South Carolina Lawyer
SC Lawyer, May 2004, #4.
Intellectual property protection as an effective covenant not to compete
South Carolina LawyerMay 2004Intellectual property protection as an effective covenant not to competeBy Douglas W. Kim and John A. DemosProtecting a company's intangible assets is a challenge that has existed for many years. One of the most valuable intangible assets is the knowledge, know-how and technical information possessed by a company. Particularly challenging is how to protect this asset when it is created and monitored across the employee base. Today's difficult economic climate has increased the number of employees leaving companies to explore new opportunities in the business world. Also, employees are more and more beginning to moonlight while starting their own companies or working for second companies while engaged in employment with other companies. Further, companies must deal with independent contractors as employees. While hiring an independent contractor may be a good business decision as far as saving in the short term, in the long term there are several issues with that employee's rights as it relates to the work he completes for the company.
An employee leaving a company can have severe repercussions on that company, particularly when several employees leave at once. The company not only needs to hire replacements, insuring the business continues to operate without the employee, but also needs to protect itself from employees unfairly using or competing with the company by improperly using company assets.
Generally, employees work in a specific field for a company and obtain and develop knowledge, know-how and technical information that can become the property of the company. This information can be extremely useful by a competitor if that employee decides to work for the competitor. It is not uncommon for an employee to leave one company to start his own competing company or to go to work for a competitor. While it is permissible for an employee to take existing skills and general knowledge to another company, the employee cannot take proprietary information, trade secrets or other protectable intangible assets. To prevent the employees from taking such information, companies need to establish methods for protecting themselves from such misappropriation.
Oftentimes, employees leaving to start their own companies moonlight in order to work on their new corporate endeavors. They may use knowledge and inside information from their current employer to help them create their new company and will eventually compete with their current employer. This moonlighting may also take away from their effective performance while at work. Companies would be wise to limit the ability of their employees to moonlight.
Companies may hire independent contractors which again may allow that independent contractor to use the company's property to compete with the company. Specific to independent contractors, there are the issues concerning ownership of created intellectual property. For example, when an independent contractor creates source code, the independent contractor may own the copyrights in the source code, not the hiring company.
Companies, especially those in competitive technology fields, seek to protect the intangible asset of their employees' and consultants' knowledge. Through the normal course of employment, especially in research and development, employees gain information and knowledge that gives companies their competitive advantage. Clearly, the ability to prevent the improper use of such information and reduce or eliminate competition from former employees is one advantage that furthers these goals. A covenant not to compete...