The Corporate Spinoff

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A third means by which nanotech companies may be started involves employees, usually researchers, who leave a large corporation. There is an old tale of Silicon Valley that "once upon a time everyone working there worked for IBM."31 At the time of this writing, few nanotech start-ups have spun out of large companies. Yet, as the field develops, some brave entrepreneurs are likely to take the leap.

The intellectual property issues associated with a group of researchers leaving a large company to start a nanotechnology company are more complex than those associated with a university or laboratory spinoff. In some instances, circumstances will be ripe for a peaceful divorce, and the parent company will support the launch of the start-up. The large corporation may choose to invest in the people leaving rather than litigate against them. A parent company is more likely to support the spinoff under two circumstances: (1) when the start-up's technology will complement, rather than compete with, the parent's technology; and (2) when the invention still requires a great deal of research and development for commercialization.32 If the parent company is cooperative, the startup could seek to license technology and/or obtain their financial assistance. Large corporations are interested in these kinds of arm's-length relationships, where they can maintain a financial interest in a related technology but not be responsible for fully funding or managing the company. For example, corporate-backed venture capital funds are becoming increasingly popular, because they can be used to maintain influence over new companies and pave the way for possible acquisitions or alliances later.

When a parent company does not support the birth of the start-up, complicated and costly intellectual property battles can ensue. Most scientists and engineers have agreements with their employers that any innovations made by the employees at the workplace belong to the company. Thus, employees who leave to start their own company face an undesirable prospect: being sued by their former employer. A carefully timed lawsuit can cripple a startup before it can raise capital and begin to take flight.

Suits launched by the parent company against its former employees are likely to be based on either trade secret law or contract law. First, the parent company might argue that, because the concept for the invention originated from research at the parent company, it owns the rights to the technology. In theory, the ideas generated in the workplace are subject to trade secret protection. In practice, however, courts generally side with former employees when the issue presented is timing of the invention.33 As one legal scholar writes, "Ex-employees usually receive the benefit of the doubt when a case presents a close question of timing, i.e., when the employer suspects (but cannot prove) that an ex-employee actually came up with the idea for an invention while still employed. Hence it is in many cases quite feasible to leave a firm after one arrives at the general notion of an invention, but before any of the provable milestones of invention arrive."34 As long as the employees take nothing tangible from their former employer, they are likely to prevail.35

Even if the parent company cannot argue that it owns the invention, it can invoke the doctrine of inevitable disclosure to prevent former employees from starting a competing company. The doctrine creates an evidentiary presumption that an employee cannot help but rely on her knowledge of the parent company's trade secrets in her new job. Some courts have used the doctrine to enjoin employees from working for competitors for a period of time or limiting the scope of the employee's duties.36 However, most courts will only apply the doctrine when the former employee acted in bad faith.37 For example, in the leading case, the court emphasized the former employee's lack of candor and "out-and-out lies" to his former employer.38 Generally, courts do not invoke the doctrine when the former employer simply fears that the departing employee may inadvertently or unconsciously use or disclose his or her knowledge of trade secrets.39

Parent companies might also assert two different arguments against former employees under contract law. First, many employers include "trailer" or "holdover" clauses in employment contracts, which state that inventions made after the employee leaves the company are still owned by the employer. Courts construe these provisions narrowly. Some courts have completely voided the provision when the period of time is unreasonable40 while other courts have upheld trailer clauses that only apply to inventions made using the parent company's trade secrets.41 As one legal scholar concludes, trailer clauses "have limited effect[.]"42

A second legal attack might rely on post-employment covenants not to compete. A non-compete clause prevents an employee from working for a competing enterprise after leaving the company. Different states have different rules regarding the enforceability of non-compete clauses. California law voids any "contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind.. ."43 While many states do enforce non-compete clauses, they are construed very narrowly. Generally, to be enforceable, a non-compete covenant must be reasonable "in view of the totality of the circumstances, including the scope of geographical, temporal, and competitive activity restrictions."44

Notwithstanding the limited utility of trade secret law and anti-compete covenants in court, the parent firm can wield a lawsuit to strangle the spinoff. Indeed, the uncertainty of the law creates "incentives for frivolous litigation designed to harass competitors rather than to obtain relief for trade secret misappropriation."45 When starting the company, entrepreneurs should take several steps to minimize the risk and costs associated with litigation involving the former employer. First, and most important, entrepreneurs should make efforts to establish positive relations with the former employer to minimize the risk of a suit. Second, to increase the likelihood of a successful and rapid conclusion, the start-up should take clear and definite measures to prevent the former employer's trade secrets from having any impact on research and development. Finally, the start-up should maintain copious development records, such as inventor's notebooks and invention logs. Comprehensive records are powerful evidence to rebut claims of trade secret misappropriation.

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