OWNERSHIP OF IP CREATED BY EMPLOYEES AND COLLABORATING OR COMMISSIONED THIRD PARTIES

16.05.2017

By Lawrence Hoffman

Part I: Who Owns Employee Created IP?

INTRODUCTION:

You have an idea for a product or a service that you want to commercialize. Perhaps you are a startup or even an existing business new to product development. In either case, you have enough funding (either on your own, or with a partner) to proceed.

Your idea is likely to result in intellectual property (IP) that needs to be protected. If you work alone at first, you will either retain ownership or assign it to your company and your attorney will be working on securing the needed protection. If all goes well, you will soon have others working with and/or for you. At that point, ownership of IP created by employees and/or independent contractors will need to be addressed. You will also need to assure that your employees protect your trade secrets both during their employment and if they leave your company.

In Part I of this six-part series, we will discuss laws in various places that deal with ownership of employee inventions and other IP. We will consider the law in the absence of an employment agreement as well as written laws that limit an employer’s right to ownership of IP created by employees.

Part II will describe the kinds of provisions that can and should go in an employment agreement. However, the law and practice concerning compensation for IP created by employees and that concerning protection of trade secrets in post-employment situations are topics in themselves. We will cover these in Parts III and IV.

Finally, in Part V, we will cover ownership of IP created by third parties either under a commissioning contract or jointly with your employees under a collaboration agreement.

THE LAW OF EMPLOYEE IP OWNERSHIP

There are two situations: (a) no employment contract or a contract that does not deal with IP ownership and (b) the more common one in which there is a contract with provisions as to IP ownership. It’s hard to imagine why an employer, especially a Company, would not address IP ownership in an employment agreement. Surprisingly, however, the law as to default IP ownership is well developed in both common law in English-speaking countries and civil law countries.

Under common law, prior decisions (whether based on general legal or equitable principles or on interpretation of written laws) serve as precedent for deciding later cases. In civil law systems, where the legal environment is defined by a comprehensive statutory framework, each case stands on its facts in relation to the written law, and prior decisions do not govern later cases. Nevertheless, the default result is largely the same in either system; employers own specifically defined “employment related” (as will be described below), and IP that is not employment related belongs to the employee. In some jurisdictions, contract terms are permitted that provide for employer ownership of non-employment related IP. In other jurisdictions, such terms are categorically forbidden.

The U.S. Common Law Default Rule:

U.S. Copyright law specifically defines “works made for hire” and provides that such works belong to the employer. Otherwise, there is no nationally applicable statutory law that governs ownership of employee created inventions or other IP. The U.S. is perhaps the only major country in which this is true.

Under U.S. common law, in most circumstances, inventions made by employees belong to the employee. This is true even if the invention was made in the course of employment or where the employee made the invention on his own time using company resources and facilities. In such cases, the employer is given only a non exclusive, non-transferrable license (“shop right”) to practice the invention. However, inventions created by employees who are “hired to invent” are generally owned by the employer.

The idea of a “hired to invent” exception to employee ownership of inventions seems to have had its origin at least as early as the mid-nineteenth century. The 1870 Supreme Court decision in United States v. Burns, involved an invention by an officer of the U.S. Army. The invention was adopted for use by the army, and a royalty was being paid for its use.

The government subsequently asserted ownership of the invention and sought to stop the royalty payments. The person to whom the inventor assigned his right to royalties took the matter to court, and the case ultimately reached Supreme Court. In its decision, the Supreme Court ruled that the government did not own the invention and that the royalty payments had to continue.

In its opinion, the Court stated:

If an officer in the military service, not specially employed to make experiments with a view to suggest improvements, devises a new and valuable improvement … he is entitled to the benefit of it, and to letters-patent for the improvement from the United States . . . and the government cannot, after the patent is issued, make use of the improvement… (Emphasis added.)

Notice the exception expressed in the highlighted portion of the quote. The Government won here because the exception did not apply.

The 1890 Supreme Court decision in Solomons v. United States addressed the exception noted in the Burns case. Solomons was the head of the government Bureau of Engraving and Printing, and made an invention at the specific request of his employer. Here, the Supreme Court held that the inventor did not own the patent. In its opinion, the Court first confirmed the common law default rule of employee ownership, and that this applied to both government and private employers. It then stated:

But … if one is employed to devise or perfect an instrument, or a means for accomplishing a prescribed result, he cannot, after successfully accomplishing the work for which he was employed, plead title thereto as against his employer.

This broad rule was narrowed somewhat in the 1933 U.S. Supreme Court decision in United States v. Dubilier Condenser Corp.:

One employed to make an invention who succeeds, during his term of service in accomplishing that task is bound to assign to his employer any patent obtained…But a manufacturing corporation which has employed a skilled workman, for a stated compensation, to take charge of its works, and to devote his time and services to devising and making improvements in articles there manufactured, is not entitled to a conveyance of patents obtained for inventions made by him while so employed, in the absence of express agreement to that effect. (Emphasis added. Internal quotes and citations omitted.)

