Founders of emerging companies must decide early on in their company’s growth cycle whether to require employees to assign their inventions (including rights to patent and patent applications –collectively “patent rights”) to the company.  This post provides a non-exhaustive analytical framework for founders to consider when making such decisions.

  1. Understanding Patent Ownership

Under US patent law, ownership of patent rights includes the right to exclude others from making, using, selling, offering to sell, or importing the claimed invention. Patent owners therefore have the ability to license part or all of the patent rights to third parties on an exclusive or non-exclusive basis, bring an infringement action against alleged infringers, build US and international patent portfolios surrounding the inventions, build new companies around the patent rights, sell the patent rights, and otherwise leverage the patent rights in an advantageous way.

A company employee who solely or jointly contributes to the conception of a claimed invention would be an inventor who, under US patent law, would be the first legal owner of the invention. Absent an agreement requiring such an employee to assign his or her rights in the invention to his or her employer, or another third party, such employee will maintain ownership over the patent rights and have the ability to fully exercise those rights as set forth above.

  1. Employee, and Contractor IP Assignment Agreements

For companies to establish ownership over inventions generated by employees and contractors, companies should first have each such person sign an IP assignment and confidentiality agreement prior to commencing employment or services with the company.

That agreement should include several key provisions including, but not limited to, an IP assignment clause using a broad definition of IP, strong confidentiality provisions to protect company confidential information (including special treatment for trade secrets), an obligation for employees to list all inventions the employees already own, provisions addressing obligations to prior employers, provisions obligating employees to cooperate during patent prosecution, and other provisions.

Several states have enacted statutes governing employee assignment agreements including Delaware, Illinois, California, Washington and North Carolina, and each have similar provisions protecting employees and limiting applicability of employee assignment agreements. For example, Delaware Code, Title 19, Section 805 provides:

Any provision in an employment agreement which provides that the employee shall assign or offer to assign any of the employee’s rights in an invention to the employee’s employer shall not apply to an invention that the employee developed entirely on the employee’s own time without using the employer’s equipment, supplies, facility or trade secret information, except for those inventions that:

(1) Relate to the employer’s business or actual or demonstrably anticipated research or development; or

(2) Result from any work performed by the employee for the employer.

To the extent a provision in an employment agreement purports to apply to the type of invention described, it is against the public policy of this State and is unenforceable. An employer may not require a provision of an employment agreement made unenforceable under this section as a condition of employment or continued employment.

In contrast to such pro-employee statutes, other states have different requirements including  Nevada’s statute that provides “employer is sole owner of patentable invention or trade secret developed by employee” absent an agreement to the contrary. The employee IP assignment and confidentiality agreement should take these and other laws into account to ensure enforceability and strike the proper balance of confirming rightful ownership over inventions generated by employees while complying with applicable law where the subject agreement will be enforced.

When it comes time to seek patent protection on an invention generated by an employee inventor, pursuant to the employee IP assignment and confidentiality agreement, companies should obtain a separate written assignment from the inventors to the company for the specific patent applications in question and progeny of those applications, and record the assignment with the USPTO to perfect ownership and provide notice to others.

  1. Risks of Not Establishing Proper Ownership

 If a company does not establish ownership over patent rights at the outset, it runs the risk of unnecessarily compromising such key assets, which could have a negative effect on its ability to attract investors, its intended exit, and the overall value of the company.

For example, assume an employee of an emerging biotechnology company contributes to an invention that is part of the foundational technology of the company. The employee had not executed an employee assignment agreement and the time comes to file a non-provisional patent application. But between the time of the invention and the patent application, the employee and Company had a falling out and the employee now works for a competitor. In most states, the employee would be the owner or co-owner of such foundational IP and getting the employee to now assign its IP to the Company likely will not happen.

Furthermore, inventors must sign oaths and declarations, and chasing former employees down can be a major challenge (hence including cooperation requirements in the employment agreement). These problems can become exponentially worse when more than one former employee is a joint inventor.

