a course of action concerning potential employee inventions. For a variety of reasons, new businesses encourage their employees to invent while working for the business. Invention and innovation help to grow the startup, as well as encourage employees to be creative and think outside the box, all in the name of growing the business. For these and other reasons, startup companies should consider encouraging employee inventions to keep their employees intellectually engaged and motivated.
However, employee inventions can have a downside, because conflicts may arise between the startup company and the employee relating to patent rights, ownership rights, and royalties. If there is no clear employee invention clause in the employee’s employment contract, these conflicts can lead to potential lawsuits. Startup Company Counsel has assisted numerous startup businesses in devising smart business plans and contractual agreements that encourage invention while protecting the business.
California Law on Employee Inventions
California Labor Code Section 2870
California Labor Code section 2870 limits a business’s ability to restrict employee inventions. Section 2870 prevents an employer from enforcing an employee invention clause if the employee created the invention entirely on his or her own time, and without using the employer’s equipment, supplies, facilities, or the employer’s trade secret information. In addition to this general requirement, section 2870 prevents the employer from enforcing an employee invention clause if the invention relates, at the time of conception, to the employer’s business or future research or development, or if the invention is the result of work done for the employer. If an employee invention does not fall under section 2870, an employer can obligate its employees to assign the ownership rights of any inventions to the employer. To do so, of course, the employer must narrowly draft the contract provision so that it complies with section 2870. If a court determines that an employee invention clause violates 2870, however, the clause is deemed void and unenforceable as against public policy.
California Labor Code Section 2871
California Labor Code section 2871 allows businesses to take measures to guard against the potential harm that an employee invention may have on their business. Section 2871 allows employers to include clauses in their employment contracts that obligate their employees to disclose all of their inventions created during the term of their employment – such a disclosure must be done in strict confidence. Furthermore, the employer may review employee inventions, and even require that full title to certain patents and inventions be in the United States to ensure compliance with other contracts between the employer and the United States. Furthermore, section 2871 prohibits the employer from making an otherwise void employee invention clause a condition of an employee’s employment or continued employment.
California Labor Code Section 2872
California Labor Code Section 2872 requires employers to make a written disclosure when an employment agreement contains an employee invention clause. Thus, if the employment agreement contains a clause that obligates an employee to assign or offer to assign inventions to the employer, then the employer must inform the employee, in writing, at the time the agreement is made, that the employee’s obligation to assign inventions does not apply to any inventions qualifying under section 2870. However, the employee, and not the employer, carries the burden of proving that their invention is exempt from section 2870.
Startup Company Counsel Can Help You Handle Employee Inventions
The attorneys at Startup Company Counsel are experienced business advisors. Being entrepreneurs and business owners themselves, they understand the complexities of starting a business. Startup Company Counsel can assist entrepreneurs like you with drafting employment contracts that include employee invention clauses. Call Startup Company Counsel today at 855-353-5377 to discuss employment contracts in California or Delaware, in addition to other issues you may face in getting your business started.