Preserving Employer’s Patent Rights with Shop Rights & Hired-to-Invent Doctrines

Preserving Employer’s Patent Rights with Shop Rights & Hired-to-Invent Doctrines

By default, U.S. patent law presumes that inventors own their inventions, even when developed during the course of employment.1As such, employers typically require new employees to sign an employment agreement, assigning patent rights to the employer at the time of hire. But what happens when no such agreement is executed or an employee refuses to assign the rights? Are the employer’s rights in an invention developed at the employer’s worksite, using employer resources unequivocally lost? In this article, we will explore two common law doctrines — shop rights and hired-to-invent — that may protect the employer’s interest in patented inventions developed by employees on the job.

I. Shop Rights: What Are They and How Are They Effective?

Essentially, shop rights allow the employer to benefit in some degree from the invention it helped to subsidize by granting it an irrevocable, royalty-free, non-exclusive license to use an invention2 when the employee uses company time, materials, facilities, or equipment to create and patent an invention. Under shop rights, companies can use the patented invention internally, during the course of business, even without a signed agreement, while also securing an equitable defense against patent infringement.3That said, shop rights are not a substitute for an assignment, and the license to use is generally non-transferrable, unless the business is sold in its entirety.4 Thus, it is prudent to have assignments in place to avoid any difficulties when formally transferring ownership rights.

A common law doctrine based on equitable principles,5 shop rights historically represent an implied license to use or a form of estoppel to prevent a former employee from suing an employer for patent infringement. Depending on which theory the court applies, the factual inquiry can change. As such, modern courts typically use a combination of the two theories, and look at the totality of the circumstances to decide what outcome is the most fair.6

Implied License to Use. When treated as an implied license, courts primarily looked at facts around the invention’s development. Facts showing that an employee created the invention during employment hours and using employer facilities and resources, typically support a finding of shop rights.7 Inventions by independent contractors may also be eligible for shop rights; courts often consider the employment arrangement/relationship as a determining factor when looking at the totality of the circumstances.8

Estoppel Against Infringement. When shop rights are treated as a form of estoppel, courts are more interested in the parties’ behavior and their relationship after the invention’s creation.9 For instance, if the inventor acquiesces or encourages the employer’s use of the invention or benefits from the employer’s involvement in the invention, courts lean heavily toward creating shop rights to prevent the employee from suing for patent infringement.10

II. Hired-to-Invent: A Backdoor to Patent Rights

Unlike shop rights, which only give employers a license to use, the hired-to-invent doctrine can grant the employer full ownership of the invention. When hired specifically to create a particular invention or to solve a particular problem, the employee is said to have already been compensated for his/her inventive work, and therefore cannot claim patent rights.11

To determine if the hired-to-invent doctrine applies, courts look at the specific relationship between the employer and employee at the onset of the inventive process to see if an implied-in-fact contract to assign invention rights exists.12 Making this factual determination can sometimes prove difficult, especially when onboarding paperwork is lacking or when factual determinations hinge on mere nuances, including subjective intentions. For example, in Banks v. Unisys Corp.,13 the court ruled that an employee-at-will’s refusal to sign an assignment agreement made it questionable whether the employee intended to forfeit his inventive ownership even though he was clearly hired to invent.

Caveat:Work-For-Hire Doctrine & Corporate Officers. Under the work-for-hire doctrine, an employee also serving as a corporate officer typically has a fiduciary duty to assign the patent rights for inventions created during his/her tenure to the company. To do otherwise would be a clear violation of his/her duties as an employee and a fiduciary not to interfere with corporate operations.

III. Conclusion

Without a written agreement assigning or licensing inventive works, it becomes difficult and fact-intensive for an employer to claim ownership rights. Because both the shop right and hired-to-invent doctrines are based in common law and revolve around fairness, it can be particularly risky for an employer to rely on a judge’s discretion for use or ownership of a valuable invention. So both doctrines should be treated as options of last resort. That said, both doctrines can rescue employers if facts demonstrate equitable entitlement to use or own an inventive work, especially when the evidence shows the employer and employee’s subjective intent.

[1] Bd. of Trustees of Leland Stanford Junior Univ. v. Roche Molecular Sys., Inc., 563 U.S. 776, 790 (2011).

[2] Mechmetals Corp. v. Telex Computer Products, Inc., 709 F.2d 1287, 1291 (9th Cir. 1983); Lariscey v. United States, 949 F.2d 1137, 1144 (Fed. Cir. 1991).

[3] See e.g., Wommack v. Durham Pecan Co., 715 F.2d 962, 965 (5th Cir. 1983).

[4] California Eastern Laboratories, Inc. v. Gould, 896 F.2d 400, 402 (9th Cir. 1990).

[5] McElmurry v. Arkansas Power & Light Co., 995 F.2d 1576, 1580 (Fed. Cir. 1993).

[6] Id. at 1580.

[7] Francklyn v. Guilford Packing Co., 695 F.2d 1158, 1161 (9th Cir. 1983).

[8] Id.; Kierulff v. Metropolitan Stevedore Co., 315 F.2d 839, 842 (9th Cir. 1963); But see, Nartron Corp. v. Borg Indak, Inc., 848 F.Supp.2d 725, 754 (E.D. Mich. 2012) (disagreeing with Francklyn that shop rights can exist with a non-employee).

[9] Hobbs v. United States, 376 F.2d 488, 495 (5th Cir. 1967); McElmurry, 995 F.2d 1576 at 1581.

[10] Francklyn, 695 F.2d at 1161.

[11] United States v. Dubilier Condenser Corp., 289 U.S. 178, 187 (1933).

[12] Teets v. Chromalloy Gas Turbine Corp., 83 F.3d 403, 407 (Fed. Cir. 1996).

[13] Banks v. Unisys Corp., 228 F.3d 1357, 1360 (Fed. Cir. 2000).