Employee Invention Assignment Agreements: Issues in Getting Them Right

June 2011

By: David J. Brody

Employee invention assignment agreements are among the most common agreements that companies have. In spite of their pervasiveness, there are a remarkable number of pitfalls that can be encountered in the agreements when a company needs to rely on them. As just a few examples, does a critically needed assignment agreement actually exist; does it contain potentially critical language that has been blessed by the courts; does it continue to protect a company’s current needs after a sale of the company or a change in its operational structure; and does it address choice-of-law uncertainties in connection with the assignment of unpatented trade secrets? These examples of potential pitfalls will be highlighted in this article. They underscore the need to review personnel files periodically to ensure that executed invention assignment agreements actually exist and can be readily located, and to ensure that the agreements continue to create rights and obligations that are necessary to protect the company’s current situation and needs.
 

The lost and not-found document

When care is not exercised in a start-up organization, or when a human resources department is not well managed, or when a company is sold, the execution of invention assignment agreements may be overlooked and executed agreements may become lost. Typically, however, employee invention assignment agreements sit undisturbed in personnel files, gathering dust for years, if not decades. Therefore, the inability to find an employee’s agreement is usually discovered only when it is too late, after the employee has left the company.

This problem can be encountered in situations beyond the typical one of an employer suing under the agreement to compel assignment of a former employee’s invention. For example, the problem can be encountered as early as the employer’s effort to secure patent protection on the invention.  A patent application may be filed after the inventor-employee has left the company, in which event it is highly likely that the inventor – now a former employee –will not have executed certain documentation that must be filed with the U.S. Patent and Trademark Office (PTO). In such an event, the employer must prove to the PTO that it has sufficient ownership rights to file and prosecute the application, and to obtain the patent as the owner of record, in the absence of the documents. That proof can be presented most easily by providing the PTO with an invention assignment agreement executed by the former employee.

The burden of proof becomes far more difficult when the agreement cannot be found and the inventor is either uncooperative or unavailable.  The difficulty can be especially great if the now­-unavailable former employee was hired many years earlier, at which time the agreement would presumably have been executed.  If that is the situation, it is likely that the company can no longer find any individual with actual knowledge that the former employee had executed an assignment agreement. Even more difficult is finding reliable proof of the actual contract language of the missing document. Because of these difficulties in finding evidence, the inability to find an executed invention assignment agreement may lead directly to a loss of patent rights on a critical invention.
 

The long-ignored document

A company’s form of invention assignment agreement may have been drafted long ago, by a now-unknown attorney, and used over the years without consideration of changed circumstances. Therefore, even if there is no difficulty in locating the executed agreement, unexpected surprises may be encountered when the need to rely on it ultimately arises.

One potential problem arises from the judicial pronouncement that federal common law controls the interpretation of a patent assignment clause, not normal rules of state contract law. In the recent past, certain words have been judicially blessed as constituting an actual conveyance of ownership of patent rights under federal common law, as opposed to a mere executory agreement to assign in the future. Because those blessed words were missing in its invention assignment agreement, a major university was forced to try to establish ownership rights in extremely valuable patents under a strained – and unsuccessful – interpretation of the Bayh-Dole Act. A company that uses an invention assignment agreement form with language similar to that used by the university, rather than the judicially blessed language, can end up with a similar loss of valuable patent rights.

Other potential problems can arise from changed circumstances that occurred after the employee executed the invention assignment agreement. For example, a corporate reorganization may have occurred during the years that the agreement had been sitting in the employee’s personnel file. In this situation, the assignment obligation in the long-ignored document may run in favor of an entity that no longer exists, or one that may no longer be used for holding title to an organization’s patents. Not having title in the proper entity can give rise to tax and other unfavorable consequences.

An intervening reorganization might also result in loss of the right to recover lost profits from an infringer. For example, the company may have shifted the sales function for a patented product to a subsidiary different from the one that had developed the technology. If the employee invention assignment agreement ran in favor of the initial subsidiary and the patent ownership rights were not properly transferred to the new sales subsidiary, an infringer may be liable only for a “reasonable royalty,” a recovery that is usually far less than the lost profits stolen by the infringer.
 

