It is a simple fact of life: employees quit. So it stands to reason that, on any long-running IT project, members of the team will leave the organisation – and the project – for any one of a hundred reasons.
But from time to time, developers and mangers involved in creating bespoke applications leave the organisation only to start work on a near-identical project at a competitor. Almost as threatening, they resign in order to form a start-up that plans to make the fruits of the project available to a wider market on a commercial basis.
UK high street retailer Marks &Spencer, for example, lost a number of key developers earlier this year. They had worked on a new security system at M&S that has reduced till-related fraud by 10%. The system analyses transactions based on rules and buying patterns, highlighting ones that stand out as unusual and alerting security staff by SMS message if it detects behaviour that matches a number of pre-defined rules. The system has been hailed by Microsoft as one of the most advanced implementations of its much talked-about .Net architecture. However, most of the development team behind its creation have now left M&S to create their own retail-focused high-tech venture.
Employees rarely leave their jobs purely out of malice or a desire to sabotage their employers. Some feel frustrated that their innovations are not being exploited to their full potential. Some believe their hard work deserves greater recognition and reward. And some even leave with their employers’ blessings.
But whatever the employees’ motivation to leave, their departure may result in a loss of valuable intellectual property – and competitive edge – for their employer. So what measures can companies take to prevent their intellectual asset seeping away as employees move on to take up new opportunities or capitalise on their past in-house work?
If a group from one specific project quits in a relatively short space of time, only to end up working together at a new organisation, their former employer may have grounds for legal recourse, according to Ann Bevitt, a lawyer in the labour and employment group at legal firm Morrison &Foerster. In these circumstances, departed employees can be accused of soliciting former colleagues, she says.
But more common are cases where an individual employee joins a competitor, either through their own initiative or after an approach from a headhunter. Some organisations have already taken measures to prevent such recruitment consultants locating and hiring the employees who produce the majority of their intellectual property (IP). ‘Non-compete’ clauses, for instance, are standard practice for many employers.
“The traditional thing is to put a clause in the contract that says the employee can’t work for a competitor or in the same industry for six months [after leaving their employer],” says John Handby, chief executive of IT directors’ forum CIO Connect. “But you have to be careful not to impose too wide a definition. If the employee leaves and can’t find a job because the clause makes it impossible for him to do anything else, he can take you to court.”
According to Bevitt of Morrison and Foerster, a non-compete clause provides an employer with some measure of protection. But, “there is an onus of reasonableness. The tougher the clause, the more senior the employee has to be,” she says. For example, geographical non-compete clauses, once popular ways of prevent employees working in locations where their former employer competes, are becoming less common as remote working becomes more prevalent.
Since they have this requirement of reasonableness, non-compete clauses almost invariably have expiration dates and cannot prevent an employee from working at a company that does not directly compete with his or her former employer.
Some organisations are more sensitive to employee defections than others. Simon East, CEO and founder of software start-up Cognima, resigned from Symbian, a developer of an operating system for mobile devices, after a disagreement over strategy. After leaving Symbian, he decided that one neglected area in the market was mobile device user interfaces.
Since his departure, Symbian has paid almost no attention to Cognima, says East. “I really haven’t heard anything from them. The mass market is not a space they’re playing in.” While the inspiration for Cognima comes in part from East’s time at Symbian, Symbian has not chosen to go after a non-competitor.
By contrast, Nigel King, CTO of radio broadband system developer PipingHot Networks, has heard a great deal from his former employer Nortel, where he worked for 15 years before being made redundant. “We were working on broadband radio access. For various reasons, Nortel had to get rid of about 90% of the workforce of a particular unit. It had no room for the project so I was out.” After consulting for eight to nine months, he was invited to join a start-up, PipingHot Networks.
Nortel executives were angry – even though PipingHot Networks does not directly compete with Nortel. “Nortel claimed we had stolen its intellectual property. But how could it show we were working on the same thing as it had been? They had sacked everyone who understood it – and I hired them as Nortel made them redundant.” As a result, the best Nortel could do was to make general claims – it was unable even to specify what IP PipingHot might have stolen. “I built PipingHot using the knowledge in my head. I’ve been in the business 30 years. They aren’t able to claim they own everything in my head,” argues King.
Like King, employees may argue that intellectual property actually belongs to them, not their former employer – and in some cases, they may be right. While common law states that any intellectual property developed by someone in the “normal course of their duties” at a company belongs to the employer, Ann Bevitt of Morrison and Foerster warns that relying on those rights to ensure ownership is not a wise decision.
