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Albert Wong Authors Law360 Article, “Creating A Better System For Employee Invention Assignment”

May 17, 2018


Albert Wong Authors Law360 Article, “Creating A Better System For Employee Invention Assignment”

May 17, 2018

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Albert Wong, Technology Specialist and Patent Agent, authored article published in Law360, “Creating A Better System For Employee Invention Assignment.

In the U.S., as a legal default rule (in the absence of private contracting), an inventor retains patent rights to any patentable inventions she creates, including inventions created during work hours using her employer’s property and inventions created using federal funds. The only exception to the default rule is if an inventor was specifically hired by her employer to create an invention (analogous to the work-for-hire doctrine in copyright law). Unsurprisingly, sophisticated companies typically opt out of this employee-friendly default rule by contractually requiring their employees to relinquish their rights to any inventions they may create during their employment. Pre-invention assignment agreements (PIAAs) typically require employees to disclose any inventions they create to their employer, assist their employer in securing patent rights to the inventions, and legally assign the patent rights to their employer.

There are few legal limitations on PIAAs beyond the traditional doctrines of duress, fraud, concealment and nondisclosure, and unconscionability that limit all private bargaining —none of which are likely to apply to PIAAs entered into in the employment context. In particular, there is no legal requirement for PIAAs to remunerate employees for any inventions assigned to the company under the agreement. A small minority of U.S. states (California, Delaware, Illinois, Kansas, Minnesota, North Carolina and Washington) modestly limit the scope of PIAAs, prohibiting them from covering inventions created by employees using their own time and their own resources when the inventions are not related to the company’s business and do not stem from work by the employee within the scope of her employment. Two states, Nevada and Utah, have passed statutes granting companies rights to their employees’ inventions by default, even in the absence of a PIAA. (Nevada’s employer-friendly invention ownership rules are consistent with Nevada’s attempt to rival Delaware as a corporate haven.)

While employees have challenged PIAAs signed subsequent to an initial employment agreement as unenforceable due to lack of consideration, companies can (and do) easily insulate themselves, either by including nominal consideration language or by requiring employees to sign a PIAA as a condition precedent to commencing employment. PIAAs have also been challenged for containing imprecise language. The U.S. Court of Appeals for the Federal Circuit has held — and the U.S. Supreme Court has affirmed — that PIAAs that require employees to “agree to assign” any inventions they create do not actually grant the employer any rights to any inventions. Rather, such PIAAs only impose a contractual obligation for the employee to assign her rights to her employer in the future. Thus, in practice it remains possible for an employee bound by such a PIAA to subsequently assign away her rights to a third party. However, it’s simple for companies to avoid these challenges by including language stating that their employees “will assign and do hereby assign” their inventions to their employer.

Getting Employees on Board

Despite PIAAs’ legal enforceability, they often don’t help companies assure optimal employee behavior. While a company will almost certainly have detailed, up-to-date knowledge of the progress of a major research initiative involving multiple employees, in many situations companies are reliant on their employees to proactively disclose their inventions. But how can a company enforce a PIAA against an employee for failing to inform the company about an invention the company isn’t aware exists? The duties imposed by PIAAs on employees not only to legally assign patent rights to their employer, but also to assist their employer in actually securing those patent rights, may also be similarly difficult to enforce in practice.

Even if a company successfully coerces an employee into formally abiding by the provisions of a PIAA, in practice the employee may not exert her best efforts in assisting with the patent prosecution process. The successful coercion of an employee would also likely have a negative impact on other employees’ morale and performance by placing the employer in an adversarial role.

Creative Invention Assignment Approaches

Companies that want to encourage optimal employee behavior have begun experimenting with novel contractual approaches. Whereas the legal “stick” of a traditional PIAAs focuses  solely on assigning legal rights and duties, a more effective contractual approach would braid a traditional, legally enforceable PIAA with a voluntary system focused on enhancing employer-employee collaboration — achieving results neither a PIAA nor a voluntary system alone could produce. Real-world examples include:

Disclosure-Triggered Reward Systems

One method for companies to encourage employees to disclose inventions is to offer a monetary incentive. For example, one company pays employees $500 for submitting a new invention disclosure form, an additional $1,000 upon the filing of a patent application based on the disclosed invention, and another $1,000 upon allowance of the application (assuming the employee has not left the company in the interim). The initial $500 disclosure bonus is intended to motivate employees to disclose their inventions even if they aren’t sure whether the company will elect to pursue patent protection. Tying additional payments to filing and allowance ensures that employees remain motivated to assist in the patent prosecution process and, compared to a single larger disclosure bonus, reduces the company’s costs if the company decides not to file a patent application or elects to abandon a patent application prior to allowance.

Another company’s reward system similarly pays employees upon filing and issuance of a patent application, but goes further by paying employees an additional bonus if the issued patent generates revenue. This system gives employees who create commercially valuable inventions an additional incentive to assist proactively in the patent prosecution process.

