Keywords: intellectual property, intellectual property rights, IP, IPR, non-disclosure agreement, NDA, confidential, protection, the Republic of Azerbaijan

Abstract

This article provides information on the importance of a non-disclosure agreement (“NDA”) for the protection of intellectual property rights (“IPR”). The provisions need to be included in NDA for the protection of IPR, legal consequences in case of a violation of any provision of NDA, and appropriate regulations within the relevant legislation of the Republic of Azerbaijan are discussed in this article. It is reviewed particularly in the context of the relationship between an employee and an employer regarding intellectual property (“IP”).

I. Introduction

NDA is a legally enforceable contract that preserves confidentiality between the contractual parties. By signing NDA, the parties agree and acknowledge to protect confidential information disclosed by any party to the other and undertaking not to disclose, publish, distribute, divulge, release, copy, modify and/or use such information without (written) consent of the disclosing party. There are various situations where NDA is applicable, one of which is to preserve IPR. NDAs prevent candidates, employees, and potential business partners from revealing confidential information about your company.[1]

II. Confidentiality for intellectual property and using NDA as a tool to protect IPR

One of the most valuable assets that many companies possess is their IP. There can be several circumstances entail disclosing IP and giving access to another legal entity and/or individual to the relevant information. In regular business, it is sometimes necessary to share a trade secret with another company, discuss new inventions with potential investors.[2] A manufacturer may need to have tests carried out on a prototype, and does not want competitors to know details of the new product, [3] the employers need to involve the employee(s) to the development of the IP of their company, a startup company cannot keep inventions locked away from investors. In such cases, the issue of confidentiality of disclosed information arises.

There are certain ways to protect IP, one of which is registering IPR. Despite this, there are also enough cases that ensure IP to be exploited without any registration. When you do not officially register your IPR to get appropriate legal protection, you should work hard to keep trade secrets confidential, protect a company’s valuable know-how and business information,[4] create a protection system for the IP strategy of a company, have employees sign a nondisclosure agreement, and pursue legal action when necessary.[5]

NDAs are a necessity in many cases and allow you to grow your business by having broader conversations.[6] A well-drafted NDA should serve the best interests of innovators of new products and intellectual property, especially if the intellectual property is disclosed publicly.[7] During employment, there is a duty implied into all contracts of employment that an employee will conduct themselves with fidelity and good faith. This duty includes an obligation to respect the confidentiality of the employer’s commercial and business information.[8] Accordingly, contracts forbidding employees to disclose the trade secrets of a company have become part of the new-hire routine in today’s business world.[9]

III. Key points for NDA on the protection of IP 

For clarity and specificity, I will write down key points through NDA concluded between an employee and an employer. NDA usually comprises four specific topics: (1) ownership of inventions; (2) non-disclosure provisions; (3) non-solicitation provisions; and (4) non-competition provisions:[10]

1. Ownership of inventions – determines who owns the IP, and marks what the employer’s position is concerning IP ownership. Ownership of inventions usually points out the holder of the IPR under the legislation of the Republic of Azerbaijan. The understanding of ownership of inventions and patent rights under UAE Laws is well-established and worth noting: usually, ownership of an idea or invention is determined by whom, where, and in what context the creation of the idea took place.[11] NDA should also specify who owns IPR that may result from the disclosed ideas or the work done during employment. Without a clear written arrangement regarding those IP rights, it can be contentious whether the IP rights to the new innovation or object belongs to the employee or belongs to you as the employer.[12]

2. Non-disclosure provisions – are needed to state that information received by the other party will be disclosed only to (a) person(s) involved in the protection system for the IP strategy of the company. NDA should prohibit employees to use and disclose trade secrets or confidential information during or after employment and have a way to identify The discloser should tell the recipient when the information is of a confidential nature. Otherwise, no one will know whether the information is confidential or not. The extent to which information is protected by the implied duty of confidence will depend on the type of information and the particular circumstances.[13]

3. Non-solicitation provisions – forbid an employee from soliciting the business of the employer’s customers.[14] For example, Texas non-solicitation provisions prohibit the employee, both during employment, and for a period of time thereafter, from soliciting the employer’s clients, employees, or both.[15] However, taking into consideration that everyone has the right to choose independently, based on his/her abilities, kind of activity, profession, occupation, and place of work[16] under the legislation of the Republic of Azerbaijan, the validity of such provisions in the contract between the parties is controversial. Thus, if non-solicitation clauses are disputed in the relevant court of the Republic of Azerbaijan, such clauses may be considered void.

