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WinTech Legal Insight for Start-Up and Established Technology Businesses

It’s Critical to Protect Your Proprietary Information

Posted in Development & Commercialization of Technology, Employment & Personnel Issues, Technology Transactions, Venture Capital, Private Equity and Other Financings

Lawsuits against employees and contractors, including consultants, for unauthorized use of a company’s confidential and proprietary information are common. For instance, on July 29, Abunassar Impact Basketball LLC filed suit against a former employee and a company he founded alleging that he “gathered Abunassar’s confidential and proprietary information in order to help start a new company which would directly and unfairly compete with Abunassar using Abunassar’s own proprietary information.” On the same day, Freeman Decorating Services Inc. filed a lawsuit against employees of a company it acquired claiming that the employees used Freeman’s confidential information to benefit the new employer. Clearly, companies need to be proactive in protecting what is almost always their most valuable asset — their proprietary information.

One of a number of ways to protect your company’s proprietary information is by requiring all employees, including founders, and all independent contractors, including consultants, to sign a Non-Disclosure or Proprietary Information Agreement (PIA). This does not apply only to staff involved in creating and using the proprietary information; rather, it applies to all employees and consultants/contractors who have access to proprietary information. In addition to source code, formulas, mask works, designs and techniques, proprietary information can include budgets, customer lists, marketing plans and other information. In the Abunassar case, the claimed proprietary information included the company’s business model, client lists, pricing and other non-technical information. In the Freeman case, the information claimed to be confidential was also not technical information.

PIAs are not just important for dealing with employees and contractors. Absent formal legal protection, such as a patent, when a company discloses confidential information to people who do not have an obligation of confidentiality, it jeopardizes the status of the information as confidential. Additionally, while a company may have a non-competition agreement in place, a PIA can be easier to enforce, and therefore may protect a company more effectively than a non-compete. Finally, any investor or acquirer is going to want to be sure that all of the company’s proprietary information has been adequately protected and PIAs are one important component of that protection.

Among other provisions, a PIA should include provisions (i) defining what information is proprietary (with a well-placed “including but not limited to” provision), (ii) protecting confidential information the company receives from third parties, (iii) assigning any rights the employee or consultant may have in the proprietary information it is providing to the company (including a “work made for hire” clause), and (iv) obligating the employee/contractor to keep the company informed of any inventions that the employee conceives of that relates to the company’s business, is created on company time or is created using company equipment. A PIA may also include a non-compete. A PIA may also have provisions prohibiting its employees and consultants from disparaging the company (especially given the advent of social media), and provisions prohibiting employees and consultants from hiring away your other employees. Extremely important is a provision authorizing the company to enforce the PIA by getting an injunction against the employee or independent contractor.

This blog post doesn’t cover other ways to protect your proprietary information. Stay tuned for a future post on trade secret protection.