“There are so many significant questions about what ‘normal duties’ are. What if the employee worked at weekends or in their own home on the project? They could argue that was outside of their normal duties. It’s far better to sort it out in the contract, so that the employee agrees to assign any IP to the employer and disclose promptly any inventions,” she says.
She advises that companies state these restrictions clearly in employees’ initial contracts. “It’s always harder to [enforce this kind of agreement] when people already in the company, because you have to renegotiate and they resent any new restrictions. When people first join a company, they accept some restrictions as normal.”
Intellectual assets can be protected in other ways – either through copyright or patent law. Software is automatically copyrighted, so if an employee takes and reuses any section of internally developed code, they have infringed the owning company’s copyright. However, if they simply re-create what the software does using different code, copyright no longer applies. The only way to prevent this kind of IP infringement is to do what few organisations have yet considered – apply for a patent on their ‘invention’.
According to Derwent’s Brocklehurst, “a patent is indisputable. Either you have it or you don’t. Even if [employees] do leave, taking their knowledge with them, and work for a competitor or for themselves, if you have the patent, they can’t use that knowledge without risk of being sued.”
A patent, he points out, applies from the date of application, not the point when it is allocated to a creator, so an organisation can file for a patent as soon as it conceives of an innovation. But Brocklehurst warns that filing for a patent is a public process and may alert rivals about potential business plans. “It’s like a game of chess,” he explains. “If you file too early, your competitors will know what you’re doing and where you’re going to be doing it, and will be able to plan accordingly. Leave it too late, and someone else might patent the idea before you.”
While software patenting per se is not permitted in Europe, software and business process patenting is still possible, providing the process involves a “technical advance”. In contrast, in the US, Amazon.com was able to patent its ‘1-click’ ordering system because it was a “new and innovative approach” – if a customer clicks the ‘buy’ button for a product on the Amazon site, unless he or she cancels the purchase within 90 minutes, the order will proceed using default delivery and credit card settings.
Patenting, because of its limited application to software in Europe and the UK, is something few CIOs in the region consider for bespoke software developed by in-house project teams. But that is changing, according to Wendi Bukowitz of management consultancy company PricewaterhouseCooper’s intellectual asset management practice. She advises companies to set up processes to investigate whether it is possible to patent their IP and where to dissuade IP theft – even if a UK patent is not possible, she says, a patent in the far larger US market might be applied for.
However, it is within the powers of an insider that wants to leave the organisation to undermine a patent application – and organisations need to guard against this where possible. “Any type of disclosure [wherein the innovation enters the public domain], whether by word of mouth, demonstration, advertisement, email or article in a journal, could prevent the applicant from getting the patent,” explains Brocklehurst. “It could also be a reason for having the patent revoked if one was obtained.” By revealing details of the technology to the outside world before leaving, the insider can compromise the patent and leave himself free to produce identical technology – although this is a rather unlikely outcome – “the stuff of James Bond”, according to Brocklehurst.
Fortunately, few employees plan to leave with the company’s ‘crown jewels’, says CIO Connect’s Handby. “In normal times, a good reward structure works very well. My perception is that [IP theft] not a big problem at the moment. During the dot-com era, it was a real worry trying to keep key people. If an idea wasn’t being developed, people would go to someone who would develop it or set up on their own. Nowadays, any start-up has got to have a very good business proposition and it’s going to take a lot of coding and hard work to make fly.” Most employees are not going to strike out by themselves in uncertain times, he says.
Equally, not all splits are unfriendly and can even be of benefit to the employer. Business intelligence and integration specialist Kalido, for example, started out as a division of petroleum company Shell, developing a solution to integration problems between Shell’s 46 installations of enterprise applications from German software giant SAP and between different divisions. In 2001, Kalido was spun off from Shell as a company with $8.6 million in yearly sales, after selling the software it had developed to other companies for five years – much to the benefit of Shell, which had taken a share of the profits during that period.
Likewise, Stephen Streater, CEO of streaming video company Forbidden Technology, was one of the original founders of Eidos, now famed as the creator of Lara Croft PC game series. Eidos had a following in the video editing market for a number of years before it decided to discontinue that side of its business.
“When Eidos closed down the division, [the company’s management] realised it would lose the benefit of all their investment in the technology,” says Streater. He persuaded them to allow his new company, Forbidden Technology, to license the technology from them. “It’s free money for Eidos. They get all the benefits of the IP but with none of the overheads,” he says. In turn, Forbidden Technology got a head start in the market using Eidos’ IP.
As such illustrations suggest, there are many simple measures companies can take to impede employees who want to leave to work on similar projects. In some cases, though, it can be easier just to help them – and get the rewards of their enthusiasm.