4. Non-competition provisions – prohibit employees from competing against the employer both during and after the term of employment.[17] They are most commonly included in an employment agreement where the employee promises that, upon leaving the job, he or she will not work for a competing firm.[18] The employee will not engage or become interested, directly or indirectly, as an owner, employee, director, partner, consultant, through stock ownership, investment of capital, lending of money or property, rendering of services, or otherwise, either alone or in association with others, in the operation, management or supervision of any type of business or enterprise that any time during the restriction period is in competition with the company business.[19] As long as these terms are at stake, such clauses need to be examined to ensure its duration, geographic scope, and scope of restricted activities are reasonable.[20] Obviously, there is no guarantee that whether the court would sustain the employer’s claim if the case will be brought to trial concerning non-competition However, each case is decided on its own merits.

In addition, it is advisable to add “liquidated damages” clauses, which are designed to set out the monetary consequences of the violation of NDA. Such clauses determine the amount of damages that the employee compelled to compensate the employer in the event of the breach of NDA. However, such clauses may not be enforced by the court unless you substantiate that the stated amount is based on actual damages, and it is not just a random number and it is not a penalty aimed just to punish the employee.

IV. Consequences of the violation of NDA: within the framework of the legislation of the Republic of Azerbaijan

Depending on the conditions laid out, the consequences of violating NDA can change. It can lead to a monetary penalty, a lawsuit, and/or termination of employment. Whilst NDA is a civil contract, in case it involves the theft of a commercial secret or the other situations governed by the relevant legislation, this can be concluded as a crime and in such cases, the consequences will be more severe, such as corrective works, even imprisonment. Under the legislation of the Republic of Azerbaijan, there are following circumstances of the violation of NDA and their consequences:

a) If the distribution of information constituting commercial secret for a mercenary or any other personal purpose without the owner’s consent results in a small amount of damage (not more than two hundred thousand manats) the wrongdoer shall be fined from two to four times of the damage (gained profit) caused by the administrative offense.[21]

b) Collecting of a data which is a commercial secret, by the abduction of documents, payoff or threats, as well as by other illegal means with intent of disclosure or illegal use of this data is punishable by the penalty at an amount from one thousand five hundred manats up to two thousand five hundred manats, or corrective works for the term up to one year, or imprisonment for the term up to two years.[22]

c) Illegal use or disclosure of a data which is a commercial secret, without consent of their owner, committed on mercenary or another personal interest with causing damage in the large amount is punishable by the penalty at an amount from three to five times of the amount of the damage (gained profit), incurred as a result of a crime or by corrective works for the term up to two years or imprisonment for the term up to six months.[23]

It should be noted that the concept of the commercial secret is accurately defined under the relevant legislation of the Republic of Azerbaijan. According to Law of the Republic of Azerbaijan on Commercial Secret, the commercial secret is the data connected with productive, technological, management, financial and other activities of legal entities and physical persons which disclosure without the consent of the owner can cause damage to their legitimate interests.[24]

Considering the above-mentioned provisions, there is no specific amount that can be applied in the event of a breach of confidentiality under the legislation of the Republic of Azerbaijan. Therefore, it would be appropriate to indicate the number of monetary penalties in NDA. This can initially create an impression, and it may prevent the employee from violating NDA and the employee will be more cautious about confidential information. Although as stated before, the amount specified in the contract may not be taken into consideration by the court, whereas this may give the employer some confidence during employment about secret information of their company.

The violation of NDA can also lead to termination of employment. The Labor Code of the Republic of Azerbaijan defines the grounds for terminating an employment contract, but the breach of confidential information of the company is not stated as a ground for termination. However, when entering into employment relations the parties may agree on conditions for the termination in addition to[25] the grounds that are provided in the Labor Code. Thus, termination of employment due to a breach of confidentiality must be specified in the employment contract.

V. Conclusion

After all, IPR is the most valuable asset of successful businesses, and therefore, there is a need to protect them. It is irrelevant whether the company trusts that the party whom it discloses its trade secrets, confidential information, or the subject matter of IP of its company will respect confidentiality. If the company intends to protect its IPR and to take appropriate measures beforehand, it should be aware of the risks and carefully define terms and conditions in the contract prior to the disclosure of any subject matter of IP. If NDA on the protection of IPR is well-drafted, the company’s benefits will outweigh its risks. Furthermore, this will contribute to building a strong, healthy, and reliable collaboration between the parties.