Dubilier is still the controlling default rule, but the exception it establishes seems to have created more confusion than clarity. In the literature, it has been suggested that inventions by engineers, scientists, R&D personnel generally belong to the employer, but most observers follow Dubilier more literally and suggest a narrower interpretation requiring that the inventor was assigned to investigate a specific problem.

U.S. State Laws:

Nine states have enacted laws that define the kinds of inventions that do and do not belong to the employer in respect to persons employed in those states. These are typically stated in terms of enforceability of contract provisions.

For example, Section 49.44.140(1) of the Revised Code of the State of Washington (RCW 49.44.140) states:

A provision in an employment agreement which provides that an employee shall assign or offer to assign any of the employee’s rights in an invention to the employer does not apply to an invention for which no equipment, supplies, facilities, or trade secret information of the employer was used and which was developed entirely on the employee’s own time, unless (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by the employee for the employer. Any provision which purports to apply to such an invention is to that extent against the public policy of this state and is to that extent void and unenforceable.

Subsection (3) requires that the employee be given written notice of the limitation in Subsection (1).

The emphasized text is an example of a provision that categorically forbids requiring an employee to assign inventions that do not fall within the description of (a) and (b). Of course, that does not preclude the employee from voluntarily to assigning such inventions to the employer in return for suitable compensation.

Identical or essentially similar provisions may be found in the laws of California, Delaware, Illinois, Kansas, Minnesota, Nevada, North Carolina, and Utah. Employment related inventions are defined in the same way in all these statutes, though the laws in Nevada and Utah are somewhat more favorable to employers in other respects.

Also, RCW 49.44.150  provides that the employee has the burden of proof as to Section  49.44.140, and  that “the employee shall, at the time of employment or thereafter, disclose all inventions being developed by the employee, for the purpose of determining employer or employee rights…” The other statutes contain provisions corresponding to RCW 49.44.150 although neither the Minnesota statute nor U.S. common law assigns the burden of proof to the employee.

Laws Outside the U.S.:

Unlike the U.S., ownership of employee inventions is covered by written law almost everywhere.

Israel:

Under the Israeli Patent Act, for example:

  • 131. An employee must notify his employer of any invention which he made in consequence of his service or during the period of his service, as soon as possible after he invented it, and also of any patent application submitted by him.
  • 132. (a) An invention by an employee, arrived at in consequence of his service and during the period of his service (hereafter: service invention) shall, in the absence of an agreement to the contrary between him and his employer, become the employer’s property, unless the employer relinquishes the invention within six months after the day on which notification under section 131 was delivered to him.
  • 132(b) permits an employee to request that the employer affirmatively to claim ownership of the invention within six months after delivery of the employee’s notification. In addition, §133 provides that disputes as to ownership may be referred to the Registrar of Patents for resolution, and §140 requires an employee to cooperate fully with the employer in its efforts to protect inventions subject employer ownership pursuant to §132.

The concept of “service invention” is unusually broad and has been taken to cover even inventions made on the employee’s own time which related to the employer’s business.

The decision in Orian Ltd. V. Bonneh reported in our Newsletter (here), provides some insight as to the meaning of §132. The Court identified four conditions required to determine that the invention belongs to the employer, namely (1) there is an invention; (2) employer-employee relationship exists between the parties; (3) the employee reached the invention within the framework of his employment; (4) the employee reached the invention during the term of employment. The court further noted that the burden of proof is on employer to establish these conditions.

Clearly, condition (3) is the most subjective one but does not appear to be addressed in reported decisions. Notice, for example that the Orian case uses the word ‘framework’ rather than the translation of the Hebrew word (consequence). Some commentators have used words other than ‘framework’ such as ‘within the scope’ in reference to §132, but all seem to treat it as having a very broad meaning.

Europe:

Under Article 60(1) of the European Patent Convention (EPC):

If the inventor is an employee, the right to a European patent shall be determined in accordance with the law of the State in which the employee is mainly employed; if the State in which the employee is mainly employed cannot be determined, the law to be applied shall be that of the State in which the employer has the place of business to which the employee is attached.

Useful general guidance on issues related to ownership of employee inventions under the EPC may be found in the March 2013 European IPR Helpdesk Fact Sheet Inventorship, Authorship and Ownership.

United Kingdom:

Under §39 of the UK Patents Act:

(1) Notwithstanding anything in any rule of law, an invention made by an employee shall, as between him and his employer, be taken to belong to his employer for the purposes of this Act and all other purposes if –

(a) it was made in the course of the normal duties of the employee or in the course of duties falling outside his normal duties, but specifically assigned to him, and the circumstances in either case were such that an invention might reasonably be expected to result from the carrying out of his duties; or

(b) the invention was made in the course of the duties of the employee and, at the time of making the invention, because of the nature of his duties and the particular responsibilities arising from the nature of his duties he had a special obligation to further the interests of the employer’s undertaking.

(2) Any other invention made by an employee shall, as between him and his employer, be taken for those purposes to belong to the employee.

