Managing IP Ownership Issues with Employment Agreements

Benjamin Franklin is credited with coining the axiom that "an ounce of prevention is worth a pound of cure." Allegedly, Franklin actually made the statement in connection with fire safety, which was an avocation for him. Today, the axiom applies perfectly to corporate efforts to manage intellectual property (IP) issues. Many companies rely on old proprietary rights forms or use generic forms collected by the human resource department (HR) with little thought given to downstream consequences.

This article advocates for having in-house or retained counsel make periodic reviews of corporate employment agreements and for having counsel involved in any new hire where there is strong likelihood that the position will lead to the creation of IP. Furthermore, interviewing a potential new hire with prior IP experience for a position that is expected to generate IP should receive special attention in order to avoid conflicts with a prior employer and any prior agreement concerning IP.

The IP provisions in employment agreements frequently include a holdover or surviving provision that obligates the departing employee to assign post-employment inventions that have a tangential relationship to the employer's business back to the employer. These provisions present several problems.

For the new employer, this information should be gathered before hiring the potential employee in order to evaluate the possibility of a conflict with a prior employer and determine if a prior agreement creates any limitation on the potential employer's ability to engage in the work of the proposed position. In requesting this information, it is important to have the potential employee identify all prior inventions, whether or not patented and/or assigned to another company or previous employer. If the individual is hired, this information should be documented in the new employment agreement.

For the prior employer, the issue turns on whether the provision surviving the prior employment is reasonable and enforceable. Many jurisdictions view a surviving assignment provision as a post-employment restriction and analyze them in a manner similar to the approach taken with non-compete agreements. Namely, courts consider whether the time and scope of the agreement provisions are reasonable and whether the provisions unduly hinder the employee's ability to work and use acquired skills.

The Supreme Court of New Jersey in Ingersoll-Rand v. Ciavatta, 542 A.2d 879 (N.J. 1988) provided  a helpful overview of the issues with assignment provisions from prior employment agreements that survive the previous employment. In  Ingersoll-Rand, the Supreme Court of New Jersey included the following instructive footnote:

"As an aid to employer's drafting future holdover agreements, we emphasize the following language of Paragraph 1(c) [Ingersoll-Rand agreement] that applies the agreement to 'inventions, copyrights and/or designs ... if conceived as a result of and is attributable to work done during such employment and  relates to a method, substance, machine, article of manufacture or improvements therein within the scope of the business of the company or any of its affiliates.'" Ingersoll-Rand has 30 divisions worldwide, so arguably the clause could apply to activities outside the scope of Ciavatta's employment but within the scope of any of those numerous divisions. We caution employers that such language appears to be overly broad, and, hence, would be unenforceable."

The above caution is something that a new employer should keep in mind when evaluating a potential employee's prior agreement. Note how the risk is allocated based on the reasonableness of the provision, and a new employer's possible defense in hiring the employee. If the provision appears to be reasonable on its face, could enforcement of the provision hinder the employee in the proposed position? If the provision does not seem reasonable, is the potential hire important enough that the new employer is willing to litigate the issue?

Having cleared the pre-employment hurdles, an employment agreement should consider and specifically address anticipated IP-related issues. In the words of Franklin, a solid agreement is the recommended "ounce of prevention."

Consider the case of  Aetna-Standard Engineering v. Rowland, 493 A.2d 1375 (Pa. Super. Ct. 1985). In that case, a designer was hired and was subsequently tasked with improving a given machine and, along with his supervisor, was successful. The parties did not have any agreement regarding ownership or assignment of the invention in place. The employer attempted to force the employee to assign the patent, but was rejected by a lower court and affirmed on appeal.

In  Aetna-Standard, the inventor had training and engineering experience when he was hired, but he maintained that he had no contract or obligation, written or oral, requiring assignment of any invention to Aetna. He refused to assign his invention. When he was given a specific task that resulted in the invention for which a patent was filed, he received no additional compensation and was only instructed to develop equipment for an Aetna project contract with a third party. Ultimately, in the absence of an agreement, Rowland did not have to assign the patent to Aetna and retained his co-inventor rights. However, since Rowland's supervisor was a co-inventor who had assigned his interest to Aetna, Aetna was at least a co-owner of the patent with Rowland and each was free to use the patent without any obligation to the other. Aetna ultimately received an expensive "pound of cure."