The possible disappearance of rights after a sale of the company

Similar surprises can be encountered if the inventor’s employer was a subsidiary that has been sold by its parent to another company. It is not uncommon for a parent corporation to have all its subsidiaries use a single invention assignment agreement form in which the parent is the contracting party. These agreements usually give all the parent’s “subsidiaries and affiliates” third-party beneficiary rights to enforce the assignment obligation against their respective employees. A potential problem arises with this form of agreement when, after the parent has sold the subsidiary to another company, the former subsidiary needs to assert the agreement against a former employee.

In any post-sale enforcement effort, the former employer is no longer a subsidiary of the parent corporation; it has become a former subsidiary. And “subsidiaries” –as opposed to “former subsidiaries” – are the third party beneficiaries under the invention assignment agreement. As such, the former subsidiary will be exposed to an argument that it has lost its third party beneficiary right to enforce the agreement and compel the former employee to execute an assignment of an important invention.

Moreover, the parent corporation that was the contracting party to the agreement may also be unable to compel its former subsidiary’s employee to assign the invention.   Invention assignment agreements typically apply to inventions related to the business of the contracting company and its subsidiaries and affiliates. In the situation under consideration, the invention relates to the former subsidiary’s business, not to the business of the former parent and its current subsidiaries and affiliates. Therefore, the former subsidiary’s former employee may be able to argue that the invention is outside the scope of the parent corporation’s assignment rights.

Thus, even though the former employee made his invention while his employer was still a subsidiary with third party beneficiary rights, the former employee’s invention might arguably slip through the cracks of the invention assignment agreement.
 

Shifting sands as trade secrets evolve into patented inventions

As noted, federal common law, not state contract law, controls the interpretation of patent assignment clauses in employee invention assignment agreements. However, most invention assignment clauses encompass unpatented trade secret inventions as well as patented inventions. The question presents itself, therefore, whether federal common law controls the clause as it relates to unpatented trade secrets. Major consequences can turn on the distinction.

A policy rationale provides the basis for applying federal common law to the interpretation of patent assignment clauses. Namely, there is a need for national uniformity on interpretation of patent ownership rights because this issue is intertwined with the statutory subject matter jurisdiction issue of standing in patent infringement cases. No such policy rationale applies to unpatented trade secrets. Therefore, as to unpatented trade secrets, there appears to be no reason for federal common law to usurp state contract law principles in the interpretation of the invention assignment clause, even while federal common law does control interpretation of the same clause insofar as it applies to patented inventions.

Choice of law considerations in the interpretation of invention assignment clauses are made even more complex by the potential evolution of unpatented trade secret inventions into patented inventions. As a practical matter, almost all inventions start out as unpatented trade secrets, whether or not they are patentable, and whether or not they are ultimately patented. Presumably, invention assignment rights and obligations relating to these unpatented trade secret inventions are governed by normal state contract law principles. But what happens when a patent application is filed, and a patent ultimately issues, on these same inventions? Do federal common law principles suddenly control the assignment rights and obligations on these inventions once a patent issues (or, perhaps, when a patent application is filed), supplanting the normal state contract law principles that had controlled when the inventions were still unpatented trade secrets? Might a company that enjoyed ownership rights under controlling state contract law, when an invention was still unpatented, suddenly lose its ownership rights to that same invention under federal common law, when the invention becomes patented? Might a federal court apply federal common law to the assignment clause even if the invention at issue is an unpatented trade secret, whereas a state court might interpret the clause under state contract law in cases involving unpatented trade secrets?

Rather than exposing itself to these uncertainties, a company might simply avoid the problem by use of an appropriate choice of law provision in its employee invention assignment agreements. Since the company cannot avoid application of federal common law in the case of patented inventions, it might provide in its invention assignment agreements that federal common law should control interpretation of the assignment clause for all inventions, whether patentable or not.
 

Final thoughts

Personnel files of employees who are likely inventors should be dusted off to confirm that the files contain executed employee invention assignment agreements. And those documents should be dusted off to confirm that they contain provisions that protect the company’s current situation and needs.