In practice, these types of disclosure-triggered reward systems are unlikely to be an optimal solution for companies. Given the relatively small sums paid to employees, the systems often have limited efficacy in encouraging employees to disclose. Such systems could also incentivize abuse by less scrupulous employees (e.g., by submitting disclosure forms for even the most minor inventions, or by trying to characterize a single invention as multiple inventions).

Revenue-Based Payment Systems

Most patents are commercially worthless. Focusing on rewarding employees whose inventions result in valuable patents allows companies to pay more to their most successful employees and eliminates the perverse incentive for employees to submit disclosures of low-quality inventions.

One company considered implementing a payment system tying inventor-employee payments to the total revenue generated by the corresponding patent. An employee would receive $5,000 for a patent that generates $5 million in revenue, $10,000 for a patent that generates $10 million in revenue, and so forth. The company ultimately rejected the idea due to the inherent challenges of tying compensation to revenue. For example, it would be difficult to accurately determine how much revenue should be allocated to a specific patent if the patent is licensed as part of a broader deal involving multiple patents or even nonpatent elements. Acrimony might arise between an employee who believes her invention is commercially valuable and an employer that decides not to pursue patent rights or refrains from monetizing an issued patent. Such a system could also inspire valuable employees to demand bespoke contracts specifying the efforts the company must take to generate revenue using an issued patent.

Nonmonetary Systems

Some companies have found that nonmonetary systems are more effective than increased compensation at “optimizing” employee disclosure and collaboration, particularly for employees under the age of 30. Implemented properly, nonmonetary systems may be more likely to enhance employees’ esprit de corps than monetary reward systems, which inherently highlight the employee’s status as a subordinate to the employer and may even evoke a sense of quid pro quo that may backfire if an employee perceives a gap between the value of her invention and the compensation being offered “in exchange.”

For example, one company has implemented a system that involves regularly scheduled “signing parties” with free food and drink, where inventor-employees gather en masse to disclose new inventions and legally assign patent rights to their employer. The system promotes a norm of employee disclosure by making invention disclosure a social event. The system also benefits the company by increasing process efficiency and promoting organic cross-pollination between the successful attendees.

Another company has implemented a system that involves granting employees face time with a senior officer during invention disclosure meetings and officially recognizing those employees at corporate functions upon the subsequent issuance of patents resulting from their inventions. By connecting successful employees directly with company executives, the system reduces the perceived “distance” between employees and employers. By tying official recognition to patent issuance, the system encourages employees to stay involved and proactively assist in securing patent rights. It also benefits the company by raising senior management’s awareness of the company’s successful employees.

Challenges to Collaborative Contracting

Legal Inventorship

One key challenge is that not everyone who plays a role in “creating” an invention is actually a legal “inventor” as a matter of patent law. A manager is not necessarily an “inventor,” even if the manager directed her employees to investigate a specific problem, specified the desired outcome, and personally supervised her team. Conversely, an employee is not necessarily an “inventor” of a creation she physically makes.

Legal inventorship is determined separately for each claim in a patent application. As claims are added, deleted, or amended during patent prosecution, the inventorship of the patent application can also change. Further, since initial provisional patent applications can be filed without any claims, it may be impossible to definitively determine legal inventorship until a utility patent application is filed.

Due to the restrictive definition of legal inventorship and the potential for employees to acquire or lose status as inventors as a patent application is prosecuted, voluntary collaboration-enhancing systems restricted solely to legal inventors may fail to motivate employees to disclose inventions they create if they fear they may not qualify as, or remain, a legal inventor. Such systems would also inevitably fail to motivate noninventor employees to assist in the patent prosecution process, even though those employees may possess key knowledge that could add significant value to a patent application or issued patent. Thus, collaboration-enhancing systems should treat all “creators” alike — construed liberally to include all employees who have made a substantial contribution to the invention.

Patent Prosecution

The length and unpredictability of patent prosecution constitutes another challenge. Twelve to 30 months typically elapse between the filing of an initial provisional patent application  and the filing of a utility patent application claiming priority to the provisional application; it then takes an average of another 24 months (and often significantly longer) before a patent issues. Thus, focusing on rewarding employees at patent issuance would result in many years delayed gratification. An employee could rationally predict that she will likely no longer be with her current employer by the time a patent is issued.

Accordingly, collaboration-enhancing systems should not reward employees solely upon patent issuance. Recognition should also be tied to one or more earlier events, such as the initial disclosure of an invention, the company’s decision to pursue an invention disclosure, the inventor-employee’s participation in an invention disclosure meeting, the inventor employee’s active participation during the process of drafting a provisional patent application, the filing of a provisional patent application, the filing of a U.S. utility patent application, the publication of a patent application, or the inventor-employee’s active participation during patent prosecution. Further, companies might consider rewarding even former employees who leave prior to the issue date. This would ensure that even employees who do not anticipate staying with the company long-term remain encouraged to collaborate in the patent prosecution process.

Click here to read the original Law360 article.

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