In 2011, the Supreme Court, in  Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, 563 U.S. 776 (2011), reiterated the long and well-established principles that the rights to an invention belong to the inventor and absent an express grant of those rights to the employer, the employer does not have rights in the invention. The principle relied upon dates back to a Supreme Court case,  United States v. Dubilier Condenser, 289 U.S. 178 (1933).

When considering whether an employee has a duty to assign inventions to their employer, courts also consider the inventor-employee's refusal to sign employment agreement documents with IP assignment provisions. The failure to address the issue can be fatal to a later effort to force an assignment under another theory of ownership. See Banks v. Unisys, 228 F.3d 1357 (Fed. Cir. 2000). Stated in different terms, "if the scope of an employee's work is generalized within a field, a court will not presume an employee's duty to assign his employer patents, absent a contract.  Peregrine Semiconductor v. RF Micro Devices, No. 3:12-CV-0911-H (S.D. Cal. Jan. 8, 2014). In that case, Peregrine was denied a preliminary injunction because it had no contract assigning employee inventions to the company, and could not show that the inventor was bound under the "hired-to-invent" doctrine. The "hired-to-invent" doctrine is an equitable one that generally states that if an employee is hired to design and develop new instrumentalities in order to solve a particular problem, the employer has an equitable right to practice the inventions devised by the employee in solving that problem; see also  Standard Parts  v. Peck, 264 U.S. 52, 59-60 (1924). The "hired-to-invent" doctrine does not, however, transfer legal title to a patent. An agreement transferring all rights in the invention to the employer is always preferred.

The language of an IP assignment provision included with an employment agreement is critical. Assignment provisions that have express, nonconditional language are likely to be enforced. Future, contingent provisions are problematic. Accordingly, there is a significant difference between " I will assign" and invention, and " I do hereby assign" the invention.

This was demonstrated in the case of  DDB Technologies v. MLB Advanced Media, 517 F.3d 1284 (Fed. Cir. 2008). The  DDB case involved a surviving IP provision in an agreement that included the following language: "Employee shall promptly furnish to company a complete record of any and all technological ideas, inventions and improvements, whether patentable or not, which he, solely or jointly, may conceive, make or first disclose during the period of his employment with [Schlumberger]. Employee agrees to and  does hereby grant and assign to Company or its nominee his entire right, title and interest in and to ideas, inventions and improvements coming within the scope of Paragraph 3:" The court followed the general rule that when the employment agreement expressly grants rights in future inventions to the employer, no further act is required once an invention comes into being, and the transfer of title occurs by operation of law.

In contrast, as noted in  Stanford University v. Roche Molecular Systems, 583 F.3d 832, 842 (Fed. Cir. 2009), an agreement to assign an invention in the future (" I will assign") has been interpreted by the U.S. Court of Appeals for the Federal Circuit as conveying mere equitable title. As a mere promise to assign rights in the future, such language requires a subsequent assignment to transfer legal title.

Thus, IP agreement language that creates a promise to assign future IP does not readily resolve the ownership issue. In  IpVenture v. Prostar Computer, 503 F.3d 1324 (Fed. Cir. 2007), the Federal Circuit considered the following language: "Such Proprietary Developments are the sole property of HP, and I agree: a. to disclose them promptly to HP; b.  to assign them to HP; and c. to execute all documents and cooperate with HP in all necessary activities to obtain patent, copyright, mask work, and/or trade secret protection in all countries, HP to pay the expenses." The Federal Circuit concluded that it was only an agreement to assign at a later date, rather than a present assignment. Accordingly, the agreement language required a subsequent written instrument to vest title in the employer. In the recent case of  Advanced Video Technologies v. HTC, 879 F.3d 1314 (Fed. Cir. 2018), the Federal Circuit again held that employment agreement assignment language using the terms " will assign" is a mere promise to assign, and it is not a present assignment transferring title by operation of law.

The primary takeaways for employers are as follows: when hiring someone that might generate IP, be sure to research all prior agreements and work experience that could impact the potential employee's duty and/or ability to assign inventions to either the prior employer or potential new employer; and make sure that company employment agreements include  language that presently assigns IP by operation of law; and, even if corporate documents have acceptable present assignment language, obtain separate signed assignment agreements, prepared for recordation, for each invention. Separate assignment documents are straight forward and can be recorded with the U.S. Patent and Trademark Office without concern for private company information that might be in an employment agreement.

As the cited cases clearly demonstrate, the attention paid to these issues ahead of time is more than " an ounce of prevention."

Reprinted with permission from the March 30, 2018 issue of The Legal Intelligencer ©2020 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.



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