Don’t Give Away Your Intellectual Property

Construction Technology Laboratories, Inc. d/b/a CTLGroup, provides engineering, materials sciences consulting, and laboratory testing services. CTLGroup serve a wide range of clients, mostly in the construction industry. When we are hired, we often encounter language such as this in the client’s contract form:  

“Consultant [CTLGroup] agrees that in consideration of payments made by Client, any and all intellectual property rights in the Work Product (‘Work’), as well as any inventions, patents, or copyrights in the Work, shall vest with the Client upon payment to Consultant. All of the Work shall be considered ’Works Made for Hire’ as that term is used under U.S. Copyright laws.”

Here is the problem. Suppose one of CTLGroup’s engineers or scientists comes up with an ingenious idea while working on a client’s project. The ingenious idea will solve the client’s problem, but it could also help solve other clients’ similar problems. Because of the ingenious idea, the inventor’s professional career and reputation could bloom stunningly. The inventor’s employer could also enjoy enhanced reputation and revenue. Nevertheless, according to the Client’s contract form, ownership of the ingenious idea must be turned over to the client for no additional charge. That seems unfair, if not unconscionable.

Attorneys, particularly those representing consultants in the business of solving problems (such as engineers, scientists, and industrial designers), should be on the alert for such onerous intellectual property clauses.

History provides notable examples of valuable intellectual property (“IP”) rights unwisely being conveyed for little value. Inventor John Spinello was a student at the University of Illinois when he created an electric game that later became known as “Operation.”   A leading toy designer offered Spinello $500 and promised him a job after graduation in exchange for all rights to the game. Spinello eventually received the $500, but the job offer never came. It is estimated that “Operation” generated at least $40 million in sales over the years. Had Spinello licensed the rights to “Operation” at a royalty rate of 5%, he might have earned $2 million for his contribution. 

In 1908, Howard R. Hughes, a Harvard drop out, paid $150 to acquire a roll bit patent from inventor Granville Humanson. The inventor had been unable to commercialize the drill. In a chance encounter in a bar, Humanson showed Hughes the model wooden spools for the drill, and Hughes was so excited he bought the model for $150. Hughes and his partner Walter Sharp improved the drill bit’s design. Then, in 1909, before astonished oilmen, they were able to drill down through 14 feet of hard rock, which no prior equipment had been able to penetrate. “The bit’s ability to [penetrate] … hard rock ten times faster than any previous bit revolutionized the oil and gas drilling industry.” Hughes and Sharp later launched the Sharp-Hughes Tool Company and made a fortune. When the original inventor, Granville Humanson, sold his rights to Hughes, he reportedly “spent a third of the proceeds on his bar tab treating a crew of roughnecks.”

In the workplace, it is crucial to be able to recognize when valuable IP could be generated, and then secure ownership, if possible. The following are tips to help accomplish this goal:

Educate your clients on patentability

 Whether in private practice or in-house, attorneys can help their clients understand the basics of what is patentable. The governing statute defines patentability as follows:  

“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor….”

35 U.S.C. § 101 (July 19, 1952, ch. 950, 66 Stat. 797.)

Under the law, the invention must be “new.” It must be sufficiently different from what has been used or described before (i.e., “prior art”). It also must be “non-obvious” to a person having ordinary skill in the relevant technology. “For example, the substitution of one color for another, or changes in size, are ordinarily not patentable.” The invention must be “useful,” that is, it has a useful purpose and it operates or functions.  Abstract ideas and suggestions do not suffice, nor do the laws of nature or physical phenomena.

Those who generally understand what is patentable are less likely to allow valuable IP rights to slip away.

Educate your clients on the value of inventorship

Among other things, CTLGroup offers services that include: laboratory testing services; consulting services for construction planning, or causes of construction defects; and research and development for new innovative products. If a client hires CTLGroup to perform laboratory testing based on common industry standards, it is unlikely that new IP will be created. The cost of such testing usually is a flat fee per test. A client may hire CTLGroup to perform laboratory testing, and then ask us to consult as to causes of defects, or provide expert opinions in litigation. For that, CTLGroup bills -- not just for lab test results -- but also for the consulting advice based on hourly rates.  If, however, a client requests that CTLGroup “invent” or “develop” a superior product or formulation, that task has a much higher value. New quality inventions have huge potential earning power. That is why the “grab-the-IP” clause is unacceptable; it conflates the value of inventions to nothing. It also dis-incentivizes the professional from innovating for the client.  

Negotiate a fair outcome

When CTLGroup sees an onerous IP clause, we first ask our project manager if our employees could create new IP while performing our services. If the answer is “no,” we usually don’t seek to revise the IP clause; pick your battles. But if the answer is “yes, IP may be created,” we try to negotiate a fair result. That means CTLGroup retains ownership of any new IP our employees create during the services. If the client’s employees create IP while working on the project without our employees’ involvement, that IP is the client’s. If IP is created through joint efforts of both CTLGroup and the client’s employees, we will share IP ownership as well the income therefrom. A wide range of creative outcomes is available to parties willing to pursue win/win solutions. If, however, the client insists on exclusive ownership of IP that CTLGroup employees create, we will require a lump sum payment according to our perceived value of the invention, or we will walk away.

Construction attorneys should be on the lookout for onerous IP clauses, and then help their clients retain valuable IP at the contract negotiation stage. In our day of accelerating technological advances, this would be an enormous “value-add.”