The Importance of Using the Correct Legal Language to Transfer IP Rights

Most individuals have at one point or another signed an employment agreement or outside contractor agreement with respect to his or her employment.  For employees, it commonly is a formality needed for a job. For employers, it is a means of obtaining an employment period, establishing or delineating work policies, and acquiring rights to intellectual property.  However, on the last point, employers must be keenly aware of the language that is used to acquire IP rights, and which rights the employer is interested in acquiring, as Advanced Video discovered. 

In Advanced Video Technol. LLC v. HTC Corp., three employees developed a video compression algorithm using a single semiconductor chip (See, U.S. Pat. 5,,781,788).[i]   After the technology was developed by the original company, Infochips Systems Inc., went out of business and the patent application acquired by AVT’s predecessor. Two of the employees assigned their rights to Advanced Video Technologies LLC’s (AVT) predecessor, whereas the third refused to execute the assignment.  The company relied on the third employee’s employment agreement to show the transfer of her rights, notably a section stating

I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and will assign to the Company all my right, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company.

In addition, there was a provision stating the employee quitclaims any to any IP infringement to the company.

The court found the provisions failed to transfer rights from the employee to the company.  In the case of the “will assign” provision, the court found this language, in consulting or employment agreements, is a mere promise to assign rights, and does not effect any transfer of ownership.[ii]  On the trust provision, the Federal Circuit found that even in the event the agreement transferred rights from the employee to a trust, the agreement did not transfer the rights from a trust to the company, nor was a transfer to the company ever executed. Because the state law does not allow a trust beneficiary to sue based on the property owned by the trust (California), the court concluded that the employer would need to force the trust to exert its rights in a lawsuit, which did not occur.[iii] However, the language used by the Federal Circuit did appear to question whether the court found the agreement formed a trust at all.[iv] Finally, the “quitclaim” provision related to interests in infringement.  The Federal Circuit found that the quitclaim provision has not applicable, as it did not provide language on assignment of patent rights, but rather to damages.[v]

The effect of this decision was that the patent infringement suit brought on by AVT was over before it began, as an indispensable party was left out of the litigation.  It highlights the importance of the language used in employment agreements and contracts, that to the extent possible the employee immediately transfers ownership of all IP rights to the employer.  It also highlights the importance of obtaining assignments in properties as soon as the rights accrue.  For example, if the original company, Infochips Systems Inc., obtained an assignment, the company would acquire all rights and making transfer of rights a simple affair.  I have inherited patent applications where an employer did not obtain an assignment.  If the employee is still employed by the employer, obtaining rights to file an application or a lawsuit can be relatively straightforward, assuming the employee is willing to cooperate.  But if the employee has left his or her position, a diligence search for the employee is required, and can be a time-consuming affair. Further, employees whom were fired to left a position on bad terms are generally less willing to cooperate with the former employer, compounding issues with consolidating ownership, undertaking patent applications, filing proceedings with the U.S. Patent and Trademark Office, or litigating a patent.  Thus, ideally employers should err on the side of caution and obtain assignments early in the application process or at the time the employer decides to patent an invention. Employers who do not regularly require employees to execute assignments must be diligent in the language of their employment agreements and ensure there is a provision to currently assign rights. For companies interested in acquiring IP rights, this is a cautionary tale on the dangers of obtaining IP without undertaking due diligence, including a confirmation of the ownership in those properties.

[i] Advanced Video Technol. LLC v. HTC Corp., et al., Nos. 2016-2309, 2016-2310, 2016-2311 (Fed. Cir. Jan. 11, 2018); (http://www.cafc.uscourts.gov/sites/default/files/opinions-orders/16-2309.Opinion.1-9-2018.1.PDF).

[ii] Advanced Video Technol. LLC v. HTC Corp., et al., Nos. 2016-2309, 2016-2310, 2016-2311, slip op. at 6.

[iii] Advanced Video Technol. LLC v. HTC Corp., et al., Nos. 2016-2309, 2016-2310, 2016-2311, slip op. at 7-8.

[iv] See, Advanced Video Technol. LLC v. HTC Corp., et al., Nos. 2016-2309, 2016-2310, 2016-2311, slip op. at 7.

[v] Advanced Video Technol. LLC v. HTC Corp., et al., Nos. 2016-2309, 2016-2310, 2016-2311, slip op. at 9.

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