Selling your everything: Non-comp clauses, IP, and employment contracts

March 8th, 2008 Posted in Business Law, Information Technology, Intellectual Property, Video Games, Virtual Worlds

I would like to write, today, about a murky subject I’ve been thinking about for a few weeks. The various forms the germ of this post has assumed over those weeks all stem from a particular type of clause – possibly all too common – in employment contracts: the IP/non-comp/we-own-you clause.

I’m not against these in principle, as for the most part, they started off as common sense non-competition agreements: the employee agrees to the usual loyalty/fiduciary duties that are generally assumed at common law, and he employer may extend it slightly – often with token compensation – but rarely beyond what common sense would allow.

For example, the following might be considered reasonable (especially if balanced with some consideration):

• The employee agrees not to work for a direct competitor in a similar capacity for a period of six months following leaving this company.

• This prevents the purchase of proprietary information and trade secrets through employee poaching, which is a lot cheaper than licensing.

• The employer acquires the IP rights to anything created by the employee during their tenure with the employer if that thing is related to the employer’s IP or industry.

• This helps to enforce the loyalty/fiduciary duties of the employee.

What bugs me is what we’re now seeing instead of those generally reasonable clauses. In some cases, the reach of the employer’s claim extends in terms of time, both forwards and backwards. For example:

The employee waives or the employer acquires rights to all IP that the employee creates or develops forever (or for some other unreasonably long time), or has ever created, that is related or similar or competitive to what the employer does.

Let’s see that in hypothetical action:

Jake Doe works for Silicon Expressions Software (SES) for 5 years as a game graphics engine developer. He writes the software that lets your character do back-flips while wielding the Sword of Many Furs. Jake leaves SES and joins Mountainview Entertainment (ME). For the reasonable non-comp 6-month sentence, he alpha-tests and debugs ME’s new networking protocol – a far cry from graphics engine development and a short whisper from long division and slide-rule trigonometry. After six months, he begins the real job for which he was hired – coding the physics engine for a virtual world so odd as to appear the love child of Douglas Adams and William S. Burroughs. SES sues Jake Doe – not in copyright or patent infringement – but in contract. A suit in IP would be reasonable. We could compare the new ME physics engine to Jake’s work at SES and see if there’s infringement. In other words, a qualification of the work and an expert analysis would happen and be argued. Instead, we have an action for breach – a very blunt instrument by comparison – because Jake was forever bound by his SES non-comp/IP contract.

Let’s look at another hypothetical:

Before SES, Jake ran his own software development company. He wrote a four-dimensional checkers-based game. It required some nifty manipulation of graphics buffers to simulate 4D in a 3D simulation on a 2D screen. Needless to say, the code is copyrighted in Canada and the United States, and the program is patented in the U.S. The SES contract assumes that it can own this, according to a loyalty ethic and the non-comp principle. Equity, in the court of common sense, tells us that the copyrights and patent are worth more than a fiduciary principle or a token amount of consideration.

I’ll leave the 3^rd party issues and questions for the comments.

Before I get on to the other unreasonable extension, I just ask how many employers actually attach a “Schedule X” or “Appendix Q” describing the employer’s “class or species of business” (to quote the Competition Act) and thus what counts as similar, related, or even competitive. Is the 4D checkers game related / similar / competitive to SES’s products? Perhaps an algorithm in the buffer manipulation is relevant. Perhaps this should be specified, inferred, or at least alluded to, in a schedule or appendix.

Tune in in a few days for the second part of this, when we will look at the second example of employers’ extension of the non-comp/IP clause in breadth.