About

June 2011

By: David J. Brody

Employee invention assignment agreements are among the most common agreements that companies have. In spite of their pervasiveness, there are a remarkable number of pitfalls that can be encountered in the agreements when a company needs to rely on them. As just a few examples, does a critically needed assignment agreement actually exist; does it contain potentially critical language that has been blessed by the courts; does it continue to protect a company’s current needs after a sale of the company or a change in its operational structure; and does it address choice-of-law uncertainties in connection with the assignment of unpatented trade secrets? These examples of potential pitfalls will be highlighted in this article. They underscore the need to review personnel files periodically to ensure that executed invention assignment agreements actually exist and can be readily located, and to ensure that the agreements continue to create rights and obligations that are necessary to protect the company’s current situation and needs.
 

The lost and not-found document

When care is not exercised in a start-up organization, or when a human resources department is not well managed, or when a company is sold, the execution of invention assignment agreements may be overlooked and executed agreements may become lost. Typically, however, employee invention assignment agreements sit undisturbed in personnel files, gathering dust for years, if not decades. Therefore, the inability to find an employee’s agreement is usually discovered only when it is too late, after the employee has left the company.

This problem can be encountered in situations beyond the typical one of an employer suing under the agreement to compel assignment of a former employee’s invention. For example, the problem can be encountered as early as the employer’s effort to secure patent protection on the invention.  A patent application may be filed after the inventor-employee has left the company, in which event it is highly likely that the inventor – now a former employee –will not have executed certain documentation that must be filed with the U.S. Patent and Trademark Office (PTO). In such an event, the employer must prove to the PTO that it has sufficient ownership rights to file and prosecute the application, and to obtain the patent as the owner of record, in the absence of the documents. That proof can be presented most easily by providing the PTO with an invention assignment agreement executed by the former employee.

The burden of proof becomes far more difficult when the agreement cannot be found and the inventor is either uncooperative or unavailable.  The difficulty can be especially great if the now­-unavailable former employee was hired many years earlier, at which time the agreement would presumably have been executed.  If that is the situation, it is likely that the company can no longer find any individual with actual knowledge that the former employee had executed an assignment agreement. Even more difficult is finding reliable proof of the actual contract language of the missing document. Because of these difficulties in finding evidence, the inability to find an executed invention assignment agreement may lead directly to a loss of patent rights on a critical invention.
 

The long-ignored document

A company’s form of invention assignment agreement may have been drafted long ago, by a now-unknown attorney, and used over the years without consideration of changed circumstances. Therefore, even if there is no difficulty in locating the executed agreement, unexpected surprises may be encountered when the need to rely on it ultimately arises.

One potential problem arises from the judicial pronouncement that federal common law controls the interpretation of a patent assignment clause, not normal rules of state contract law. In the recent past, certain words have been judicially blessed as constituting an actual conveyance of ownership of patent rights under federal common law, as opposed to a mere executory agreement to assign in the future. Because those blessed words were missing in its invention assignment agreement, a major university was forced to try to establish ownership rights in extremely valuable patents under a strained – and unsuccessful – interpretation of the Bayh-Dole Act. A company that uses an invention assignment agreement form with language similar to that used by the university, rather than the judicially blessed language, can end up with a similar loss of valuable patent rights.

Other potential problems can arise from changed circumstances that occurred after the employee executed the invention assignment agreement. For example, a corporate reorganization may have occurred during the years that the agreement had been sitting in the employee’s personnel file. In this situation, the assignment obligation in the long-ignored document may run in favor of an entity that no longer exists, or one that may no longer be used for holding title to an organization’s patents. Not having title in the proper entity can give rise to tax and other unfavorable consequences.

An intervening reorganization might also result in loss of the right to recover lost profits from an infringer. For example, the company may have shifted the sales function for a patented product to a subsidiary different from the one that had developed the technology. If the employee invention assignment agreement ran in favor of the initial subsidiary and the patent ownership rights were not properly transferred to the new sales subsidiary, an infringer may be liable only for a “reasonable royalty,” a recovery that is usually far less than the lost profits stolen by the infringer.
 

