Employee contracts and protecting intellectual property (IP) are two key areas that start-ups and SMEs tend to overlook. This can be a costly mistake, as Edward Chatterton and Helen Colquhoun from DLA Piper explained at a Chamber roundtable on 19 February.
Chatterton, who is co-head of the firm’s IP practice in Asia, introduced the five key pieces of IP, three of which are registrable: trademarks, patents and designs. The first trademark ever registered is still used today – the red triangle for the drink Bass.
“So trademarks are potentially a very powerful IP right of SMEs and businesses,” he said.
But trademarks must be distinctive, which is one of the key things that companies get wrong, Chatterton said. “Very often they come up with a brand, but don’t search beforehand. Then, when they use their trademark, they are subject to the threat of infringement proceedings.”
The second key IP is patent rights, which must include an inventive step, and the inventor must not disclose the patent before filing. The third is designs, which protect the visual design of objects that are not purely utilitarian, such as shape.
The two major unregistered rights are copyright and confidential information.
“Copyright is one area where we see a lot of SMEs creating errors,” Chatterton said. “If an external person creates something and it is not documented, in the absence of any agreement, this will be owned by the creator, not the company that commissioned it.”
Confidential information also must not be disclosed externally. The secret recipe for Coca-Cola is a classic example, and is worth “incalculable amounts,” Chatterton said.
So why is IP protection so important? Firstly, you can sell or licence it to create value streams. It is also important for capital raising, as investors prefer companies that have protected their IP.
“I’m fully aware that SMEs have lots of competing demands on their budgets,” Chatterton said. “But you should not put IP to one side.”
Generally, IP created in the course of employment belongs to the employer. But there are grey areas.
“It is very important in employment contracts to define what the duties of the employees are. If not, the employee could develop something and argue that it was not created in the course of employment.”
Colquhoun, DLA Piper’s head of employment in Hong Kong, elaborated on the issue of contracts and employee rights in general.
“The good news for businesses is that Hong Kong is a pretty employer-friendly jurisdiction, particularly compared to other Asian countries,” she said. “But there is a misconception that this means straightforward.”
She noted that start-ups and SMEs often make a lot of mistakes when drafting employee contracts.
“You would be amazed at how often I see a two-page contract for a director and a 15-page one for a secretary,” she said. “Tailoring is critical. Junior staff contracts should be short and straightforward, while for senior people you need more detailed contracts to ensure you are properly protected.”
Important elements, such as IP, should be in the individual’s contract, not just the staff handbook.
Contracts should also be regularly updated. In a dispute, one line of defence that an employee can use is that their contract is not enforceable, for example, if it has not been updated for several years. Employers must be able to show that their contracts are appropriate, tailored, and are enforced when they are breached.
“Trust can be a dangerous thing,” Colquhoun said. “I am constantly amazed at the valuable things that people are taking on trust.”