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Employee Inventors and Patent Ownership: Whose Rights Are They Anyway?

Frederick Albert Jonathon Carbone

Summary

  • To protect its intellectual property, a company must ensure employee-inventors assign patent ownership to it, ideally recording assignments with the USPTO to secure rights and avoid future disputes.
  • Courts typically defer to state contract law for patent ownership, but Federal Circuit rules establish that specific contractual language determines whether patent assignments are automatic or merely obligations to assign.
  • The “hired-to-invent” doctrine obligates employee-inventors to assign patents to employers, while shop rights may create an implied license for employers to use inventions if the employee was not specifically hired to invent.
Employee Inventors and Patent Ownership: Whose Rights Are They Anyway?
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To properly protect its intellectual property, a company should ensure that all employee-inventors have properly assigned ownership in their patents to the company. Indeed, all owners of a patent are required to voluntarily join as plaintiffs in order for there to be standing to bring a patent infringement action, and inventors are presumed to be owners unless they have assigned their rights.

The assignment of rights may be accomplished through use of a written, signed instrument. The prompt recording of such an instrument with the United States Patent and Trademark Office (USPTO) is the most secure and effective way for an employee-inventor to assign his or her patent rights to the employer, for at least two reasons. First, it will prompt the USPTO to issue a certificate of acknowledgment that “shall be prima facie evidence of the execution of an assignment, grant or conveyance of a patent or application for patent.” Second, if an assignment is not recorded with the USPTO within three months of its signing, the assignee runs the risk of losing its patent rights to later, bona fide purchasers or mortgagees that did not have notice of the prior assignment.

However, even without recording a written, signed assignment with the USPTO, courts have found that assignments, obligations to assign, or even licenses may exist due to employment contracts, assignment contracts, or the nature of the employer-employee relationship.

FilmTec, Arachnid, and the Importance of Clarity in Assignment Obligations

When making determinations of patent ownership based on contractual obligations, courts have often deferred to state contract law. However, when determining whether a patent assignment clause in an employment contract is an automatic assignment or merely an obligation to assign, the Federal Circuit’s so-called FilmTec rule preempts state law. This rule is discussed below in conjunction with what can be called the Arachnid rule, which states that agreements to assign in the future do not necessarily give rise to automatic assignments. These Federal Circuit decisions, issued just days apart, have created fact-dependent boundaries for assignments by way of employment or assignment contracts.

Specifically, the Federal Circuit in FilmTec reasoned that an assignment of rights to an invention that predates the existence of the invention may be viewed as an expectant interest that gives the assignee only an equitable title. Once the invention is made and an application for patent is filed, however, legal title to the rights accruing under the assignment would be in the assignee, and the assignor-inventor would have nothing remaining to assign. The court explained that no further act is needed to convey legal title in a patent from an employee-inventor to his employer when the language of the employee’s employment or assignment contract effectuates an automatic assignment. For instance, an automatic assignment of an employee-inventor’s patent rights is created by the use of the words “does hereby grant” in an employment or assignment contract.

Days after the FilmTec opinion issued, Arachnid provided guidance for instances where an employment or assignment contract does not effectuate an automatic assignment. In Arachnid, the Federal Circuit again looked at the language of the employment agreement to determine if it created an automatic assignment, but the court held that the phrase “will be assigned” does not rise to the level of a present assignment to transfer all legal and equitable rights in an existing or expectant interest. The court held that “[a]lthough an agreement to assign in the future inventions not yet developed may vest the promisee with equitable rights in those inventions once made, such an agreement does not by itself vest legal title to patents on the inventions in the promisee.” Thus, if an employment or assignment contract only effectuates an obligation to assign patent rights in the future, it appears that in view of Arachnid, some other act of assignment is necessary after property rights in an invention exist in order to transform the employer’s equitable title in the patent rights into legal rights sufficient to confer standing to sue for monetary damages for infringement of the patent.

Together, the FilmTec and Arachnid rules demonstrate the importance of ensuring that employment or assignment contracts state that the employee “hereby grants” his or her patent rights and does not simply state that the employee’s patent rights “will be assigned.” And though the Federal Circuit has since adhered to these rules, Justices Breyer and Sotomayor have called for their review. Specifically, Justice Breyer asserted that the Federal Circuit provided no explanation for what seems to be a significant change in the law and failed to give an explanation for that change in its opinions that apply the rules. Nevertheless, in Shukh v. Seagate Technology, LLC, the U.S. Supreme Court denied a petition for certiorari on the issue of whether the FilmTec rule is constitutional. Thus, for the foreseeable future, the FilmTec and Arachnid rules remain good law, and courts will continue to apply them.

