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Who Owns That New Product - The Company or the Employee?

Who Owns That New Product - The Company or the Employee?

Who Owns That New Product - The Company or the Employee?

In this age of mobility of workforce and business the ownership of proprietary developments is frequently overlooked. The pressures of running the business distracts from the attention to the detail of the relationship between the business entity and the employee. The issue may surface later (if ever) through such as the discovering the technology has been commercialized by a competitor. Unfortunately, when the question of ownership arises, the players have changed or moved and the determination of ownership of the development may require court action.

A Scenario: The business is going great guns! Pots, Inc. has finally gotten sufficient market share to be a true player in the outdoor cooker business. The Smokey Hollow model smoker has been the hallmark of the company's line of cookers and accessories and now rivals the national brands in the mid-south market. Pots marketing group .0 is on a high since the recent successful test market of the new Smokey Brumey, a smoker including a unique misting unit which accelerates the smoking/cooking process while ensuring that the smoked meat remains moist and juicy. The production line has been refitted to concentrate on manufacture of the Smokey Brumey, at no small expense, and the advertising campaign was launched last Monday. Pots, Inc. is excited, from CEO to line assembler.

Enter the Sheriff, who serves a summons issued by General Sessions Court, filed by Pans, Inc. seeking an injunction against the further manufacture, promotion and sale of the Smokey Brumey. Pans alleges that the mist unit of the Brumey is the invention of one of its employees, Rusty Pipes, a former maintenance man at Pots, Inc., who has assigned the invention to Pans. Pans further alleges that the invention, misappropriated by Pots, is the subject of a patent application which will issue as U.S. Patent 6,987,654 next Tuesday. A hearing on the matter is set for next Monday.

Far fetched? Far from it! Rusty is an avid outdoors man who spends most of his spare time hunting and fishing. While sitting in a duck blind, musing over the time it took to smoke his booty, the thought struck him that since elevated temperatures in his smoker often shriveled the meat, maybe using a mist might keep the product moist. After weeks of tinkering in his shop, he devised a humidifier to operate in conjunction with his smoker. Rusty's frequent hunting companion (Joe Hardsell) was a good sounding board for the several unsuccessful attempts to perfect the hardware to get the right mix of smoke, heat and moisture. Joe knew smokers since he was an assistant product manager for Pots and was in charge of marketing of the Smokey Pot, Pots' first product now being phased out. He suggested that Pots look at the mister.

The Issues: The ownership and right of use of inventions lies in the law of contract and master/servant (employer/employee) relationship. The U.S. patent law is helpful in the ownership issue only in that it provides that an application for a patent must be made by the inventor of the invention for which patent protection is sought. The relationship of the inventor to any entity supporting the work/invention and the rightful owner is usually decided by state law as it applies to contracts (frequently implied). The issue is more easily addressed if there is a written agreement between the "employee" and the company (employer) containing specific terms governing the work product of the employee. Absent such an agreement, the arbiter of the issue will look to special aspects of the relationship to make the ownership determination. Such facts as whether an inventor is a partner, manager, shareholder or an officer or director of the company will affect the assessment. Another facet of the relationship that may be determinative of ownership is the nature of duties to be performed by an inventor and whether the inventor is so paid. There may be a presumption of ownership in an employer or hirer of services if the duties or services to be performed specifically involve activity that would likely produce invention adjunct to a body of technology, a product or process already owned by the employer.

The Standard: With the absence of a definitive state statute, the courts look to the decisions of prior cases and learned treatises for guidance in these knotty issues. Case law is frequently so fact specific that it doesn't provide a clear prediction for resolution of the issue. The Restatement of Agency, a detailed statement of the "common law" relating to the rights and obligations in the field of "worker-workee," including master/servant and employer/employee is a primary guide, based upon the rationale of an implied contract. The Restatement speaks in terms of patents, in the context of the tangible recognition of the invention, i.e., the patent being a certificate analogous to a deed for land that may be registered to provide notice and proof of ownership. As with fraudulent registrations of title to land, there may also be intentional or unintentional misrepresentations in the ownership of invention. The basic rule stated by the Restatement (397) recites that "Unless otherwise agreed, a person employed by another to do non-inventive work is entitled to patents (inventions) which are the result of his invention although the invention is due to the work for which he is employed."

The breadth of this pronouncement should strike fear into the hearts of all managers and owners of businesses that rely upon the inventive contributions of their employees to maintain the company's market position. Probably more disconcerting is that courts frequently are influenced by the rule. The direct solution to the dilemma is to ensure that all employees are under a written agreement to assign all inventions to the company. While this seems a ready fix, your contract lawyer will surely advise that in order for there to be a binding contract, there must be consideration given for the benefit received.

The matter is more easily dealt with among salaried employees who receive negotiated terms; it remains difficult to define a universal solution for the hourly workforce whose work product is manual, usually with tools provided by the employer. Putting company employees under a specific employment contract which likely impacts a number of the elements of the employer/employee relationship is an imposing task often viewed as threatening and an invasion of privacy by the employee. If the workforce is under a labor (union) agreement, collective bargaining may be involved. Such mechanisms as suggestion programs and special awards can be useful to create a transfer of rights.

There are two aspects of the rule that provide some comfort to the employer. As related earlier however, the establishment of the right to the qualification is very fact specific and not often as straightforward in its analysis as management would hope. A fact-driven exception to the rule may give the Pots, Inc. some relief. A first exception in the Restatement rule covers the employee who has no specific agreement, and in the course of employment, may invent and the invention is made in the course of experimentation using the compan's facilities and resources for experimentation (as by an engineer exploring a different area of technology than assigned).

The exception may support an exclusive or non-exclusive right (license) to the company to use the invention in the regular course of its business. A second exception to the Rule gives the company a "shop right" to the invention, enabling it to use the invention in a limited course of its business. The end result is similar to the non-exclusive license above, but is based on a different fact situation. The qualification of shop right arises from the situation of an employee (not expected to invent) who invents on company time and uses company facilities, tools and/or supplies during time that the employee should have been devoting to normal duties.

In our example, if Rusty should have been maintaining production machinery, but instead he was busy tinkering at a bench using an old Smokey Pot and some of the hardware from the Smokey Hollow to fashion his misting unit, Pots, Inc. might come out of the proceedings with a shop right (a restrictive license) to continue making and selling the Brumey. The shop right is strictly construed and may allow use of the invention only at the facility where invented.

Caveat: The issue of ownership of inventions is complex if not addressed at the outset in the product development exercise. The risks should cause every product/marketing manager and company executive to want to know the source of each new product idea and ensure that the company has the clear and exclusive control over its destiny. The prudent company will make its deal with the employee/inventor up front and enjoy the security of exclusive use of the invention.