Broken Symmetry

Patents as Intangible Asset Partitions

Before amending the patent law, Congress should consider the incredibly expensive alternative to our patent system: a world in which only trade secrets and contract rights can be used to define and enforce rights to intangible assets, such as R&D.

Some relatively recent academic work on the law of corporations has discovered a point that was probably obvious to many business people all along: that the corporate form is often more useful as a shield of the corporation's assets from shareholder creditors than it is as a shield of the shareholders from the corporation's creditors.  The terminology adopted to describe these different uses of corporate limited liability are "affirmative asset partitioning" and "defensive asset partitioning," respectively.

A key insight is that shielding a corporation's assets from each shareholder's creditors (including descendants and donees) permits a more stable pool of capital to be developed and deployed.  Without the corporate form, shareholders would have to place company assets beyond creditor reach by contracting with each creditor -- a project too expensive to be worthwhile, especially when the benefits of the contracts are shared with the other shareholders.  The corporation as an asset partition dramatically reduces the transaction costs of forming the pool of capital necessary for putting it into business.

What do asset partitions have to do with patent law?  In a very clever paper on the subject, Prof. Paul Heald argues that patents serve a similar transaction costs reducing function in pooling the human capital necessary to complete projects within a company.  To see how, consider that -- without patent rights -- companies would have to rely solely on contracts and trade secrets to protect their R&D.  Unfortunately, because employees can't willingly forget what they learned doing R&D at Company A, there is no practical way to enforce contract and trade secret rights without taking extraordinary (and expensive) measure to prevent employees from leaving, taking with them to Company B the family jewels.

Business history is replete with stories of raids of R&D employees.  For companies, and even whole economies, the essential ingredient of economic growth is human capital.  An underappreciated point about patent law is that it permits the more efficient development of human capital by a more free-market for R&D employees and less risky joint-venture among companies.

A corrollary is that if patent rights are weakened too much, companies will do redundant, wasteful R&D in producing the same level of innovation for consumers -- and if it's really valuable innovation (i.e., with highly inelastic demand), it's the consumers that bear the costs.

Congress and Courts should bear this in mind when trimming patent law back.

Overview of Patent Ownership Law

After the recent post on DDB, it seemed useful to share some information about patent ownership law with readers interested.  The law of patent ownership in the United States is an interesting mix of state and federal, common law and statute.  Here's a brief summary for anyone interested.  I haven't checked to see what's happening legislatively at the state level since I wrote this a couple years ago.

Overview of Patent Ownership Law

Unlike some foreign nations, in the United States only a person may apply for a patent.[1] That person is the inventor or discoverer of what is claimed in the patent.[2] Thus, the chain of title to any patent in the United States always begins with an inventor. Because of this disputes over patent ownership logically divide into two categories. In the first category are disputes over the origin of the chain of title. Disputes over the origin of the chain of title are usually about whether a person was properly named or omitted as an inventor, which in turn is a matter determined by judicial interpretation of federal statutes. In the second category are disputes over transfers in the chain of title. Disputes over transfers of patent title sound either in the law of contract or the law of tort,[3] and so are almost always a matter of state law.   (But note that DDB held that federal can apply when the  issue is raised as part of a standing analysis.)

A. Defining Inventorship

Although by statute, applications for patent must be made by “the inventor,”[4] the patent statute does not itself specify what acts constitute inventorship. On the contrary, the statute adds flexibility to the concept of inventorship by expressly providing that an invention may be the work of more than one person. Under 35 U.S.C. § 116, two or more persons may apply for a patent jointly, even when they did not work together physically or contemporaneously or contribute equally to every invention claimed. In addition, 35 U.S.C. §§ 116 and 256 permit both the Patent and Trademark Office Commissioner and federal courts to correct errors in the naming of inventors. The error of incorrectly naming a person who is not properly an inventor is called “misjoinder.” The error of incorrectly omitting the name of a person who is properly an inventor is called “nonjoinder.” The group of persons who are properly named is called either “the co-inventors” or “the inventive entity.” Inventorship is an important issue in patent ownership disputes because of the rule in the United States that co-inventors are co-owners, each capable of granting a license to third parties for use of the patented invention without the consent of other co-owners.[5]

The act of inventing has been considered “a mental result” in the United States since at least the 19th century. “The machine, process, or product is but [a] material reflex and embodiment” of a patentable invention.[6] Recently the Federal Circuit (which has appellate jurisdiction over almost all patent appeals)[7] has held that “[c]onception is the touchstone of inventorship, the completion of the mental part of invention.”[8] The classic definition of conception is “the formation in the mind of the inventor, of a definite and permanent idea of the complete and operative invention, as it is [t]hereafter to be applied in practice.”[9] “Conception is complete only when the idea is so clearly defined in the inventor’s mind that only ordinary skill would be necessary to reduce the invention to practice, without extensive research or experimentation.”[10] But interestingly, the inventor need not know that her idea will work for conception to be complete.[11] “The discovery that an invention actually works is part of its reduction to practice.”[12]

