2 November 2021
“Assets” generally refer to all kinds of economic resources that may be used to reap benefits and typically consist of tangible assets (land, factories, equipment, funds, and inventory, which exist in a specific physical form) and intangible assets. Among intangible assets, besides those intellectual property which are specifically protected by law such as patents, copyrighted works, trademarks, trade secrets, others like human resources (the knowledge, skills, and experience owned by the employees) or goodwill (including implied concepts such as commercial relations, enterprise culture or brands), although not included in the balance sheet, still fall within the scope of intangible asset.
Although intangible assets appear to be ethereal for a lack of physical form, still they actually have a more far-reaching impact than tangible assets on the gross margin (i.e., the percentage of the operating revenue less the cost of goods sold to the operating revenue) of an enterprise. For a knowledge-intensive industry, intangible assets generally account for a significant percentage of an enterprise’s total asset. In the event of any major incident that impairs intangible assets (such as patent infringement, leakage of trade secrets, impairment to goodwill, or poaching of key employees by competitors), not only the enterprise’s profitability will be undermined, but also the valuation of the enterprise by the capital market will also be greatly impaired (resulting in plummeting share prices).
Trade secrets often account for the largest share of intangible assets. In addition, creating comprehensive trade secret protection mechanisms is of utmost importance to an enterprise since “usually it would be unavoidable for the enterprise to must allow key employees to access or learn its trade secrets for its business operation” and “it is very difficult for the enterprise to successfully prove ‘the misappropriation of its trade secrets’ when it seeks remedies as a result of the misappropriation of its trade secrets.” According to our observations, in practice , although there are cases where external competitors occasionally misappropriate trade secrets through commercial spies or hackers, the misappropriation of an enterprise’s trade secrets is primarily attributable to “leakage by employees,” and trade secret lawsuits have often arisen from employee poaching in industries in recent years.
Therefore, an “employment agreement,” which governs the rights and obligations between an enterprise and its employees, is indubitably a very important factor of all kinds of legal tools that protect intangible assets. The common clauses on the protection of intangible assets in an employment agreement are separately and briefly discussed below:
I. Confidentiality clause
An enterprise generally includes confidentiality clauses in employment agreements to request the employees to maintain the confidentiality of the confidential information they have learned, accessed, or possessed in the course of their employment and to prohibit them from using or disclosing such information to others without the prior approval of the enterprise (employer), except for justified uses required in the performance of their job duties.
Although the “trade secrets” as defined under the Trade Secrets Act of Taiwan are protected through the provision on the “civil and criminal liabilities for infringement of trade secrets,” still the information whose confidentiality an enterprise expects its employees to maintain may not necessarily satisfy the “three criteria” stipulated by the Trade Secrets Law (i.e., the “secrecy,” “economic value” and “reasonable confidentiality measures” under Article 2 of this law, which to some degree are all indefinite legal concepts) in individual cases. In practice, courts also affirm that if a secret both parties have agreed to keep confidential is considerably specific and reasonable, the parties should also be bound by such an agreement under the principle of freedom of contract, even if the secret does not fall within the scope of the “trade secret” defined under the Trade Secrets Act. In practice, it is generally recognized that “confidentiality clause” per se is part of the “reasonable confidentiality measures” of trade secrets. The “specific imposition of confidentiality obligations on an employee in an employment agreement” thus would help solidify the finding that the information involved in an individual case is a trade secret protected under the Trade Secrets Act.
In addition, the survival provision (e.g., “the confidentiality clause will survive the termination, rescission or invalidity of the employment agreement”) and punitive/liquidated damages provision (e.g., “the employee shall pay a certain amount of punitive damages or liquidated damages for the violation of the confidentiality commitment) are common in practice ” so that the employee will remain subject to the confidentiality obligation even when there is no employment relationship and the employer’s burden of proof to substantiate the amount of damage suffered due to employee’s breach of the confidentiality commitment can be eased.
II. Ownership of the intellectual property rights derived during the term of employment
Although the Patent Act, Copyright Act and Trade Secrets Act of Taiwan have already contained some provisions on the ownership of relevant rights (i.e., different provisions differentiating between an employment relationship or a mandate relationship between the two parties, and whether the invention is completed in the performance of the employee’s job duties or not), still the wording of the law is relatively abstract and allows room for interpretation (e.g., what is meant by an invention completed by an employee “in the course of performing job duties”? Therefore, it is still useful for enterprises to specify in an employment agreement (e.g., to specify the circumstances under which the invention is deemed as the invention made in the employee’s “performance of job duties”) to avoid future disputes.