These undesirable and avoidable results can be exceedingly difficult to explain to an investor or potential investor, and this issue is guaranteed to be looked at during due diligence for investment or acquisition. First is the concern over ownership, that the Company’s ownership is in the hands of or shared with a third party, seriously affecting the value of the Company. In a shared ownership situation, without the other patent owner’s permission, the Company also cannot exclusively license the full rights under the patents and may have limited rights to bring a lawsuit.

Importantly, the issues cited above are not limited to employees, but also arise amongst founders.  Consider, for example, three founders of an artificial-intelligence-meets-biotech company who each contributed to an invention and filed a provisional patent application naming each of them as inventors. The company was formed, but no founder IP assignment agreement was in place requiring the inventors to assign their rights to the company.   Time passes and the co-founders have a falling out, each having a different vision for how to use the technology the company is centered around. Without an agreement in place, each joint inventor is also a joint-owner, and each is entitled to exploit the invention without accounting to the others (like a joint-tenancy in property law).  Depending on the shareholder agreement that may be in place, the commercialization or exit strategies, or applicable fiduciary duties, this situation could be very problematic on many levels and seriously devalue the leverage of the intellectual property rights surrounding the technology and the company itself.

Accordingly, one of the very first things the founders of an emerging company must do is generate a proper founder and employee IP assignment and confidentiality agreement and have all founders and employees execute that agreement. From there, the Company has covered a major base in ensuring innovations that are generated by the people performing work for the Company are owned by the Company, satisfying the founders’ duties to the Company, investors and themselves.

Disclaimer: The information contained in this posting does not, and is not intended to, constitute legal advice or express any opinion to be relied up legally, for investment purposes or otherwise. If you would like to obtain legal advice relating to the subject matter addressed in this posting, please consult with us or your attorney. The information in this post is also based upon publicly available information, presents opinions, and does not represent in any way whatsoever the opinions or official positions of the entities or individuals referenced herein.

 

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Photo of Dan Shores Dan Shores

Dan Shores is Partner at Rothwell Figg.  Dan Shores is a dedicated patent lawyer and strategist who believes in his clients and the power of their ideas. He focuses on serving biotech, medical device, energy, software, cybersecurity, and other technology-based companies and understands

Dan Shores is Partner at Rothwell Figg.  Dan Shores is a dedicated patent lawyer and strategist who believes in his clients and the power of their ideas. He focuses on serving biotech, medical device, energy, software, cybersecurity, and other technology-based companies and understands the myriad of challenges that such companies face when breaking through and establishing themselves in their respective markets. Dan works with clients to build robust patent portfolios, protect trade secrets, negotiate strategic collaborations, conduct due diligence and landscape investigations, and prepare for success in funding rounds and exits. An engineer by education, and having extensive experience in transactional, litigation, procurement, and strategic counseling matters for technology-based companies, Dan is a problem-solver who excels at deciphering key translational aspects of a broad array of technologies to maximize leverage in the context of clients’ desired implementation of such technologies whether as participants in dynamic markets or as first movers.

Dan has served companies utilizing the following technologies (without limitation): mRNA therapies; lipid nanoparticle delivery technologies; genetically engineered swine and organs for xenotransplantation; artificial intelligence for drug discovery; CAR-T therapies; oligonucleotide development; pharmaceutical treatment of rhinitis with levocetirizine; pharmaceutical treatment of hepatitis B with telbivudine; genetically-modified cotton seed; fiber-optic probes for tissue investigation; implantable glucose-sensing devices; high throughput genetic seed-chipping technology; cybersecurity threat assessment platforms; interactive media systems for healthcare institutions; artificial intelligence (various applications); identification systems for cable-based medical devices; identification of digital positions of interest on media items; heat-treated glass with multilayer low-emissivity coatings; automotive and agricultural equipment; pressure-sensitive adhesives; three dimensional printing of buildings and other structures; and integrated electronic securities marketplace systems.

Dan is a registered patent attorney licensed to practice before the United States Patent and Trademark Office, and is admitted to practice law in Massachusetts and in the District of Columbia. He is a member of the bars of the Supreme Court of the United States, United States Court of Appeals for the Federal Circuit, and United States District Court for the District of Massachusetts. Dan lives in Boston with his wife Lindsay and their two English Bulldogs Jarves and Rosie.