In accordance with these rules, for purposes of joint inventorship, “the qualitative contribution of each collaborator is the key — each inventor must contribute to the joint arrival at a definite and permanent idea of the invention.”[13] As a practical matter, joint inventorship is determined by considering whether a collaborator contributed to the conception of any claim of the patent. Even a single claim is enough to confer the status of co-inventor, and hence co-owner.[14]

B. Transfer of Patent Ownership

The second category of ownership disputes covers all disputes over patent transfers. But within the second category, the most common disputes are between an initial owner (i.e., as we have seen, the inventor) and an initial transferee. Often, the inventor has a pre-existing relationship with the initial transferee, for example, as a consultant or employee. When that is the case, the transfer may form consideration for a pre-existing contract between the inventor and the transferee, such as a consulting or employment agreement. Federal courts have long held that inventions may be the subject of transfer prior to patenting, and when such pre-existing agreements are in place the dispute is no more than a simple claim for breach of contract.[15] The more interesting case for purposes of this paper arises when the inventor and initial transferee have a pre-existing relationship but there is no express contract in place. These are the cases for which a common law of patent ownership developed in England and the United States.

Before giving a summary of that common law, it will be useful to say briefly what kinds of transfers may occur. A transfer of patent rights must be either an assignment or a license.[16] The inventor may make one of three categories of assignments: first, of the whole patent right, including the exclusive right to make, use, and sell the invention throughout the United States; second, of an undivided part or share of that exclusive right; or third, of the exclusive right under the patent within a particular geographical region.[17] Any transfer that does not fall within one of these three categories “is a mere license, giving the licensee no title in the patent, and no right to sue at law in his own name for an infringement.”[18]

Turning back to the common law of patent ownership, let us assume to begin with that the inventor and initial transferee have a traditional employee-employer relationship. Even when there is no express agreement between an inventor and her employer, courts may nonetheless find that an implied-in-fact contract exists.^[19] Three generalized factual scenarios may obtain when there is no express agreement between an employer and an employee-inventor: (1) the employee-inventor is employed to do research and development, (2) the employee-inventor is not employed to do research and development, but is acting within the scope of her employment or using her employer’s resources, and (3) the employee-inventor acts outside the scope of his employment and uses her own resources.

In scenario (1), courts almost always find the employer to be owner of the invention.^[20] “When the purpose for employment … focuses on invention, the employee has received full compensation for his or her inventive work.”^[21] In scenario (2), the employer may have an implied-in-law royalty free nontransferable license (also known as a “shop right”) if the invention was made using employer resources or by an employee acting within the scope of his employment.^[22] The employee, however, retains title to any patent.^[23] Employed inventors do not lose their right to be named inventors simply because they are employees.[24] In scenario (3), the employee has complete ownership of the patented invention, and her employer must take a license,^[25] or otherwise pay for whatever rights the employer uses. There is no statutory limit on what the employee-inventor’s compensation might be in scenario (3), and no compulsory license to the employer. In general, when there is an employer-employee relationship, courts have a tendency to assign the invention to the employer, the rationale being that the employee’s paycheck is consideration for her inventive work.

The tendency is reversed, however, when the inventor has taken definite steps toward ending the employer-employee relationship,[26] or has specifically reserved intellectual property rights to herself up front.[27] Thus, courts have a tendency to leave ownership with the inventor when the inventor has left to start a new firm, or was hired only on a consulting basis.

In concluding this brief overview of patent ownership law, it is worth noting that in addition to the common law on patent transfers there are some state and federal statutes that govern transfers of patent ownership in certain limited circumstances. In particular, there are some states that limit the enforceable scope of contractual assignments of patent rights from employee to employer to what would be implied at common law. In other words, in some states an employee-inventor cannot assign to her employer what her employer would not otherwise be entitled to at common law.[28] In addition, mirroring the state statutes that apply restrictions to private contract, there are at least two federal and several state statutes that apply restrictions on ownership of inventions by government employees or employees working under government contract with a particular agency.^[29] For example, the statute applicable to the National Space Program declares that “[w]henever any invention is made in the performance of any work under any contract of the [National Aeronautics and Space] Administration” and the employee was either “assigned to perform research,” or was acting within the scope of employment and using government resources, “such invention shall be the exclusive property of the United States.”^[30]

            Last but not least, under the Bayh-Dole Act of 1980, inventors employed by a not-for-profit organization or small business firm that has entered into a funding agreement with the federal government are entitled to separate compensation for inventions made during their employment.[31] Most major universities in the United States, both public and private, now have an office dedicated to acquiring patent rights for research done at the university, and with licensing those patent rights for commercial development.

 

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[1] See, e.g., 35 U.S.C. § 102 (“A person shall be entitled to a patent unless …”).

[2] See 35 U.S.C. § 101.

[3] Typically, a plaintiff would bring a tort claim of trade secret misappropriation or unfair competition if patent title were still inchoate (i.e., if a patent had not issued), and a breach of contract claim (either express or implied) otherwise.

[4] See 35 U.S.C. § 111(a)(1).

[5] See Schering Corp. v. Roussel-UCLAF SA, 104 F.3d 341, 344 (Fed. Cir. 1997).

[6] Smith v. Nichols, 88 U.S.112, 118 (1874).

