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Patent Assignments in Employment Agreements – A Sometimes Overlooked, but Always Important, Component

Intellectual property is often the most valuable asset a business can own.

Opinions expressed by Entrepreneur contributors are their own.

Businesses, of course, have a strong interest in owning intellectual property created by their employees. Intellectual property — patents, copyrights and other confidential and proprietary information including trade secrets — are often the most valuable assets a business can own, so it is important to ensure that employee developments and inventions belong to the employer. In the United States, inventions presumptively belong to the inventor, and any transfer of ownership (assignment) must be in writing to be effective. Rather than requiring employees to sign assignment agreements for each patent application filing, employers sometimes rely on employment agreements and handbooks to establish ownership in intellectual property created by an employee. Employers often provide employment agreements with assignment clauses that are intended to give the employer rights in inventions made by the employee during the period of employment. These assignment clauses are often treated as mere boilerplate, yet the precise wording of these clauses can have major impacts on the effectiveness and limitations of any assignment.

Ensure that you have an assignment and not a mere promise to assign

When drafting an agreement to have an employee assign future inventions, it is vital that the language used in an assignment clause states a present-tense, actual assignment. Phrases such as hereby assign, agrees to grant and does hereby grant or that inventions shall belong to the employer and employee hereby conveys, transfers and assigns, have been deemed by the courts to be effective to transfer ownership of a future invention without the need for any subsequent agreement. Ownership effectively transfers immediately, once the invention has been made.

Assignment clauses that use future tense language, on the other hand, generally will require an additional agreement to result in a transfer of ownership of the invention, and any intellectual property (“IP”) covering the invention. Terms such as will assign, agree to assign, will be assigned and the like, have been found by numerous courts to constitute nothing more than a promise or contract to assign an invention in the future, but not to serve as an actual assignment. 

In addition to the wording used in the assignment clause, the language of any carve-outs should also be scrutinized. Agreements may contain a carve-out clause to exclude a new employee’s prior inventions from being assigned, or to prevent assignment of inventions unrelated to the employee’s work from being swept into the assignment provision. A broad, non-specific carve-out clause may prevent an employee agreement from automatically assigning inventions of that employee, even where the assignment clause includes the proper hereby assign type of language, because this leaves open the possibility that an invention is not subject to the assignment clause. This contrasting language may create an ambiguity in the employment agreement that subjects it to construction under state law, which in turn may allow for the employee to introduce extrinsic evidence, such as conversations that took place during employment negotiations, to defeat the automatic assignment. While patent assignment provisions are governed by Federal Circuit law, resolution of contractual ambiguities is governed by state law, which varies considerably regarding the admissibility of such extrinsic evidence.   

Failure to obtain an automatic assignment can have negative consequences

An assignment clause that is deemed ineffective to automatically transfer ownership of an invention can create significant problems for an employer. In such circumstances, a business would not have standing to bring a patent infringement suit until it has taken the necessary steps to obtain a valid assignment. This may require the filing of a breach of contract claim against the employee to require fulfillment of the contractual obligations, including execution of assignment documents. In the interim, infringers could continue practicing the invention; and if the infringing activity has gone on long enough, the six-year statute of limitations may prohibit full recovery of damages. Further, if an inventor/employee has made only a promise to assign, and instead transfers ownership to a third party who lacks knowledge of the assignment obligation, that second transfer of ownership may well prevail, leaving the original employer with no exclusionary rights at all.

Ineffective assignment provisions can affect more than just litigation. Businesses and investors typically conduct IP due diligence when entering into transactions involving the investment in or sale of IP assets, company divisions or entire entities, and any weaknesses in assignment provisions may affect the perceived value of the IP assets and/or business being considered.    

Related: The How-To: Protecting Your Intellectual Property As A Small Business

Do not count on the hired-to-invent doctrine to result in ownership of employee inventions

Some employers do not require employees to sign an agreement containing an assignment of inventions because they believe that they automatically own inventions that they paid someone to create. Under the hired-to-invent doctrine, this will only occasionally be correct.  Employees or contractors hired (and paid) specifically to create a particular invention or to solve a particular problem may be deemed to have implicitly assigned their rights in the invention to the employer. This is a highly fact-based determination, however, and applies only to inventions created in response to the specific thing the employee was hired to do. A mere title of researcher or even inventor will not, standing alone, suffice to ensure ownership of inventions by the employer. Further, until a court has ruled one way or the other, an employer relying on this doctrine will not have any certainty in its rights to the invention. Should the court rule against the employer, it would lose the exclusionary rights it believed it possessed and may face an infringement lawsuit from the employee or anyone to whom the employee may have assigned the invention/patent rights.

Absent an effective assignment, an employer may obtain limited shop rights in inventions made using the employer’s time, materials, facilities or equipment. Shop rights take the form of an implied license to practice the invention, precluding the employee from obtaining damages or injunctive relief on a patented invention. Shop rights are limited, however, and do not allow the employer to prevent others from competing by practicing the invention. Further, shop rights cannot be transferred via license or assignment, effectively devaluing the IP assets and, perhaps, the company. 

Other considerations

In addition to having the proper hereby assign language, employment contracts should ensure that inventions, rather than just patents or patent applications, are subject to the assignment clause. Language stating that all inventions, improvements, discoveries and the like, whether or not patentable or copyrightable, are subject to the assignment, ensures that information that could be protected through other regimes, such as trade secrets, automatically become the property of the employer. 

Related: Securing Your IP: The Two Key Legal Documents Every UAE ...

Conclusion

Intellectual property has taken on an ever-increasing role in determining the value of a business. A company’s ability to develop and protect its intellectual property is a key factor in its future success. Given this, it is important that businesses recognize that assignment provisions of employment agreements are not mere boilerplate, but instead may be one of the most important legal provisions that ultimately can impact not only an employment arrangement, but the value of the business itself.

Related: Top 5 Intellectual-Property Challenges Businesses Face

*The authors would like to thank Lando & Anastasi summer intern Tyler Gruttadauria for his contributions to this article.