In Yale Preston v. Marathon Oil Co, the Federal Circuit confronted the issue of whether an invention by an employee was properly assigned to his employer through an employment agreement entered into shortly after he began work as an at-will employee. The Federal Circuit determined controlling Wyoming law by certifying a question to the Wyoming Supreme Court. Under that law, continued employment constitutes sufficient consideration to support an agreement modifying the terms of employment. The Federal Circuit construed terms of the agreement to effect broad assignment of inventions to the employer and narrowly viewed inventions excluded from that requirement.

Background

In March 2001, Mr. Preston started working for Marathon Oil. A month later, Preston signed an Employee Agreement with Marathon, which contained provisions (1) defining "Intellectual Property" as "made or conceived by EMPLOYEE during the term of employment with MARATHON"; (2) assigning "Intellectual Property" to Marathon; and (3) excluding from "Intellectual Property" any invention specifically listed in the agreement. For the exclusion clause, Preston wrote "CH4 Resonating Manifold."

Preston raised the idea of using baffles to reduce water in a methane well to another Marathon employee, showing him a "conceptual drawing." Preston drew these baffles plates using a company computer and met with a Marathon engineer to discuss the baffles. On Marathon's behalf, Preston hired a company to make baffle plates and begin installation in Marathon's wells, and he personally participated in several installations. Preston's employment with Marathon ended in April 2003. Then, between April and July, Marathon installed Preston's baffle system in eight additional wells. Although the parties disputed when Preston conceived of his baffle system, they agreed that that he never actually "made" the baffle system until after joining Marathon.

The Marathon engineer with whom Preston had met started Marathon's internal patenting process, explaining that Preston had designed and installed a significant new technology. According to the district court, Preston never objected to this internal patenting process, despite knowing that it was underway. Separately, Preston filed his own patent application for the baffle system.

About a year later, Marathon filed a patent application. Patents ultimately issued from both applications—Preston's and Marathon's. The patent that Preston obtained named only himself as the inventor. Marathon's patent named both Preston and the other Marathon engineer.

Marathon sued Preston, alleging that he breached his employment agreement by refusing to assign his patent to Marathon. Preston counterclaimed for patent infringement and conversion. Preston then filed his own complaint asserting patent infringement, unjust enrichment, conversion, breach of implied contract, and misappropriation of trade secrets, and sought a declaration that Preston is the sole inventor of Marathon's patent.

The district court found that Marathon acquired a shop right to Preston's baffle system, which absolved Marathon of any infringement liability. The district court also found that Preston's claims for unjust enrichment, conversion, and trade-secret misappropriation were barred by the shop-right doctrine or because they were untimely. On summary judgment, the district court held that Preston was the sole inventor of both patents, but that his employee agreement required him to assign his interest in both patents to Marathon and that he breached the agreement by not doing so.

The Marathon Decision

On appeal, Preston challenged the district court's holdings regarding Marathon's shop right and ownership. Marathon filed a "protective" cross-appeal, seeking reversal of the district court's holding that Preston was the sole inventor of Marathon's patent.

According to Preston, the employee agreement was invalid for a lack of consideration because the initial offer letter he signed was an express, written, employment agreement embodying the terms of his employment. Therefore, he argued, the employee agreement was not a valid, enforceable modification of those terms unless he received additional consideration beyond continued employment.

The Federal Circuit disagreed, finding the employment agreement valid and enforceable. The district court had rejected this argument, finding that, under the controlling Wyoming law, additional consideration is not required to modify the terms of an at-will employment agreement. After oral argument on appeal, the Federal Circuit certified this question to the Wyoming Supreme Court, which responded that continued employment was sufficient consideration for an agreement requiring assignment of intellectual property. Accordingly, the Federal Circuit found that the employee agreement is valid and enforceable.

Under Preston's next argument, even if the employee agreement is enforceable, it did not assign rights to Marathon. Specifically, Preston claimed, his invention was not "Intellectual Property" as defined by the employee agreement because Preston conceived of the invention before working at Marathon. Alternatively, Preston argued, even if his invention were considered "Intellectual Property" under the agreement, he expressly excluded it from the employee agreement because he listed "CH4 Resonating Manifold" under the "Previous Inventions and Writing" section.

Under the district court's ruling, Preston did not invent the CH4 resonating manifold until after beginning his employment with Marathon because, before that point, he had little more than a vague idea. Accordingly, the district court found, Preston invented the manifold while employed by Marathon and was therefore required to assign his interest to Marathon. The Federal Circuit took a different approach: because the agreement assigned to Marathon any invention "made or conceived" by an employee while employed at Marathon, the court held that Preston had to both make and conceive of the invention before his employment with Marathon in order to exclude it from the assignment requirement. In other words, by first making the invention at Marathon, Preston triggered the assignment.

Regarding whether Preston's invention was properly excluded from the employee agreement as a listed previous invention, the Federal Circuit found that an invention necessarily requires at least some definite understanding of what has been invented, which Preston did not have, even under a broad interpretation of the term "conceive." Because the district court had found that Preston lacked even that, the Federal Circuit did not determine what level of invention would be required under the "Previous Inventions and Writing" section of the employee agreement or whether that level of invention differs from the level of invention required under the "Intellectual Property" section. Accordingly, the court affirmed the district court's decision that Preston had, by operation of his employee agreement, assigned his rights in both patents to Marathon. Because the assignment was automatic under the terms of the agreement, the court vacated the district court's holding that Preston stood in breach of the agreement. Finally, because of the automatic assignment, the court did not need to address the issues of inventorship or Marathon's shop right.

Strategy and Conclusion

The key argument in this case—consideration for a modification to terms of employment—turned on an interpretation of state law. It behooves both employers and employees to make sure they understand the applicable law in this regard and structure agreements accordingly.

Although it had not been raised by either party, the Federal Circuit went out of its way to note that the district court's finding that Preston breached his employment agreement by not assigning his patent rights to Marathon conflicted with the automatic assignment of the patents to Marathon, which occurred under the Employee Agreement. As the Federal Circuit noted, execution of an assignment of rights to Marathon was not necessary because it was accomplished automatically by the Employee Agreement.