Who Owns an Employee Invention? About Employee Patent Rights.

Intellectual Property Rights in the Workplace

There are myriad concerns that need to be addressed in the creation and operation of a business. However, we find that the majority of businesses that come to us for assistance have not given intellectual property (IP) its due consideration.  The owners and operators often have limited understanding of IP and its value. However, significant value can be lost if a business does not address the ownership of intellectual property (for example, inventions and patents) created by its employees. The business must protect its technology, know-how, and proprietary information through written contracts with each employee. In such an agreement, the employer can protect the company's intellectual property, confidential information, and control potential developments by the employee that result from the employee's training and involvement in the business.

Employers Should Have an Employee Agreement Addressing Intellectual Property Rights

Under US patent law, the default rule is that the inventor is the owner of the invention. Banks v. Unisys Corp., 228 F.3d 1357, 1359 (Fed. Cir. 2000). In the absence of an employee assignment, the employer has a nonexclusive license to use an invention devised by an employee while working for the employer. In other words, the employee owns the invention, and the employer has a nonexclusive license to use it without paying royalties to the employee. The employer's right to use such inventions is called a "shop right". Mechmetals Corp. v. Telex Computer Products, Inc., 709 F. 2d 1287 (9th Circuit 1983). The employer has no further patent rights in this scenario. In contrast, the employee has the right to exploit the invention by selling or licensing it to other users, or starting a competing business. An invention assignment agreement can be used to control the ownership of inventions and other IP that relate to the business or that are created using the employer's resources.

Why is this important? Consider a scenario in which a company trains an employee to be highly skilled in a particular technology and discloses the company's business plans and trade secrets to the employee to enable the employee to develop high value products and services for the company. The employee then develops a product that is relevant to the company's business, but was not developed as part of the employee's tasks or job description and was created on the employee's own time. If there is no IP assignment clause in place for that employee, the employee would retain any patent rights in the product and could leave the company and start their own business selling the product that the employee invented.

In order to control against these scenarios, a company should have practices in place to establish employee agreements that require employees to assign any inventions and other intellectual property that they create using company resources or that is related to the company's business operations and plans. Such agreements may be a standalone agreement or may be a provision within an employment contract that states the conditions under which an employee-inventor’s invention rights or other IP rights are assigned or granted to the employer. Ideally, the agreement should be executed at the time the employment relationship begins. However, a later agreement can be made, but consideration (compensation) will likely have be paid by the company to the employee for the agreement to be valid and enforceable.

Overview of Relevant California Labor Code Provisions

In California, the ownership of employee inventions and other IP is governed by a combination of statutory provisions and case law, which together provide a framework for determining rights and obligations. The relevant provisions of the California Labor Code are sections 2860, 2870, 2871, and 2872.

Section 2860 establishes the general principle that anything an employee acquires by virtue of their employment, other than the compensation due to them, belongs to the employer ​(Cal Lab Code § 2860). This broad provision has been interpreted by the courts to stand for the principle that when an employee is hired to invent, any invention an employee creates during their employment that is related to their job automatically becomes the property of the employer, including the patent rights. Gen. Elec. Co. v. Wilkins, 2012 WL 3778865 (E.D. Cal. Aug. 31, 2012). However, this principle is subject to several important exceptions and conditions, as provided in Section 2870.

Section 2870 introduces a significant limitation to the broad ownership rights granted by section 2860. It provides that an employment contract that purports to assign patent rights or other rights in an invention developed entirely on the employee’s own time without using the employer's equipment, supplies, facilities, or trade secret information is the employee's property, provided that the invention does not relate to the employer’s business or actual or demonstrably anticipated research or development, or does not result from any work performed by the employee for the employer is against public policy and is therefore invalid ​(Cal Lab Code § 2870)​.

Section 2871 complements section 2870 by prohibiting employers from requiring employees to agree to terms that are void and unenforceable under section 2870 as a condition of employment. This section also clarifies that employers can require disclosure of all inventions made during employment and establish a review process to determine ownership​ (Cal Lab Code § 2871).

Section 2872 requires employers to notify employees in writing if their employment agreements include provisions that require them to assign their rights to inventions, ensuring that employees are aware of their rights under section 2870. In disputes over the applicability of section 2870, the burden of proof rests on the employee ​(Cal Lab Code § 2872).

