Intellectual property & employment contract

How we protected an employee bringing their IP to new job

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Intellectual property & employment contract

Usually employment contracts grant intellectual property ownership to the employer, if the IP was created during the course of an employees’ duties. Our client was offered a new role as an investment company’s Chief Information Officer. Previously, he developed software that managed investment portfolios on a single investment management platform.  This software was our client’s intellectual property. The investment company planned to install and integrate this software solution on every computer system.

Gannons’ task

We ensured our client retained ownership of the software’s current and future intellectual property rights. We:

  • Assessed the employment contract for unusual or onerous terms, particularly:
    • Restrictive covenants,
    • Notice,
    • Pay and bonuses;
  • Ensured the employment contract did not assign any intellectual property rights created before the employee started employment; and
  • Added terms that authorised the investment company to use the software, yet ensured our client retained the intellectual property ownership.

Employment contract

Employers usually draft standard-form employment contracts, that take no account of particular circumstances.  It’s unlikely the investment company thought about intellectual property retention and licence agreements. In this employment contract, unusual or onerous terms included:

Probationary period

The employment contact required an extensive probationary period.  We removed this clause. We advise employees to resist serving a probationary period.  A probationary period dilutes the protection of an initial fixed term, or long notice period,  if the employer can terminate within the first few months on minimal notice.

Payment in lieu of notice (‘PILON’)

The employment contract contained a PILON clause.  PILON clauses enable employers to dismiss the employee with immediate effect and still enforce restrictive covenants.

If the PILON clause is deleted:

  • Payment made to the employee, on termination of employment, are damages for breach of contract for loss of their contractual entitlement over the notice period;
  • The first £30,000 of the termination payment is free of income tax;
  • The employer cannot rely on the restrictive covenants.

If the employment contract contains a PILON clause, that the employer uses when terminating employment, the employee:

  • Is entitled, in principle, to be paid the full amount of their notice pay as a debt; but the PILON payment
    • Is taxable in full;
    • Is usually paid in instalments during the notice period, and not in one lump sum.

Our client chose to delete the PILON clause.

Liquidated damages

The employment contract contained no such clause. We negotiated the exact amount our client would receive in the event of termination in breach of contract.  Thus our client gained certainty regarding the termination payment, on termination of employment.

Salary

The investment bank had included a salary review clause. We ensured our client gained a guaranteed salary increase inline with the Retail Prices Index.

Bonus

Our client’s bonus clause was discretionary. As usual, we ensured the discretionary elements were subject to the employer’s obligation to act reasonably.

Some employers avoid paying bonuses by terminating employment just before calculating bonuses. We carefully reviewed the effect of termination of employment on bonus payments.

Restrictive covenants

We limited the effect of our client’s restrictive covenants. We decreased their length and limited their scope by narrowly defining the areas of business.

Licence agreement for use of our clients’ IP

The employment contract sought to assign our clients’ intellectual property rights to the investment firm, without reward.

To use our client’s software, the investment company needed the owners’, i.e. our client’s, permission. Without our client’s permission, they would infringe our client’s intellectual property rights. Merely loading our clients’ software onto their computer would involve copying it, which would infringe our client’s intellectual property rights.

However, the software agreement details were negotiable.  We ensured our client retained ownership of the current and future intellectual property rights. Some provisions we negotiated included:

Permitted use of intellectual property

The investment company wanted the following to use the software:

  • Other corporate group companies;
  • Unconnected parties, which provided IT related services to the investment bank;  e.g.
    • Third-party maintainers,
    • Contractors of those companies.

We tightened these requests in the licence agreement by defining:

  • Restrictions of use;
  • Confidentiality; and
  • Pricing.

Our client would find it harder to police the use of his software, in accordance with agreed terms, the more parties who used it. It was difficult to prevent unauthorised use, because:

  • Our client did not have contractual arrangements in place with all users;
  • Unconnected parties and service providers could be our client’s competitors;

We safeguarded the intellectual property against breaches and unauthorised activities by adding checks and balances to the employment contract.

Pricing was relatively easy to negotiate. We calculated royalty payments on anticipated usage. This enabled our client to measure usage, and charge accordingly.

Our client accepted that some third parties, requested by the investment company, could use the software.  However, we negotiated additional security.  The investment company provided our client with an indemnity to protect him from any losses, including:

  • Negligent or unauthorised use of the software by the investment company or a third party;
  • Unauthorised modifications or copying.

IP ownership upon employment termination or resignation

Circumstances when employment can be terminated, include, but are not limited to:

  • Notice being given by either employee or employer;
  • Mutual agreement;
  • Dismissal by the employer;
  • Termination by the employee;
  • Expiry of a fixed-term contract.

We recognised that employment could be terminated. The issue was after termination of the employment contract, who owned the licenced intellectual property.  The IP included both the object code and the source code software versions.

Accordingly, we negotiated that on termination (for any reason), the investment company:

  • Permission to use the software also ceased.  If the time arose, this would open up negotiations for our client.
  • Returns to our client all elements of his software;
  • Provides a written undertaking confirming that no further use would be made by the company or its agents.

However if our client resigned, the investment company had an option to negotiate new licence terms and royalty arrangements. So, e.g. if our client changed employer, he could benefit from royalty payments, if he was happy for the investment company to use his software.

Monitoring use of software

Our intellectual property terms in the licence agreement ensured there were mechanisms to prevent and enforce unauthorised software usage. Each additional software user was registered with our client. Thus the users are monitored. Royalties are calculated from this log.

Takeway

This case demonstrates you should:

  • Have your employment contract reviewed. These contracts are always drafted in the employers favour.
  • If you want to retain your intellectual property ownership rights, review and negotiate the  intellectual property clauses.
  • Reflect the reality that any licence may out-live the employment relationship. Besides usage and revenue, define what happens on termination of employment or the licence agreement.