In addition, to allow the enterprise to grasp the intellectual property rights derived in the employee’s performance of job duties timely, some clauses in the employment agreement are also common in practice, such as:
1. The intellectual property rights in works, inventions …… or other results created by the employee in the performance of his/her job duties (the “Creations”) shall be vested in the employer or its designee, and shall vest in or be assigned to the employer upon completion of the Creations, regardless of whether such intellectual property rights are created or invented in whole or in part by the employee independently or jointly with others and whether they have been registered with the competent authority.
2. If the Creations mentioned above are created, the employee shall (1) immediately inform the employer in an appropriate manner and provide a written description of the creation process; (2) if, by operation of law, the intellectual property rights of the Creations are not vested in the employer, the employees shall provide documents required for the assignment of rights at the request of the employer; and (3) thoroughly comply with the employer’s internal policies concerning the management of intellectual property rights.
Provisions requiring the employee to “actively assist the enterprise to protect its intellectual property rights” (e.g., assisting the employer to apply for patents and assisting the employer to seek remedies in case of any infringement upon the relevant patents) are also common, since the employee should be very knowledgeable about the essence of the ” Creations that he/she completed in the performance of job duties.”
III. Non-competition clause
For executives or other key employees (such as the head of the research and development department) who possess important confidential information of the company, confidentiality clauses alone may not be sufficient to control the risks (of leakage of confidential information) (mainly because of the difficulty in proving that the employee has breached his/her confidentiality obligations). Therefore, it is common for an enterprise to further protect its trade secrets from being leaked through a “non-competition clause”.
General non-competition clauses often cover an employee’s non-competition obligation during the “term of employment” and even “for a specific period after the employment is terminated.” The fairness and reasonableness of the former are usually not questioned because of the employee’s duty of loyalty to the employer and the exclusive nature of the employment relationship. The latter is subject to the following conditions as required under Article 9-1 of the Labor Standards Act for such clauses to be valid: (1) the employer has proper business interests that require being protected; (2) the position or job of the employee entitles him or her to have access to or be able to use the employer’s trade secrets; (3) the period, area, scope of occupational activities and prospective employers with respect to the non-compete limitation shall not exceed a reasonable range; and (4) reasonable compensation for non-compete is provided.
In addition, a “non-solicitation clause” often accompanies a “non-competition clause” in an employment agreement and usually restricts employees from recruiting or poaching other employees of the enterprise, either on their own or for a third party, during their employment or even for a period of time after their departure. Although there is currently no law that directly stipulates the criteria for the “non-solicitation clause,” still such a clause should be reasonable to a certain extent to avoid being subsequently invalidated by a court on the ground that such a clause is obviously unfair.
Besides, it is common in practice for an employment agreement to specifically stipulate that “the employee who breaches the non-competition and non-solicitation covenants of the employment agreement shall pay the employer a certain amount of punitive damages or liquidated damages” so that the employer’s burden of proof to substantiate the amount of damage suffered due to employee’s breach of such commitment can be eased.
IV. Employee’s voluntary disclosure obligation to avoid employer from being “reversely contaminated” by the intangible assets of competitors
In addition to the above-mentioned measures to prevent the loss of intangible assets, an enterprise should also pay attention to avoiding “reverse contamination” by the intangible assets of competitors, such as infringement disputes between an enterprise and a former employer of its employee due to the employee’s breach of confidentiality obligations to the former employer and the use of the former employer’s trade secrets in his/her work, or the impairment to the enterprise’s operation when its employees are forced to leave their jobs due to breaching the non-competition obligations to former employers.
A common practice is to stipulate in an employment agreement that “for the creations or works set forth in a contract executed with another party, or for creations or works which have been completed prior to the employment, if the employee is under the obligation not to use, divulge or deliver the same pursuant to laws, regulations or any contract, the employee shall inform the employer upon execution of the employment agreement,” and that the employee specifically represents and warrants in the employment agreement that his/her employment at the enterprise “does not violate any contractual obligation to any third-party,” and that the employee will not disclose any third-party’s trade secrets to the enterprise.
As stated above, “intangible assets” are key elements for an enterprise to create and sustain its competitive advantages in the industry, but the protection of intangible assets is often costly. For example, in the case of patent protection, the cost of acquiring or maintaining the rights is considerable. In the case of trade secret protection, the “reasonable confidentiality measures” as required under the Trade Secrets Act may cause various operational inconveniences, which inevitably undermine the operating efficiency of the enterprise to a certain extent. Therefore, in addition to properly controlling risks through employment agreements, an enterprise is also advised to integrate different functional units such as research and development, legal affairs, IT, audit and even education and training to jointly plan and implement appropriate intangible asset protection mechanisms to strike a balance between “reducing the risk of damage” and “improving operating efficiency”.
For further information, please contact:
Albert Yen, Lee Tsai & Partners
lawtec@leetsai.com
[1] The authors are lawyers at Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and do not represent the position of this law firm.