[7] Almost all because in 2002 the Supreme Court ruled that the regional circuits have jurisdiction over appeals involving patent infringement counterclaims that would not appear on the face of a well-pleaded complaint. See Holmes Group, Inc. v. Vornado Air Circulation Sys., Inc., 535 U.S.826 (2002). For the twenty years between 1982 and 2002 the Federal Circuit’s appellate jurisdiction was entirely exclusive.

[8] Burroughs Wellcome Co. v. Barr Lab., Inc., 40 F.3d 1223, 1227 (Fed. Cir. 1994).

[9] Hybritech Inc. v. Monoclonal Antibodies, Inc., 802 F.2d 1367, 1376 (Fed. Cir. 1986) (citing 1 Robinson on Patents 532 (1890)).

[10] Burroughs Wellcome Co. v. Barr Lab., Inc., 40 F.3d 1223, 1228 (Fed. Cir. 1994).

[11] Id.

[12] Id.

[13] Id. at 1229.

[14] See Ethicon, Inc. v. U.S.Surgical Corp., 135 F.3d 1456, 1460 (Fed. Cir. 1998).

[15] See, e.g., Gayler v. Wilder, 51 U.S. 477 (1850).

[16] See CMS Indus., Inc. v. LPS Int’l, Ltd., 643 F.2d 289 (5th Cir. 1981).

[17] See Waterman v. Mackenzie, 138 U.S. 252, 255 (1891).

[18] Id.

[19] See, e.g., Teets v. Chromalloy Gas Turbine Co., 83 F.3d 403 (Fed. Cir. 1996)

[20] Id.

[21] Id. at 407 (citations omitted).

[22] See, e.g., Banner Metals v. Lockwood, 3 Cal. Rptr. 421 (Dist. Ct. App. 1960). Supreme Court precedents include United States v. Dubilier Condenser Co., 289 U.S. 178, 187 (1933) and Solomons v. United States, 137 U.S. 342, 346 (1890).

[23] See Wommack v. Durham Pecan Co., Inc., 715 F.2d 962, 965 (5th Cir. 1983) (“The inventor retains a valid patent.”) However, the existence of a “reverse shop right,” i.e., an employee’s implied right to make, use, and sell an invention made within the scope of his employment to others has been rejected by at least one court. See Mainland Indus., Inc. v. Timberland Mach. & Eng’g Co., 649 P.2d 613, 618 (Or. Ct. App. 1982) (holding for plaintiff when defendants conceded that no precedent exists for applying the “shop-right” doctrine in favor of an employee and the facts did not warrant application of the doctrine).

[24] See Lipscomb’s Walker on Patents 331 (1986). There is an analogy here to the moral right of attribution found in civil law jurisdictions, and more recently, under the Visual Artists Rights Act in the United States. See 17 U.S.C. §106A.

[25] This is the scenario in which no contract implied-in-fact or shop right has been found. Thus, the cases cited for scenarios (1) and (2) are generally applicable to scenario (3).

[26] See Koehring Co. v. E.D. Etnyre & Co., 254 F. Supp. 334 (N.D. Ill. 1966).

[27] See, e.g., Lone Star Steel Co. v. Wahl, 636 S.W.2d 217 (Tex. App. 1982); see also John Mohr & Sons, Inc. v. Jahnke, 198 N.W.2d 363 (Wis. 1972); Jamesbury Co. v. Worcester Valve Co., 318 F. Supp. 1 (D. Mass. 1970).

[28] Eleven states have passed such statutes, including California, Delaware, Illinois, Kansas, Minnesota, Nevada, North Carolina, North Dakota, South Dakota, Utah, and Washington. See

Del. Code Ann. tit. 19, § 805 (West 2003) (enacted 1984); 765 Ill. Comp. Stat. 1060/2 (West 2004)(enacted 1983); Kan. Stat. Ann. § 44-130 (West 2003) (enacted 1981); Minn. Stat. § 181.78 (West 2004) (enacted 1977); Nev. Rev. Stat. § 600.500 (West 2004) (enacted 2001); N.C. Gen. Stat. §§ 66-57.1 to 66-57.2 (West 2003) (enacted 1981); N.D. Cent. Code § 34-02-11 (West 2003); S.D. Codified Laws § 60-2-10 (West 2003); Utah Code Ann. § 34-39-1 to 34-39-3 (West 2003) (enacted 1989); Wash. Rev. Code § 49.44.140 (enacted 1979). The North and South Dakota statutes appear broader, but have been interpreted to apply the same restraint of contract made express in the other statutes. See Keller v. Clark Equipment Co., 715 F.2d 1280, 1287 (8th Cir. 1983) (interpreting N.D. statute); Rural Pennington County Tax Ass’n v. Dier, 515 N.W.2d 841, 846 (S.D. 1994).

[29] For federal statutes, see 42 U.S.C. § 2457 (NASA) and 42 U.S.C. § 5908 (Department of Energy). For state statutes, see Conn. Gen. Stat. Ann. §§ 4-61a.

[30] 42 U.S.C. § 2457(a). These are, of course, the same common law exceptions that we’ve seen all along.

[31] See 35 U.S.C. § 200 et seq.