Protecting Your Ownership of Employee-Created Intellectual Property
Risk Management Update July_Aug 2010.pdf
By George Kobayashi
Most employers assume that any intellectual property ("IP") created by an employee in connection with the employee's job duties will automatically become the exclusive property of the employer. This assumption, however, is often incorrect, and the price the employer pays for not protecting its employee-created IP can be quite high. Recently, Stanford University found the price was in the millions of dollars because the assignment-of-invention-agreement it required its employees to sign turned out to be a legally ineffective promise-to-assign. Before we discuss how Stanford University failed its own "legal-writing" course, we will generally discuss the law regarding employee-created IP.
Generally, an employer's exclusive right in employee-created IP (including, inventions and improvements to existing products) largely depends on whether the employer and employee have entered into an agreement that fully and specifically provides that the employer owns IP created by an employee in the course of the employee's work duties. This agreement is often called an "assignment-of-inventions" agreement. Often, the assignment-of-inventions provision is contained in the general employment agreement the employee signs before he begins his employment. Further reference in this article to an "assignment-of-inventions" agreement includes employment agreements that specifically incorporate such a provision. In most cases, if an assignment-of-inventions agreement properly setting forth the employer's ownership rights in the employee's invention rights has been signed by the employee, the assignment-of-inventions agreement will control the parties' rights and the agreement will be enforceable in federal and state court. However, without such an agreement, the parties' rights will often be decided under the law of state in which the employment relationship exists -- and that law may not favor the employer.
Let's briefly examine an employer's rights in employee-created IP in two different situations:
I. EMPLOYEE INVENTIONS WHERE THERE IS NO ENFORCIBLE ASSIGNMENT-OF-INVENTIONS AGREEMENT.
In the absence of an assignment-of-inventions agreement, in most instances, an employee presumptively owns any inventions that he or she creates that are entitled to protection under applicable trade-secret or patent law. This means that the employer may have no ownership interest in an employee-created invention, even if the invention was developed on company-time or where the employee used company resources and facilities. There is no U.S. law that compels an employee to assign his or her rights andinventions to the employer. Although specific laws may differ from state to state, the following principles generally apply to all states:
1. Employees Who Are Employed to Invent: Inventions created by employees who are "employed to invent" (i.e., engineers, scientists, R&D personnel) are generally owned by the employer if the employee did not sign an assignment-of-inventions agreement. Even so, an employer is taking a substantial risk if it does not have this category of employee sign an assignment-of-inventions agreement that specifically provides for the assignment of inventions.
2. General Employees: The ownership of inventions invented by general employees (i.e., sales staff, marketing personnel), who have not been hired specifically to perform inventive activities will depend largely on the specific circumstances of the employment and the origin of the invention. The general rule, however, is that the employee will be the exclusive owner of such inventions if there is no contract that provides for the assignment of inventions.
Even if the employee in this circumstance becomes the owner of an invention, the employer may still retain certain rights in the invention referred to as "shop rights." A "shop right" does not necessarily provide the employer with any ownership interest in the invention, but provides the employer with a non-exclusive, royalty-free, non-transferable license to make, use and sell products embodying an employee's patentable invention. This right only applies within the normal scope of the employer's business, and, of course, it is much less valuable than the exclusive ownership right in an invention.
3. Inventions That Do Not Relate to the Business of the Employer: Inventions that do not relate to the business of the employer are generally owned by the employee if no assignment-of-inventions agreement has been signed.
II. EMPLOYEE INVENTIONS WHERE THERE IS AN ENFORCIBLE, WRITTEN ASSIGNMENT-OF-INVENTIONS AGREEMENT.
In the event there is an express and enforceable assignment-of-inventions agreement, the assignment-of-inventions agreement will supersede any state common-law right (as discussed above) with respect to ownership interests. Therefore, it is clearly in the company's best interests to require its employees to sign an enforceable and properly-worded assignment-of-inventions agreement before the employee begins employment with the company. But the agreement must specifically and clearly assign all of the employee-inventor's rights to the company and should also require the employee to assist the company in obtaining any applicable rights. In addition, these agreements generally must be fair, and in most cases, cannot broadly require the assignment of all inventions and/or intellectual property rights, especially if such rights have no relation to the company business. Moreover, some states, including California and Illinois, have laws that limit the effectiveness of assignment-of-inventions agreements where the invention was created outside the inventor's employment with the company.