Implied Obligations to Assign and “Shop Rights”

The Supreme Court has created common-law rules that may imply an obligation of an employee-inventor to assign his or her patent rights to the employer or may at least award an employer of an inventor an implied nonexclusive and nontransferable royalty-free license, called a “shop right.” In United States v. Dubilier Condenser Corp., the Supreme Court created the equitable doctrine called the “hired-to-invent” doctrine when it held that “[o]ne employed to make an invention, who succeeds, during his term of service, in accomplishing that task, is bound to assign to his employer any patent obtained.” The Court found this implied obligation to assign exists if the employee has only produced that which he or she was employed to invent and if the invention is the precise subject of his or her employment contract. In contrast, the Supreme Court asserted that if one’s employment is general to a field of labor and the invention was conceived of in performance of the work within this field, the employment contract will not be construed to require an assignment of the patent to the employer. However, the Federal Circuit has clarified that “[e]ven if hired for a general purpose, an employee with the specific task of developing a device or process may cede ownership of the invention from that task to the employer.”

The Federal Circuit has explained that “[t]o apply this contract principle, a court must examine the employment relationship at the time of the inventive work to determine if the parties entered an implied-in-fact contract to assign patent rights.” Further, the court clarified that an implied-in-fact contract is an agreement “founded upon a meeting of the minds, which, although not embodied in an express contract, is inferred, as a fact from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding.” Thus, by way of example, the Federal Circuit has held that in determining if the “hired-to-invent” doctrine applies to create an obligation to assign, a court must consider an employee’s refusal to sign assignment agreements and a company’s acquiescence to this refusal to have not created an implied-in-fact contract to assign inventive rights due to a lack of the meeting of the minds. Therefore, in view of the foregoing, employment for the purpose of inventing products that ultimately are patented may create an implied obligation to assign an employee-inventor’s rights to the employer as long as this obligation has not in some way been denied by the employee during the course of his or her employment.

Even if an employee is employed merely to design, construct, or devise methods of manufacture but not to specifically invent the subject matter that is ultimately patented, courts have found a “shop right” may exist that creates an implied nonexclusive and nontransferable royalty-free license for an employer to use its employees’ inventions. The Supreme Court defined a “shop right” as existing when “a servant, during his hours of employment, working with his master’s materials and appliances, conceives and perfects an invention for which he obtains a patent.” Further, the Federal Circuit has acknowledged that “[a] ‘shop right’ is generally accepted as being a right that is created at common law, when the circumstances demand it, under principles of equity and fairness, entitling an employer to use without charge an invention patented by one or more of its employees without liability for infringement.” Additionally, the Federal Circuit has held that the “shop rights” doctrine is a judicially created defense to patent infringement and not an ownership interest. Therefore, the Federal Circuit has acknowledged that the “shop rights” doctrine applies when an employer is sued for patent infringement by an employee who created the patented invention with the employer’s resources and while under its employment. The court has also acknowledged that the doctrine has limits. For example, an employer may only use the invention internally in its own business. It is also likely that the doctrine does not extend to an employer’s sale of the patented invention to a third party for the third party’s use since only the employer has the “shop right.”

While the Federal Circuit acknowledges a split in the courts as to the doctrinal basis for “shop rights,” the court has asserted that courts should consider factors such as “the circumstances surrounding the development of the patented invention and the inventor’s activities respecting that invention, once developed,” in order to determine if equity and fairness demand that a “shop right” exists for the employer. Further, the Federal Circuit has held that determining whether an employer has acquired a “shop right” should be done by looking at the totality of the circumstances on a case-by-case basis under the principles of equity and fairness. Thus, by way of example, an employee-inventor who suggested that the employer use the employee’s patented invention, to which the employer had no equitable claim, and helped install the patented invention on a number of the employer’s tools, without ever asserting that the employer was precluded from using the employee’s patented invention, was found to have given the employer a “shop right” to use the patented invention. Therefore, in view of the foregoing, if an employee patents an invention to which the employer has not hired the employee to invent and to which the employee is under no other obligation to assign to the employer, but the employee used the employer’s resources to invent it or acquiesced to the employer’s use of it, then the employer most likely has a “shop right” to use it.

Conclusion

Careful planning can make all the difference in avoiding potentially costly patent ownership mishaps and disputes. To minimize the chances of such a dispute, employment agreements should clearly state that employees “hereby assign” patent ownership rights. For the best security, assignment should be addressed as soon as a patent application is filed, and written and signed assignments from each inventor should be recorded with the USPTO. Even where employers have failed to take such preemptive measures, they may still obtain ownership where their employees were obligated to assign their patent rights. At the very least, employers may have so-called shop rights that allow them to practice inventions that they do not actually own, even if they cannot assert those rights against competitors.

©2021. Published in Landslide, Vol. 13, No. 4, March/April 2021, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

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