Many startup entrepreneurs are not aware of California’s laws around the ownership of intellectual property.
And for most, the concepts for products or services are the life-blood of a company’s operations and future. There are various junctures where a startup’s IP could potentially be disclosed – raising capital, recruiting employees, beta testing or testing a prototype, and in day-to-day meetings.
To put these risks into context, it is important to understand California’s laws regarding competition. California workers are free to work anywhere, even for a direct competitor, provided the competition is fair and lawful. In California, most covenants not to compete are void and unenforceable. (Business & Professions Code section 16600.) As a result, startups should take both legal and technical measures to protect their IP.
Use Confidentiality Agreements
While California will not enforce covenants not to compete, California’s courts often enforce confidentiality agreements and intellectual property assignment provisions. The more specific the confidentiality terms, the more likely a court is to enforce the provision. Startups should make certain that they describe with specificity categories of information they seek to protect. We recommend prioritizing and identifying what information is highly valuable, or would cause the greatest injury if it were improperly used or disclosed, and build the confidentiality agreement around those categories. Confidentiality agreements should exist with employees, contractors, vendors and suppliers.
Include “Trade Secret” Information in Confidentiality Agreements
Confidentiality agreement should also encompass “trade secret” information. California follows the Uniform Trade Secrets Act (Civil Code sections 3426.1-11.). Trade secret information may include source code, CAD designs, research and development tests, business plans, customer, vendor, and supplier information, and other commercially sensitive information which gives the business a competitive advantage.
California’s version of the UTSA has some unique features. First, it protects against the theft, use, or disclosure of information which can be in electronic, paper or memorized by an employee. Second, under California’s definition of a “trade secret” it is immaterial that some aspects of the trade secret could be found in publicly available sources. Under California’s UTSA, our Legislature likely anticipated that companies would compile information in their research and development efforts from public sources and modify or incorporate some elements into their products or services. Startups should make certain that their confidentiality agreements reference California’s UTSA because of these unique features.
Pay Attention to Labor Code Provisions
Likewise, California has specific Labor Code provisions which should be followed to ensure clear title to the startup’s IP. (Labor Code sections 2870-2872.) If the specific terms of the intellectual property assignment statute are not followed, a startup can easily find itself in expensive litigation over the ownership of its technology. That type of battle will undoubtedly infuriate angel investors or venture capital firms.
Know the Pitfalls of Employing a “Bring Your Own Device” Option
Technical measures should also be used to protect confidential information and trade secrets. Particularly given the open, collaborative environment, startups should use firewalls, passwords, redundancies, two-step authentication, and should avoid having workers use “Bring-Your-Own-Devices” (BYOD) for work projects. While popular, BYOD work environments make it extremely difficult to retrieve data when employees leave.
Most data theft results from employees uploading files to the cloud, or to various storage devices. To help protect against employees taking information, startups should monitor computer usage, and also make certain to conduct thorough exit interviews and screenings of new hires.
Implementing legal and technical protections can certainly help startups thrive while protecting the company’s IP.
This blog also appeared in RocketSpace Blog on March 1, 2016.