Under §42(2), provisions in derogation of statutory rights of employees, e.g., as to ownership or compensation, are unenforceable.

Germany:

The Patent Law Modernization Act, which came into force on October 1, 2009, provides a comprehensive and detailed legal framework for determining ownership and compensation for employee inventions. It applies to inventors employed in Germany and in situations in which application of German law is specified in an employment contract or where the employment is otherwise subject to German law under international legal principles.

The Act applies to inventions that may be patentable or protectable as utility models, and to unpatentable ‘technical improvements).

Employee inventions are ‘tied’ (or ‘service inventions’) if they are “made during the term of employment and (i) either resulted from the employee’s tasks… (ii) or are essentially based upon the experience or activities of the [employer]…”(§

Other employee inventions are ‘free’.

Service inventions must immediately be reported in full detail to the employer (§5). All rights to the reported invention automatically pass to the employer if the employer does not affirmatively release the invention to the employee within four months of receiving the report (§6).

For an employee invention that becomes its property, the employer must promptly file a patent or utility model application, either nationally, or as a European or PCT application designating Germany (§13) and release the invention back to the inventor in countries in which it does not intend to seek protection (§14).

Free inventions must similarly be reported so the employer can judge whether they are in fact a free invention (§18). However, this obligation as to a free invention does not apply “if the invention is obviously not capable of being used in the employer’s enterprise”.

Under §19, before the employee exploits a free invention during the term of employment, he or she must offer the employer a non-exclusive right to use the invention on reasonable terms, if the invention falls within the range of the actual or planned activities of the employer’s enterprise at the time the offer is made.

Under §22, provisions of this Law may not be modified by contract to the detriment of the employee.

Disputes under the Act may be submitted to arbitration if both parties agree, or may be addressed judicially under specified circumstances.

An employee is entitled to compensation for service inventions that become the property of the employer, as discussed in Part III.

France:

Under Article L611-7(1) of the Intellectual Property Law, employee inventions that are made “in the execution of a work contract comprising an inventive mission corresponding to his effective functions or of studies and research which have been explicitly entrusted to him” automatically belong to the employer,

Under Article L611-7(2), all other inventions belong to the employee. However, for inventions made “during the execution of his functions or in the field of activity of the company or by reason of knowledge or use of technologies or specific means of the company or of data acquired by the company, the employer shall be entitled…to have assigned to him the ownership or enjoyment of all or some of the rights in the patent protecting his employee’s invention”.

Japan:

Effective 1 April 2016 Article 35 of the Japanese Patent Act was amended to add a new §3 stating that the right to obtain a patent for an ‘employee invention’ shall belong to the employer from the time of its occurrence, as long as this is provided for in advance by contract, work rules or any other provision.  §4 specifies that an employee is entitled to reasonable money or other reasonable economical profits as compensation for employee inventions that become the employer’s property under §3.

Article 35(1) defines ‘employee invention’ as one “made by an employee in the course of exercising his work duties under the control of the employer”. Employment agreements may not provide for employer ownership of non-employee inventions.

China:

According to Article 6 of the PRC Patent Law:

An invention-creation, made by a person in execution of the tasks of the entity to which he belongs, or made by him mainly by using the material and technical means of the entity is a service invention-creation. For a service invention-creation, the right to apply for a patent belongs to the entity…For an invention-creation that is accomplished by using the material and technical conditions of an employer, if the employer has concluded a contract with the inventor or designer providing the ownership of the right to apply for the patent or the ownership of the patent right, such provision shall prevail.

Under Rule 12 of the Implementing Regulations:

A service invention-creation made by a person in the execution of tasks of the entity to which he belongs” referred to in Article 6 of the Patent Law means any invention-creation made:

(1) in the course of performing his own duty;

(2) in execution of any task, other than his own duty, which was entrusted to him by the entity to which he belongs;

(3) within one year after the retirement, transfer from the entity to which he originally belongs or the labor and personnel relationship being terminated, where the invention-creation relates to his own duty or the other task entrusted to him by the entity to which he previously belonged.

PRC practitioners note that the statutory language is ‘vague’ or ‘rudimentary’ and that there are frequent disputes as to the application of Art. 6 and Rule 12. Precise definition in an employment agreement as to the ‘tasks of the entity’, the individual’s status as an employee, the tasks he or she has been hired to perform, a mechanism for acknowledgment of assignment of assignment of tasks other than his or her normal duties, and various other matters as discussed in Part II.

CONCLUSION

From the discussion above, two Golden Rules clearly may be seen:

  • Anything and everything related to ownership of should be covered in a written employment contract to minimize the risk of later conflict and to avoid nasty surprises; and

 

  • There is no “one size fits all” employment agreement; what needs to be in an agreement will be determined by facts in a particular situation and laws related to employees’ rights which vary from jurisdiction to jurisdiction.

 

This article is intended only as general information and is not and should not be considered as legal advice. Advice of counsel should be obtained so that necessary agreements can be prepared to take account of specific facts and the applicable laws.

 

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