Employer-Employee Relationship Matters in Patent Ownership

When an employee creates an invention and later is issued a patent on that invention, does the employer get any rights to the patent? This might be a strange question to ask for some people, especially to those without expertise on patent law. They might take it for granted that an inventor owns all patent rights to his or her invention. However, this is not always the case.

 

Patent Law: Ownership is Different From Inventorship

A person must show that he or she contributed to the claims of a patentable invention in order to qualify as an inventor of the patent. By default, the inventor becomes the owner of the patent, but this ownership can be assigned away through a written document, or in some instances through an implied-in-fact understanding (discussed below).

It is the owner, not the inventor, who enjoys all property rights to the patent. With these property rights, the owner of a patent can license the patent to third-parties; sell the patent ownership; sue a potential infringer; and manufacture, offer to sell, sell, or use a product covered by the patent. If the inventor assigns his ownership to someone else, then he or she will not have any of these rights.

 

Ownership and Inventorship in Employer-Employee Relationship

The general rule is that the employee who creates an invention owns the patent rights to the invention. There are two exceptions to this general rule: (1) intellectual property (IP) was explicitly assigned to the employer or (2) the employee was specifically hired to create the invention at issue.

Explicit assignment of IP usually occurs in the form of signing an IP Assignment Agreement. The agreement would provide that all IP that the employee has created or may create in connection with the services provided to the company and/or derived from the company’s proprietary information shall be the property of the company. Different states have different laws regarding the scope of work that this assignment can cover. For example, California’s labor law stipulates that an employee owns the patent rights to his or her invention if the invention is made entirely on the employee’s own time, without using any of the company’s equipment or technology, as long as the invention (a) does not related to the company’s business, and (b) did not result from work performed by the employee “as an employee” of the company.

Even if an agreement was not signed between the employee and the employer, the employer might still have been assigned the patent rights if the employer explicitly hired an employee to invent the product that was patented. This arises from the implied-in-fact understanding that the employee was specifically hired and paid to create the invention and therefore, any fruition of patenting the invention should be the employer’s.

 

Where Assignment Has Not Been Made, Employer Might Still Have “Shop Right”

So is the employer completely without any remedy if the assignment scenarios above do not apply? Not if the employee used the employer’s resources, such as its computers or laboratories, to create the invention. A judge-made doctrine called a “shop right” allows employers to practice inventions created by employees that the employer helped to subsidize.

However, a shop right does not involve transfer of ownership. A shop right is basically a non-exclusive and royalty free license given to the employer. The employee still holds the ownership of the patent and is free to go to third parties and negotiate non-exclusive licenses. Also, the employer cannot sell or transfer this shop right to a third-party.

One important note: the shop right doctrine is not a substitute for an assignment. The doctrine is only a defense to patent infringement in court. In other words, it only arises in situations where the employer is sued by the employee for infringing the patent that the employee was issued by practicing the invention.

 

Implications for University Students and Faculty

Many startups are formed by the students and faculty of universities. Graduate students and faculty typically sign an IP assignment agreement with the university, which means that the employer-employee relationship discussed above is established. A good example of this relationship is Larry Page, one of the co-founders of Google, and Stanford University. As you can see from the excerpt of patent number US 6,285,999 below, the inventor of this patent that served as the foundation of Google was Larry Page. However, he was not the owner of the patent because he was a Ph. D. student at Stanford. As a result, the assignee of ownership was Stanford University, and the university received 1.8 million shares of Google stock in exchange for long-term license of this patent, which translated to $ 337 million.

Meanwhile, each university has its own policy regarding IP assignment of undergraduate students and other students who are not employees, but typically, universities do not seek to claim rights to patents issued as results of class participation. For example, the University of Michigan policy states that:

“The University will not generally claim ownership of Intellectual Property created by students. (A “student” is a person enrolled in University courses for credit except when that person is an Employee.) However, the University does claim ownership of Intellectual Property created by students in their capacity as Employees. Such students shall be considered to be Employees for the purposes of this Policy. Students and others may, if agreeable to the student and Tech Transfer, assign their Intellectual Property rights to the University in consideration for being treated as an Employee Inventor under this Policy.”

 

Advice for Startups

If you’re a startup, there are many other issues regarding IP that should concern you. Regarding the employee IP assignment issue, make sure that all employees sign IP assignment agreements. Litigation is expensive. You don’t want to go to a court to argue that you had an implied-in-fact assignment or that you have a shop right defense to infringement. IP assignment agreements are a lot easier.

Also, find out whether you are working with university faculty or grad students already in an employment relationship with a university. This pertains to your employees as well as independent contractors who will participate in creating inventions for the company. Your employee or independent contractor signing multiple IP assignment agreements could cause ownership problems further down the line.