In addition, for an assignment-of-inventions agreement to be enforceable, it must conform to the general principles of contract law, including, chiefly, that the employee must receive some benefit under the agreement, and it usually must be signed before employment begins.
III. STANFORD UNIVERSITY FAILS ITS OWN LEGAL-WRITING CLASS.
In September of 2009, Stanford University in California learned a most expensive lesson on the importance of a carefully-drafted assignment-of-inventions agreement. This lesson was taught by a federal court that ruled Stanford University had no ownership interest in three valuable patents relating to HIV therapies and treatments. The court's ruling in that case ("Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems") is a strong reminder that the "assignment-of-inventions" clauses in general employment agreements must be carefully drafted. Essentially, the facts the Court considered are these: in 1988, Stanford University sent one of its research assistants to an unrelated research lab to obtain information critical to the development of technology relating to HIV treatments and therapy. The employee signed a "Visitor's Confidentiality Agreement" when he first visited the outside lab. The lab's agreement stated that the visitor assigned his rights and interest in the ideas and "inventions" he devised as a consequence of the work he performed and observed at the research lab. Unfortunately for Stanford, the employee did not tell the university that he had signed the Visitor's Confidentiality Agreement.
The employee had earlier signed a "Copyright and Patent Agreement" with Stanford, but that agreement provided only that the employee "agrees to assign... right, title and interest in" his ideas and inventions created while he was employed by Stanford.
Eventually, the employee helped Stanford develop HIV treatments and therapies that incorporated some of the work he did while visiting the outside lab. In 1992, Stanford applied for and obtained three patents based, in part, on the employee's work. More than a decade later, Stanford sued the outside lab's successor ("Roche Molecular Systems") for patent infringement. The Court ruled against Stanford, in large part, based on the language of its Copyright and Patent Agreement.
Although the court opinion involves several complicated procedural rulings, the Court's main point was this: The Copyright and Patent Agreement that Stanford required the employee to sign did not actually assign the employee's rights in his inventions to the university -- the language was merely a promise to assign such inventions (I "agree to assign"). But the language contained in the outside lab's Confidentiality Agreement was a present assignment ("I do hereby assign"). The Court concluded that the Stanford employee had assigned to the outside lab his rights in any invention he contributed to as a result of his visit to that lab. Therefore, the employee had no rights left to assign to Stanford. On such a seemingly minor language distinction does a company's fortunes rise and fall.
Stanford must get a grade of "F" in the subjects of legal-drafting and managing employee inventions for its failure to draft an effective assignment-of-inventions agreement for its employees and for its failure to expressly prohibit its employees from signing agreements in the course of its employee's work without first obtaining the University's consent.
Employers cannot assume that all employee-created IP will automatically become the exclusive property of the employer. Where possible, employers should require their employees to execute an assignment-of-inventions agreement that clearly sets forth the employer's rights in and to the employee's inventions. The assignment-of-inventions agreement should include an express statement by the employee that he or she is assigning to the employer all rights associated with the intellectual property and that he or she will cooperate with the employer in prosecution of any patent applications. In addition, employers should also note that the laws controlling the ownership of employee-created IP can differ from state-to-state. Therefore, it is strongly recommended that the employer contact an experienced IP attorney to assist in the preparation of an assignment-of-inventions agreement that the courts will enforce.
Finally, in addition to requiring employees to sign enforceable assignment-of-invention agreements, your company should also develop a policy for employees who are specifically hired to invent. This policy should include, at a minimum, how such employees should keep their inventor logs (i.e., such as how they locate, use and identify information reviewed in connection with their inventing duties). The policy should also prohibit employees from signing any documents that relate to their inventing duties unless the company first gives them permission to do so.
Questions or comments regarding this article should be directed to George Kobayashi, Chair of the Masuda Funai Intellectual Property Practice Group (email@example.com), or Edward J. Underhill, Chair of the Distribution and Sales Practice Group (firstname.lastname@example.org).