Employer Ownership of Patents and Trade Secrets

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The rules regarding employer-employee ownership of trade secrets are essentially the same as for patents, despite the differences between these two types of intellectual property. The general rule is that your rights to an invention can be acquired by your employer either through a written agreement (such as an employment contract) or if you were originally hired to create an invention. Writing agreements and hiring employees for the purpose of inventing are the two most common ways that employers obtain the rights to employee-created patents and trade secrets. Employers may also obtain more limited rights to employees’ inventions in certain circumstances. These limited rights are called shop rights.

Written Employment Agreements and Preinvention Assignments

Some employment agreements have provisions requiring the employees to assign any inventions to the employers. Because such an employment agreement is signed before an employee creates an invention, it is sometimes referred to as a preinvention assignment. You should examine your employment agreement (or other agreements you have with your employer) to determine if there are any preinvention assignment provisions. These provisions might also be located in your employee manual or in other employee guidelines—which are often considered as legally binding terms of your employment agreement.

Disclosure of Inventions to Employers

Disclosure provisions require that you report to your employer all inventions made by you during your period of employment that relate to the company’s business, result from tasks assigned to you by the company, or are created using the company’s resources. The purpose of the provision is to allow the employer to evaluate your inventions and determine if the company has any rights (either by assignment or under shop right rules).

If an invention is created with your own resources and is outside the scope of the employer’s business, you will not need to disclose the invention under the terms of the sample provision below. However, each provision may be different. For example, some employers may ask for a list of all inventions you create or may ask for a list of inventions created before your employment. If you have any doubts about making a disclosure to your employer, you should consult with a patent attorney before making the disclosure. Generally, however, it is a good idea to furnish the employer with a list of inventions you created before your employment. This list can help to avoid any claims of employer ownership for these inventions.

Limitations on Preinvention Assignments

To protect employees, eight states, including California, impose restrictions on the permissible scope of assignments of employee-created inventions. These restrictions apply only to “inventions” an employee creates—that is, items for which a patent is sought. The California restrictions are typical. Under California law, an employee cannot be required to assign any of his or her rights in an invention he or she develops “entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information” unless either of the following is true:

  • When the invention was conceived or “reduced to practice” (actually created or a patent application filed), it related to the employer’s business or actual or “demonstrably anticipated” research or development.
  • The invention resulted from any work performed by the employee for the employer. (California Labor Code § 2870.)

As you can see, these limitations on employee invention assignments are not very generous to employees. The only inventions an employee can’t be required to assign to the employer are true independent inventions—those that are developed completely without company resources and that don’t relate to the employee’s work or the employer’s current business or anticipated future business.

The following states impose restrictions similar to California’s:

  • Delaware (Delaware Code Annotated Title 19, § 805)
  • Illinois (Illinois Revised Statutes Chapter 140, §§ 301-303)
  • Kansas (Kansas Statutes Annotated §§ 44-130)
  • Minnesota (Minnesota Statutes Annotated § 181.78)
  • North Carolina (North Carolina General Statutes §§ 66-57.1, 66-57.2)
  • Utah (Utah Code Annotated §§ 34-39-2, 34-39-3), and
  • Washington (Washington Revised Code Annotated §§ 49.44.140, 49.44.150).

If you work in California, Illinois, Kansas, Minnesota, or Washington, state law requires that you be given written notice of your state’s restrictions on an employer’s right to obtain an assignment of employee inventions. If this is not done, the assignment could be unenforceable.

What if you live in one of the 42 states that do not have laws restricting invention assignments? Even in most of these states, preinvention assignments can’t be grossly unfair. Because they want their preinvention assignment agreements to be legally enforceable, employers in these states sometimes track the rules used in the eight states above when drafting assignments. None of the state law limitations on invention assignments discussed above apply to independent contractors; they only apply to employees. So, even if you live in a state like California that has such a law, companies that hire you as an independent contractor have more latitude in how they word their assignment agreements. Even so, a court might hold an unconscionable or fraudulently obtained assignment invalid, just as if you were an employee.

Employed to Invent

It is possible that even without a written employment agreement, an employer may own rights to your patent or trade secret under the “employed to invent” doctrine. How might this rule apply to you? If you were employed—even without a written employment agreement—for your inventing or designing skills, or you were hired or directed to create an invention, your employer would own all rights to your subsequent invention. This doctrine is derived from a Supreme Court ruling that stated, “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.”

Generally, most companies prefer to use a written agreement, which is more reliable and easier to enforce than this implied agreement.

Shop Rights

The previous two situations (written employment agreements and the employed-to-invent rule) allowed the employers to become the owners of all patent and trade secret rights. There is another situation in which the employer may not acquire ownership of your patent or trade secret but may acquire a limited right to use these innovations, known as a shop right. Under a shop right, you retain ownership of the patent or trade secret, but the employer has a right to use the invention without paying you.

A shop right can only occur if you use the employer’s resources (materials, supplies, time) to create an invention. Other circumstances may be relevant, but use of employer resources is the most important criterion. Shop right principles are derived from state laws and precedents in court cases. Generally, the shop right claim arises when an inventor sues a former employer for patent infringement. The employer defends itself by claiming a shop right.