Stake / Startup Legal Strategy / Does Your Business Own Your Core IP? The Importance of Patent Rights Assignments

Does Your Business Own Your Core IP? The Importance of Patent Rights Assignments

Since the inventors will be the founders of the company, isn't it automatic that the company can make, use, or sell the invention, include the patent in its valuation, or enforce the patent? NO!

You may think you own your IP, but do you? I run into this scenario all the time: a startup company is being founded around an awesome new idea invented by one or more of the founders. The entire business will rely upon making, using, or selling the awesome new idea. Since the inventors will be the founders of the company, isn’t it automatic that the company can make, use, or sell the invention, include the patent in its valuation, or enforce the patent? NO!

The problem: who owns the patent?

At a surface level, it may seem natural that the company can use the IP of its founders. However, this is permitted not because of any sort of automatic license, but only because the founders are—knowingly or unknowingly—choosing not to sue their company. Believe it or not, if the founders hold a patent on the invention, the company may very well be infringing on its founders’ patent rights. You may say: “Josh, but your free-to-download Practical Patents guide tells me a patent is enforceable by the owner, but it’s not automatically enforced. The founders are not going to sue their own company.” You’d be right on the law and you would probably be right on the application—at first. What happens if one of the founder-inventors leaves the company?

Also, consider the embarrassment of a company proceeding to exit through a sale to another company or investor, only to find out during due diligence the company’s most valuable assets—its core patents—are not owned by the company. During due diligence, attorneys will pour over all of the assets the company says it owns, and basic IP due diligence is to verify the company owns the IP it says it owns. The selling company not owning its core patents can be enough to sink the sale entirely, or at a minimum, can severely impact the company’s sale value. A company may be able to clean this up at the time of sale by getting assignments from the inventors. But, what if an inventor (a) disagrees with the sale, (b) has left the company never to be heard from again, or (c) leaves the company on sour terms? Prudence suggests putting in a little work early on is best practice to obviate such potential future major issues.

Lastly, consider the sunk costs of the company initiating patent enforcement litigation against a competitor, who may very well be actually infringing on the patent, only to lose on a motion to dismiss—if in the extremely unlikely situation the case even makes it that far—because the company does not have the right to enforce (i.e., does not own) the patent it is seeking to enforce. If one of my clients were to receive a cease-and-desist letter, as a patent attorney, one of the first things I would check is whether the sender of the letter owns the patent.

The solution: Execute a properly drafted Assignment.

The good news is that there is a simple solution: have the inventors execute an assignment. This is often best done before a patent application is even filed (in some cases, it must be). Then, the founders can be sure that the company owns the rights and can enforce them against others. This also assists with two technical problems. First, the company can be the applicant on the patent application and can conduct the patent application process even if an inventor leaves the company and is never heard from again. Second, in the worst-case scenario that a founder leaves on sour terms, the company can rest assured that that former founder-inventor would be unable to sue the company for patent infringement. It’s important to get these assignments executed early, when everyone is getting along well.

If you’d like to have a free 30-minute discussion about your IP and what you need to do to ensure you own it, click here to schedule a meeting with me at a time that works for you.

I need to dispel with a myth.

You may have some level of understanding of something called “work made for hire” doctrine in copyright law—this says that if certain factors weigh in favor of the hiring entity having hired the author to make the work of authorship, copyright may automatically vest in the company. If you’ve ever asked a good attorney about this in an employment agreement or contractor context, they’ve probably told you not to rely on work made for hire doctrine and instead spell out the assignment in the employment agreement or contract. That’s because the doctrine can be unreliable, and reasonable certainty the transfer actually happened cannot be ascertained unless the matter is litigated.

There is no work made for hire doctrine in patent law. There is no legal mechanism for patent rights to automatically vest in a company simply by virtue of an employer-employee or contractor relationship with an inventor if that inventor was not hired specifically to invent a particular invention. Put another way, if there has not been an assignment of patent rights, the inventors still own the patent rights free and clear.

But can’t I require employees or contractors to assign their inventions to the company?

Yes! One of the issues immediately faced at the prospect of assigning patent rights stems not from patent law, but from contract law. Any entrepreneur, MBA, or first-year law student will tell you, for a contract to be valid, there must be consideration. This means that there has to be an exchange of something for something else. The somethings can be money, promises, performance, goods, or anything of sufficient value. This is why many patent rights assignments will begin with some variation of, “In consideration of $1.00 and other good and valuable consideration, the receipt of which is hereby acknowledged . . .”

OR, the astute observer will note that continued employment itself is a promise of value by the company. Issuance of shares or options in a company, payment of a distribution from an LLC, payments to contractors, salaries or bonuses paid to employees, benefits, etc. are also all valuable things that can be given by a company to an employee or contractor. This is why it is possible—and good practice—for a company to include an assignment-of-patent-rights clause in its employee agreements or contractor agreements. It is important that this clause be a present assignment of patent rights and not merely a promise to assign any future inventions. This topic deserves an article unto itself—and it will receive such treatment. Stay tuned and get on our email list by requesting our free Practical Patents guide.

Need to talk about your employee or contractor agreements and whether they sufficiently cover IP? Let’s talk.

In conclusion.

Patent rights do not automatically transfer from the inventors to the company, even when the inventors are founders of the company or an employee of the company absent a written agreement contemplating such transfer. It’s important to ensure that assignments are executed to ensure the company is not inadvertently infringing on a founder’s or employee’s patent, which can be a ticking time bomb should the founder or employee leave the company. Assignments of patent rights are a simple step to ensure the company owns its IP.

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