Introduction

Graduates entering the workforce may encounter various restrictive covenants within employment and independent contractor agreements. These covenants can be embedded within the main contractual documents or provided as standalone agreements. While some of these restrictions pertain to intellectual property, others serve broader purposes. The legal frameworks and practices surrounding these covenants can vary significantly across different jurisdictions. This discussion focuses on the context within the United States.

Key Terms

• Assignment of Ownership: Often referred to as a “work-for-hire agreement,” this clause clarifies that any intellectual property created by the employee during their employment is owned by the employer.
• Confidential Information: Typically defined within an employment contract, this term encompasses non-public information related to a business’s operations, products, or financial status. The scope of what constitutes confidential information can vary by employer and position, and it includes both documented and observed information.
• Restrictive Covenant: Clauses within a contract that impose limitations on the actions of the signatory. In the context of employment, these covenants are designed to safeguard the employer’s interests by restricting the employee’s activities both during and after their tenure.
• Work-for-Hire: Refers to any work produced by an employee within the scope of their employment and for which the intellectual property rights are assigned to the employer.

Types of Restrictive Covenants

• Non-Disclosure Agreements (NDAs): These agreements restrict the dissemination of specific information. The scope and terms of NDAs can vary, but they generally cover:
  • Information eligible for intellectual property protection (e.g., patents, copyrights).
  • Confidential information that, if disclosed, could undermine a party’s competitive advantage.
  • Trade secrets, such as proprietary algorithms.
  • Proprietary business processes or factory floor layouts, often referred to as “know-how.”
• Non-Solicitation Agreements: Also known as “non-poaching agreements,” these clauses prevent an employee from soliciting the original employer’s customers, vendors, or employees for a defined period. These restrictions may also be geographically limited and are expected to be reasonable in scope.
• Non-Compete Agreements: These agreements prohibit an employee from engaging in competitive activities, either by working for a competitor or starting a competing business, for a specified duration. The enforceability of non-compete agreements is currently under scrutiny due to recent actions by the Federal Trade Commission and subsequent federal cases. Some employers circumvent potential limitations by broadly defining confidential information within NDAs.
• Exclusivity Agreements: Similar to non-compete clauses, these agreements restrict an employee from working with competitors during their employment term.
• Indemnification or “Hold Harmless” Provision: This provision shifts potential risk and costs from one party to another, usually with regard to third-party claims. For instance, if the employer faces legal action for using the employee’s intellectual property, the employee is responsible for the associated legal costs. These provisions may be mutual (in which both parties agree to compensate the other in cases of breach of contract) or one-way (in which only one party agrees to this).

Understanding Employment Agreements

When you enter into an employment agreement, it is important to fully understand the terms. These agreements can use complicated language, so take the time to read all documents carefully before signing. If anything is unclear, don’t hesitate to ask questions.

Start by looking at the section that defines key terms, generally labeled “Defined Terms” or “Definitions.” This part explains specific words that will be used throughout the agreement. Keep in mind that these definitions may differ from their common usage and can significantly change the impact of the agreement. For example, “confidential information” might be defined narrowly to include only certain sensitive data, or it could be defined as “any information learned during employment.”

Seek clarification from your employer about any limitations imposed by the agreement. Employers often interpret terms broadly, so it is crucial to know how your expectations for future use of information related to your job might be affected. The norms in a business setting can be very different from those in academia; for instance, while publishing research is encouraged in academia, this may not be the case in a corporate environment.

Employers usually understand that employees will have questions about the agreement. At the same time, they are unlikely to be willing to negotiate its terms. It is also rare for employers to sign supplemental agreements requested by the employee.

Operating Under the Terms of Your Agreement

Typically, any intellectual property (IP) you create while employed will belong to your employer. This means they will control the rights to that IP, and you will need their permission to use it.

The terms may also set expectations for you to support the assignment or enforcement of the employer’s IP even after the term of your employment.

If you plan to bring any existing IP into your job, it is a good idea to document this to ensure it is not mistakenly claimed by the employer. Depending on the situation, you might need to formally ask for your existing IP to be recognized in the contract. Keeping detailed lab notebooks with proper version control is an effective way to track the development of your IP before, during, and after your employment. Informal methods, like simple emails, are usually not sufficient.

Sometimes, employers may include clauses in the agreement that allow some types of IP to be licensed back to you under certain conditions. Again, be sure to carefully review these terms and ask for clarification on anything that isn’t clear.

Expect employers to interpret the terms of your agreement broadly. It is easy to break the terms of an NDA through casual mentions about details of the employer or your work, in social media references, or even by simply taking or sharing photos at the office.

Litigation is relatively rare, but contracts have real-world impacts and should be taken seriously. For example, employers may share information about NDAs and non-compete agreements with competitors recruiting for related positions. This expectation is sometimes included in the terms of the agreement.

Requesting Help

UW-Madison staff and students seeking legal help in reviewing a non-disclosure agreement or other restrictive covenant can request assistance from the UW Law School Law & Entrepreneurship Clinic using the form linked below:

Apply for Legal Advice