The possible disappearance of rights after a sale of the company

Similar surprises can be encountered if the inventor’s employer was a subsidiary that has been sold by its parent to another company. It is not uncommon for a parent corporation to have all its subsidiaries use a single invention assignment agreement form in which the parent is the contracting party. These agreements usually give all the parent’s “subsidiaries and affiliates” third-party beneficiary rights to enforce the assignment obligation against their respective employees. A potential problem arises with this form of agreement when, after the parent has sold the subsidiary to another company, the former subsidiary needs to assert the agreement against a former employee.

In any post-sale enforcement effort, the former employer is no longer a subsidiary of the parent corporation; it has become a former subsidiary. And “subsidiaries” –as opposed to “former subsidiaries” – are the third party beneficiaries under the invention assignment agreement. As such, the former subsidiary will be exposed to an argument that it has lost its third party beneficiary right to enforce the agreement and compel the former employee to execute an assignment of an important invention.

Moreover, the parent corporation that was the contracting party to the agreement may also be unable to compel its former subsidiary’s employee to assign the invention.   Invention assignment agreements typically apply to inventions related to the business of the contracting company and its subsidiaries and affiliates. In the situation under consideration, the invention relates to the former subsidiary’s business, not to the business of the former parent and its current subsidiaries and affiliates. Therefore, the former subsidiary’s former employee may be able to argue that the invention is outside the scope of the parent corporation’s assignment rights.

Thus, even though the former employee made his invention while his employer was still a subsidiary with third party beneficiary rights, the former employee’s invention might arguably slip through the cracks of the invention assignment agreement.
 

Shifting sands as trade secrets evolve into patented inventions

As noted, federal common law, not state contract law, controls the interpretation of patent assignment clauses in employee invention assignment agreements. However, most invention assignment clauses encompass unpatented trade secret inventions as well as patented inventions. The question presents itself, therefore, whether federal common law controls the clause as it relates to unpatented trade secrets. Major consequences can turn on the distinction.

A policy rationale provides the basis for applying federal common law to the interpretation of patent assignment clauses. Namely, there is a need for national uniformity on interpretation of patent ownership rights because this issue is intertwined with the statutory subject matter jurisdiction issue of standing in patent infringement cases. No such policy rationale applies to unpatented trade secrets. Therefore, as to unpatented trade secrets, there appears to be no reason for federal common law to usurp state contract law principles in the interpretation of the invention assignment clause, even while federal common law does control interpretation of the same clause insofar as it applies to patented inventions.

Choice of law considerations in the interpretation of invention assignment clauses are made even more complex by the potential evolution of unpatented trade secret inventions into patented inventions. As a practical matter, almost all inventions start out as unpatented trade secrets, whether or not they are patentable, and whether or not they are ultimately patented. Presumably, invention assignment rights and obligations relating to these unpatented trade secret inventions are governed by normal state contract law principles. But what happens when a patent application is filed, and a patent ultimately issues, on these same inventions? Do federal common law principles suddenly control the assignment rights and obligations on these inventions once a patent issues (or, perhaps, when a patent application is filed), supplanting the normal state contract law principles that had controlled when the inventions were still unpatented trade secrets? Might a company that enjoyed ownership rights under controlling state contract law, when an invention was still unpatented, suddenly lose its ownership rights to that same invention under federal common law, when the invention becomes patented? Might a federal court apply federal common law to the assignment clause even if the invention at issue is an unpatented trade secret, whereas a state court might interpret the clause under state contract law in cases involving unpatented trade secrets?

Rather than exposing itself to these uncertainties, a company might simply avoid the problem by use of an appropriate choice of law provision in its employee invention assignment agreements. Since the company cannot avoid application of federal common law in the case of patented inventions, it might provide in its invention assignment agreements that federal common law should control interpretation of the assignment clause for all inventions, whether patentable or not.
 

Final thoughts

Personnel files of employees who are likely inventors should be dusted off to confirm that the files contain executed employee invention assignment agreements. And those documents should be dusted off to confirm that they contain provisions that protect the company’s current situation and needs.

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