Case Law on Employee Inventions Related to the Employer's Business

The statutory framework is further shaped by California case law, which has addressed various aspects of invention ownership.

In Goodyear Tire & Rubber Co. v. Miller, the court held that when an employee is specifically hired to invent or if their job involves developing new processes or products, the inventions developed in the course of their employment belong to the employer​. This principle reinforces the employer’s ownership rights under section 2860, especially in cases where the employee’s role directly involves innovation.

However, in cases where the employment agreement is less clear, courts have applied a more nuanced approach. For instance, in Aero Bolt & Screw Co. v. Iaia, the court ruled that even if an invention is developed during employment, the employer may not automatically own it unless there is an express agreement assigning the invention to the employer​. This decision highlights the importance of clear contractual terms defining ownership rights in an employee agreement.

In the Mattel, Inc. v. MGA Entertainment, Inc. case, a significant federal case applying California law, the Ninth Circuit held that even an employee’s “ideas” could be subject to assignment if they were conceived during employment, even if not fully developed​. This ruling underscores the potential breadth of employer ownership rights under California law and the critical role of employment agreements in defining the scope of these rights.

Inventions Developed by Independent Contractors

The situation becomes more clear cut when dealing with an independent contractor (IC). Unlike employees, ICs are generally presumed to own the IP they create, unless there is a written agreement specifying otherwise. Generally, the ownership of intellectual property rights, including inventions, must be defined in a written contract with the IC.

However, when ICs create inventions using the hiring party’s resources or within the scope of their contracted work, the hiring party may assert ownership under the theory of “shop rights”.

Practical Considerations and Recommendations

Companies that are developing new product designs, manufacturing processes, and technologies should take several practical steps to protect their respective interests:

Clear Employment Contracts:

Employers should ensure that employment contracts explicitly address the ownership of inventions, including clauses that define the scope of work and the ownership of any resulting IP. Employee proprietary information and invention assignment agreements are typically required during the onboarding process to ensure confidentiality and ownership of inventions, copyrights, and other intellectual property. The agreements should include assignment clauses in employee agreements signed at the time of hiring. Businesses should also include assignment clauses in independent contractor agreements that transfer IP rights created in the work performed by the independent contractor.

Written Notifications:

Employers must comply with section 2872 by providing written notifications to employees about their rights under section 2870, ensuring that employees are fully informed of their rights and obligations.

Invention Assignment Agreements (IAA):

If there are existing employees that are working in research and development or product development and have not yet been asked to sign an employment contract that includes an assignment clause, an IAA should be prepared and signed to clearly delineate the rights of both parties concerning inventions. These agreements should comply with California law and avoid overreaching provisions that could be deemed void under section 2870. In such cases, consideration in the form of payment or other value should be provided in exchange for the employee's agreement to transfer their rights to inventions.

Independent Contractor Agreements:

When engaging ICs, hiring parties should use detailed agreements that specify ownership of any inventions created during the engagement. These agreements should explicitly state the intent of the parties regarding IP ownership.

Due Diligence and Documentation:

Both employers and employees should document the development process of any invention, including the resources used and the time of development. This documentation can be crucial in resolving disputes over ownership.

Legal Counsel:

Given the complexity of IP ownership issues, both parties should seek legal advice when drafting or reviewing contracts related to employment or independent contractor relationships. Legal counsel can help ensure that the agreements comply with California law and effectively protect the interests of both parties.

Conclusion

The ownership of inventions developed by employees and ICs in California is governed by a combination of statutory provisions and case law that together create a complex legal framework. To properly control the ownership of patents and other intellectual property rights, employers must consider who performing work for them (employees and/or ICs), the limitations on assignment requirements provided under sections 2870-2872, and ideally have a written contract signed that addresses IP ownership at the time the employee or IC is initially engaged.

Given the potential for disputes, it is essential for all parties involved in the creation of IP to have clear, well-drafted agreements that address the ownership of inventions. As the legal landscape continues to evolve, staying informed of the latest developments in intellectual property matters is essential to maximize the value of an enterprise in California or any state.

If you are an employer with questions about your legal rights to an invention or an employee with questions about obligations to your employer for an invention, discussing the matter with an intellectual property attorney would be worth your time. If you have not yet considered this issue, a review of your employment agreements for assignment provisions addressing inventions or other intellectual property is warranted.

The attorneys at Sierra IP Law are experienced in dealing with employee and IC invention matters. Contact our offices for a free consultation.