Why Do Technology Startups Need IP Assignment Agreements?

If you are considering forming a startup, an intellectual property (IP) assignment agreement will be crucial for your company, especially if your company wants to get financing from outside investors in the future. An IP assignment agreement is a contract that transfers an individual’s rights to an intellectual property (for example, patent, trademark, copyright, etc.) to another legal entity, such as a company. You and your colleagues may want to ask: why do you need to transfer your intellectual property rights to your company?


What are the consequences for not having an IP assignment agreement?

If individual inventors do not assign the IP rights to the company, it will be very difficult for the company to seek investment in the future, because an investor will not fund a company that does not have the complete ownership of its intellectual property assets. Therefore, the IP assignment agreement will be a key document that the investor will look for before deciding whether she will fund the company.

Imagine two inventors jointly own a patent. An obvious concern for potential investors is whether this patent can be effectively protected against infringement. However, if the patent is involved in patent infringement litigation, both co-owners must join the lawsuit so that the suit can be filed. Either owner’s lack of interest in joining the litigation will make the patent meaningless because the patent can be easily infringed. In contrast, if a sole owner, the company, owns the patent, the company itself can bring this suit. This is easier for protecting the patent because the company does not need to get every owner’s consent to bring the suit.

Additionally, the value of the patent will be diluted if it is jointly owned by several owners. Each co-owner of the patent can independently exploit, without consent of, and without accounting to, the other co-owners. Because a license is available from more than one party, its value is inevitably diluted. Otherwise, if a potential licensee wants to get an exclusive right to the patent, it must negotiate with all owners, and the holdout problem (where one party’s withholding of support prevents a deal) is likely to occur.


What provisions need to be included in an IP assignment agreement?

Because the IP assignment agreement is critical to a company, the agreement should be drafted by a lawyer. Both the Assignor (e.g., the individual developer) and the Assignee (e.g., the company) must carefully review the provisions in this agreement. The most important sections of an IP assignment agreement are:

Assignment of Intellectual Property. This section describes the assignment and acceptance of the intellectual property. If the Assignor agrees to assign the intellectual property in exchange for a consideration, either in the form of cash, equity or royalty, the consideration needs to be clearly identified in the agreement.

Description of the Assigned Intellectual Property. The agreement usually includes a full description of the intellectual property or refers to an exhibit that describes the intellectual property. Notably, the to-be-assigned intellectual property sometimes includes goodwill, which is the intangible value of the intellectual property. The assignment of trademark’s goodwill is particularly important because it includes the brand’s reputation and recognizability.

Warranty. It is especially important to have the Assignor warrant that she has the capacity to assign the intellectual property. Otherwise, the assignment may not be effective.

An IP assignment agreement is crucial for showing your startup’s future investors that the company possesses valuable intellectual properties. Therefore, soon after your company is formed, remember to ask everyone who may have a right in the intellectual property, including inventors, employees, independent contractors and so on, to sign the IP assignment agreement.


Hiring New Employees: Beware the Risks of Assignor Estoppel


A drawing included for the patent for a slinky (Patent #: US 2415012 A), issued in 1947.

Startup companies frequently hire new employees from established technology companies — or even competing startups. New employees often provide creative energy and technical expertise critical to the growth of a startup. However, new employees may also bring unforeseen liabilities as a consequence of their past employment. One such liability in the domain of patent law, called assignor estoppel, could prove hugely detrimental to a startup in potential patent disputes down the line.


Patent Basics

Patents provide their owners exclusive rights to exclude others from practicing the invention detailed in the patent. Patents can cover a huge swath of technology areas ranging from pharmaceuticals to software. The Patent Office has even issued a patent on a method of swinging a swing.

All patented inventions must have an inventor or a set of inventors, but the inventor can assign, or transfer, her rights to the patent to another person or entity. Most commonly, this occurs when an employee at a company invents something during the course of her employment. Many employers require employees to assign all of their intellectual property rights if the intellectual property connects to the employee’s work at the company. As patent applications have flourished in recent years, particularly in the field of software, many technology employees have pending or issued patents that are assigned to previous employers.

Once a patent has issued, patent owners can sue others who infringe the patented invention; these cases generally arise in federal district courts. Defendants battling against patent owners in these cases typically have two primary lines of defense: non-infringement and invalidity. Non-infringement means that the defendant did not actually practice the invention and thus did not violate any of the patent owner’s rights. Invalidity, on the other hand, means that the Patent Office should have never issued the allegedly infringed patent in the first place, because the patent did not satisfy the criteria necessary for a valid patent. Increasingly, district courts have been invalidating patents, particularly software patents deemed to cover un-patentable abstract ideas.


Assignor Estoppel

The rise of patent invalidations has rendered invalidity defenses invaluable weapons in defendant companies’ arsenals. But the doctrine of assignor estoppel can eliminate a company’s invalidity defense, potentially subjecting a company to millions of dollars in patent damages.

Assignor estoppel poses the following proposition: If an inventor files an application for a patent and assigns his patent rights to someone else, he cannot later claim that his assigned patent is invalid during a district court battle. Essentially, the doctrine prevents inventors from patenting an invention and later claiming that the patent is worthless.

For example, an inventor may create a new software application and then assign his patent rights to a large company in exchange for money. Later, the inventor may want to sell the software application to others, even though he assigned away his patent rights already. If he sells the application anyway and thus infringes the company’s patent, assignor estoppel will prevent him from trying to invalidate the patent if the company sues him.

This doctrine can also apply to the new employers of inventors as well. For instance, if the inventor in the previous example joined a new company (Company B) and helped that company develop a competing application, the original company with the patent rights (Company A) might sue Company B. During the ensuing district court battle, Company B may be prohibited from raising an invalidity defense because its new employee has infected his new employer with assignor estoppel.

Assignor estoppel will transfer from a new employee to his new company if a number of factors are met. Some of these factors include the employee’s leadership role at the new company, the employee’s role in allegedly infringing activities, and the employee’s ownership stake in the new company <>. Roughly, employees with larger influences at their new company pose a higher risk of infecting their new employer with assignor estoppel. At small startup companies, this risk can be significant and pervasive.


Nipping Assignor Estoppel in the Bud

So how can startups hedge their risk against a potentially “infectious” employee and secure the availability of legal defenses in patent suits should the need arise? Here are a few tips that entrepreneurs and startups should consider when hiring new employees or taking on additional founders:

  1. Have new founders and employees sign a form that assigns to the company all of the employee’s intellectual property rights that relate to the company’s business.
  2. Ask new founders or employees if they have any issued patents from when they worked at previous employers. Most companies require employees to assign their IP rights, but some employees may not remember that they assigned their patent rights to a previous employer. Consequently, you should search for any issued patents or published pending patent applications with the prospective employee’s name on them.
    1. If a prospective employee has issued patents or pending applications assigned to a competing company, ensure that your new products will not infringe or potentially infringe these patents. It may be prudent to enlist the services of a patent attorney to counsel the company on potential litigation risk relating to these patents.
    2. If the prospective employee will have a leadership role or ownership stake in the startup, the risks of assignor estoppel will be higher. If, however, the employee won’t be working on product development and receives no equity, the risks of assignor estoppel, while still potentially present, will be lower.

Hiring great employees involves a number of important considerations completely divorced from legal risks down the line. However, an employee’s prior patent assignments can create huge legal risks for burgeoning startups. Consequently, startups should be mindful of these risks when making hiring decisions.