 

Bibliography.

[1] Deborah Sweeney, The 3 main types of Intellectual Property Protection, explained, updated on January 29, 2020, available at https://www.fundera.com/blog/three-ways-to-protect-your-intellectual-property;

[2] Katie Gordon, NDA and IP deals, available at https://sites-penningtons.vuturevx.com/50/2205/landing-pages/nda-and-ip-deals.asp;

[3] Vivien Irish, Director of Intellectual Property, NXT plc, September 2003, available at https://www.wipo.int/sme/en/documents/disclosing_inf_fulltext.html;

[4] Joanelle O’Cleirigh and Colm Maguire, Ireland: Know How To Protect Your Know-How, July 18, 2018, available at https://www.mondaq.com/ireland/trade-secrets/720336/know-how-to-protect-your-know-how;

[5] Erik J. Martin, Contributor, Everything You Need to Know About Intellectual Property, Published April 29, 2019, available at https://www.uschamber.com/co/start/strategy/how-to-protect-intellectual-property;

[6] Ariel Soiffer, NDAs, Confidentiality Provisions And How To Make Sure Your IP Stays Yours, May 15, 2015, available at https://techcrunch.com/2015/05/15/ndas-confidentiality-provisions-and-how-to-make-sure-your-ip-stays-yours/?guccounter=1;

[7] STA Law Firm, United Arab Emirates: Non-Disclosure Agreements for the Protection of Business, available at https://www.mondaq.com/Intellectual-Property/854048/Non-Disclosure-Agreements-For-The-Protection-Of-Business;

[8] Confidentiality for intellectual property development, January 14, 2019, available at https://hjsolicitors.co.uk/article/confidentiality-for-intellectual-property-developments/#section-6;

[9] Karla C. Shippey, A short course in international intellectual property rights, 3rd edition, page 14;

[10] Deborah E. Bouchoux, Intellectual Property, The Law of Trademarks, Copyrights, Patents and Trade Secrets, fourth edition, page 475;

[11] Ayen Biar, Ownership of Inventions: Employers vs. Employees, December 2011, available at https://www.tamimi.com/law-update-articles/ownership-of-inventions-employers-vs-employees/;

[12] Aileene Koh, Before the NDA, own the IP rights, January 30, 2017, available at https://www.everynda.com/blog/before-nda-own-ip-rights/;

[13] Confidentiality for intellectual property development, January 14, 2019, available at https://hjsolicitors.co.uk/article/confidentiality-for-intellectual-property-developments/#section-6;

[14] Michael S. Sirkin, Lawrence K. Cagney, Executive Compensation, 2006 (date originally published 1996) page 4-43;

[15] Robert Wood, Non Solicitation agreements in Texas, available at https://www.texasnoncompetelaw.com/articles/nonsolicitation-agreements/;

[16] The Constitution of the Republic of Azerbaijan, November 12, 1995, Article 35.2;

[17] Deborah E. Bouchoux, Intellectual Property, The Law of Trademarks, Copyrights, Patents and Trade Secrets, fourth edition, page 476;

[18] Gerald R. Ferrera, Mystica M. Alexander, William P. Wiggins, Jonathan J. Darrow, Cheryl Kirschner, The Legal and Ethical Environment of Business: An Integrated Approach, 2014, page 483;

[19] Information Security, Securing Intellectual Property: Protecting Trade Secrets and Other Information Assets, 2009, page 170;

[20] James T. Hunt, Jr., Understanding Non-Compete Provisions, April 28, 2014, available at http://www.tenagliahunt.com/understanding-non-compete-provisions;

[21] The Code of the Republic of Azerbaijan On administrative violations, December 29, 2015, № 96-VQ, Article 431;

[22] Criminal Code of the Republic of Azerbaijan, December 30, 1999, № 787-IQ, Article 202.1;

[23] Criminal Code of the Republic of Azerbaijan, December 30, 1999, № 787-IQ, Article 202.2;

[24] Law of the Republic of Azerbaijan on Commercial Secret, December 4, 2001, № 224-IIQ, Article 2.0.1;

[25] The Labor Code of the Republic of Azerbaijan, February 1, 1999, № 618-IQ, Article 75.1.

 

Posted on SSRN on 14 October, 2020, available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3694375

 

The articles on this blog are not, nor are they intended to be, legal advice. You should consult a lawyer for individual advice or assessment regarding your own situation.