Don’t Overlook Agreements with the Inventors
Corporate formalities are rarely a high priority for early stage development companies. There may be a formal legal entity (such as a corporation or limited liability company) or the participants may operate informally as a partnership. Some participants may be paid employees of the development company while others may still be full time professors or even have other jobs and work for the development company in their spare time. Inventions may be entirely new concepts or may only be improvements (albeit significant ones) to earlier inventions. It may not be at all clear exactly who owns what rights in anything that might be invented.
The participants often do not worry much about this until the day when something potentially valuable is discovered. Then the world changes. Suddenly the participants are focused on allocating rights (including the now important economic rights) to the invention. As they move to the likely next stage of seeking venture capital, they will be asked to prove that the development company owns the invention that it is trying to commercialize. Any misunderstanding about the rights to the invention can become a major problem if they are not addressed before this point.
How can early stage entrepreneurs handle this potentially difficult problem at an acceptable cost? The answer is clear and deceptively simple. From the start of a project, there should be written agreements in place that expressly assign all relevant intellectual property rights to the development company and allocate the various rights of the participants.
Under patent law, our starting point in reaching this conclusion is clear. Unless there is an exception, the individual inventor, and not the company, owns the patent rights to any invention. One common exception is the “hired to invent” doctrine which makes the company the owner of the patent if the employee was specifically hired or assigned duties for the purpose of using his or her inventive facilities to address the specific problem that resulted in the invention. Another exception is the equitable right of the company to force certain company owners and insiders to assign patent rights to the company. Even if an individual inventor is deemed to own the invention, the company may in some circumstances have limited “shop rights”, which is a nonexclusive royalty-free right to exploit the invention. Finally, if multiple inventors are involved, each joint inventor may have the right to freely exploit the invention on his or her own, without any permission from the other inventors.
After the development company examines the application of all of these doctrines, it may think it has a reasonably good idea of what rights it will own. The problem with relying on these doctrines and their various exceptions, however, is that they all raise difficult factual and equitable issues. This means there will be less certainty about who owns the rights. Venture capital investors usually hate uncertainty, and may well force the company to solve that problem by getting agreements with the inventors. Sadly, agreements that everyone was eager to sign at the start, when the company’s project was just a hopeful idea, may look much less attractive to the inventors when real dollars are involved.
Even obtaining signed agreements from all involved may not solve all of your problems, and there will still be some areas of potential concern. First, inventors can only assign the rights they own. If the invention is really just an improvement to an earlier invention, you can not ignore the rights of the earlier inventors. If development started while the inventors were employed by other companies, you cannot ignore the possibility that another company will have rights in the invention. This is a complicated problem and one that does not lend itself to easy low-cost solutions. But, even at an early stage in the project, you should ask the necessary questions to understand the scope of this problem and be sure the direction of your development plan makes sense, given any potentially conflicting rights.
Finally, if you are going to rely on agreements, you should be sure they are enforceable. This is usually not a problem so long as the agreements are clear and reasonable in scope. At a minimum, the agreements should have clear and express assignments of all relevant intellectual property rights. Ideally, the agreements will also minimize future arguments by dealing with the allocation of the possible future profits from the commercialization of inventions. To avoid the risk of unenforceability, the agreements should be supported by adequate legal “consideration,” although this is unlikely to be a problem with respect to an agreement with any inventor who will be sharing in the profits from commercialization. Many states limit the scope of permissible assignments, but that is generally not a problem so long as the assignment is limited to inventions relating to the proposed development project, and does not purport to assign rights in unrelated inventions that the inventor develops entirely on his or her own time without any use of company facilities, supplies or trade secrets.
Note: for more about ownership of inventions, see John Conley’s previous post in the Bench to Market series, “What Happens When Professors Have Valuable Inventions.”
