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Brilliant Idea. Now Who Owns the Patent?

5/5/2014 Articles

Patent rights created by employees or independent contractors in California can be the source of expensive disputes over who owns what. Different rules can apply depending on whether the person who did the inventive work for the business is an employee or an independent contractor, and in California, mistakenly characterizing one as the other can lead to serious penalties.

For different reasons, both businesses and workers may prefer to characterize the worker's status as that of an independent contractor instead of an employee. Businesses may want to avoid having to pay payroll taxes and providing workers' compensation insurance. Anti-discrimination and retaliation laws only protect employees, but not independent contractors. Some businesses may simply see workers as outliving their usefulness from one project to another. For their part, workers may wish to receive more compensation "up front" rather than having taxes taken out of their paychecks, or have the freedom to take on projects for other businesses.

But mistakenly characterizing a worker as an independent contractor when she is really an employee can lead to serious employment-law penalties, including exposure for unfair business practices, tax liability, penalties and interest—even criminal liability. In determining whether a worker is an employee or independent contractor, California courts apply multi-variable tests that rely on traditional principles of agency as well as additional considerations depending on the purpose of the law at issue in the case. See Toyota Motor Sales v. Super. Ct., 220 Cal. App. 3d 864, 877 (1990) and S. G. Borello & Sons, Inc. v Dept. of Industrial Relations, 48 Cal.3d 341 (1989).

Whether a worker is an employee or independent contractor has serious implications for patent rights arising from her efforts. Labor Code sections 2870-2872 govern assignments of inventions to employers by employees but not independent contractors. These provisions favor the employer because they allow it to require employees to assign to it any inventions made that (1) "[r]elate at the time of conception or reduction to practice of the invention to the employer's business, or actual or demonstrably anticipated research or development of the employer; or (2) [r]esult from any work performed by the employee for the employer," even if the employee creates the invention "entirely on his or her own time without using the employer's equipment, supplies, facilities, or trade secret information." Labor Code § 2870(a). As a result, it has long been routine to ask each new employee to sign inventions assignments at the time of hire.

Whether Section 2870 applies to employee inventions is a factually intensive issue. See Iconix, Inc. v. Tokuda, 457 F. Supp. 2d 969, 991-92 (N.D. Cal. 2006). But courts tend to construe the "related to" language of Section 2870 broadly to find that the invention relates to the employer's business. See Cadence Design Sys., Inc. v. Bhandari, No. C 07-00823-MHP, 2007 WL 3343085 (N.D. Cal. Nov. 8, 2007); Cubic Corp. v. Marty, 185 Cal. App. 3d 438, 448 (1986).

California law also allows introduction of extrinsic evidence to determine the "related to" issue. "Such extrinsic evidence may include evidence of the nature of the employer's business and the nature of the employee's work for the employer, as well as evidence of the conduct of the parties, i.e., evidence probative of whether or not they regarded the invention as falling within the agreement." SiRF Tech., Inc. v. Int'l Trade Comm'n, 601 F.3d 1319, 1326-27 (Fed. Cir. 2010). The employee's salary itself is sufficient consideration for the assignment to be effective, so employers want to have employees sign pre-assignments of rights at the time of hire. If the assignment is not executed until a later date, it should come with some consideration besides the employee's current salary, such as a raise or bonus. See Cubic Corp., 185 Cal. App. 3d at 448.

Section 2871 of the Labor Code also allows the employer to require that the employee disclose to it, confidentially, all inventions he or she makes during the term of her employment so that it can determine whether the inventions fall within the invention assignment agreement. Section 2872 requires a mandatory disclosure. The employer must give notice to the employee that the invention assignment does not apply to "an invention which qualifies fully under the provisions of Section 2870" at the time the agreement is made. But it also places the burden of proving that the employee's invention is not covered by the assignment agreement "on the employee claiming the benefits of its provisions." While there is no requirement that notice be given to independent contractors of section 2870, it would be prudent for employers to do so on the possibility that someone hired with the title of "independent contractor" may be re-classified as an employee.

In addition to the benefits that Sections 2870-72 confer on employers, the courts have interpreted Section 2860 of the Labor Code to hold that inventions which the employee was "hired to invent" belong to the employer, even when there is no express assignment. See Gen. Elec. Co. v. Wilkins, No. CV-10-0674 LJO JLT, 2012 WL 3778865 (E.D. Cal. Aug. 31, 2012). By contrast, there is no statutory scheme in California concerning assignment of inventions created by independent contractors. In the context of independent contractors, the parties are thus free to specifically contract around those issues. Iconix, Inc. v. Tokuda, 457 F. Supp. 2d 969, 994 (N.D. Cal. 2006).

Unlike with employees, businesses should not expect the "hired to invent" doctrine to favor them when it concerns inventions created by independent contractors. "[T]he hired-to-invent doctrine employs a bright-line rule that a contract term transferring invention ownership to an employer may not be inferred when the inventor is an independent contractor." Bldg. Innovation Indus., L.L.C. v. Onken, 473 F. Supp. 2d 978, 984 (D. Ariz. 2007).

Regardless of whether a worker is an employee or independent contractor, the tense of the assignment can be crucial. "[T]he contract language 'agree to assign' reflects a mere promise to assign rights in the future, not an immediate transfer of expectant interests." Bd. of Trustees of Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., 583 F.3d 832, 841 (Fed. Cir. 2009). By contrast, "the [contract's] language of 'do hereby assign' effect[s] a present assignment of [the inventor's] future inventions" to the company. Id. at 842. In Roche, the agreement with the "do hereby assign" language vested title to the patents at issue in the party with whom the inventor had signed the agreement as an independent contractor, even though the inventor had previously signed an agreement with the other party—his employer—with the "agree to assign" language. Thus, a principal would be wise to require a worker to "hereby assign" at the time of hire any future patent rights she creates that relate to the principal's business.

Rod Thompson is a partner and Erik Olson is a senior associate in Farella Braun + Martel's intellectual property litigation department in San Francisco. They can be reached at [email protected] and [email protected].

Reprinted with permission from the May 5, 2014 issue of The Recorder. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.

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