Quirky Question # 164:

One of our employees recently left our company and joined one of our competitors. He did not have a non-compete (we are located in a state that rejects non-competes). But, he did have an inventions assignment agreement. He took some very clever ideas to one of our competitors, which promptly hired him. The competitor began working on his ideas and has created an immensely successful product line based on his concepts. We have reason to believe that he conceived these ideas while still employed at our company, even if he only worked on them during off hours. We think he also may have used at least some of our company’s equipment to develop or refine his ideas.

Don’t we own these ideas? Doesn’t the product line that our competitor “developed” really belong to us?

Roy’s Analysis:

Your question involves the interplay between several interrelated variables: contract law, state statutes and common law. Individually and collectively, an evaluation of these three areas will likely to help you analyze your company’s rights regarding your former employee’s ideas.

First, you referenced your company’s “inventions assignment agreement.” As with any case involving a contract, your analysis should begin with the language of the contract. What does the contract state about the ownership of inventions? How are inventions defined in the agreement? Does the contract address employee inventions that are unrelated to the business of your company? Does the language exempt inventions the employee created offsite or not on company time? These are some of the basic inquiries you will need to explore to get a handle on whether your company has a legitimate claim to your ex-employee’s ideas.

There are other fundamental contract issues that also may bear upon whether your company or your competitor can make a persuasive claim to the ideas developed. For example, when did your former employee execute the inventions assignment agreement – before his employment commenced or after he had begun working? Similarly, did the company provide him consideration for his agreement to this provision? Is the inventions assignment agreement a stand-alone agreement or is it part of a more comprehensive contract? If the latter, are there any provisions of the contract that are likely to be objectionable to a court? Does the agreement have a severability provision – that is, a provision stating that any objectionable provisions should be disregarded by the court, which then should enforce all non-objectionable provisions? How do the courts in your jurisdiction typically address these issues? You also noted in your question that these facts arose in a state that repudiates non-competition agreements. Is your inventions assignment agreement likely to implicate any of the same issues that your state’s courts have considered when rejecting non-competition agreements (restraint on trade, reduction in employee mobility)?

As you can see, just on the contract issue alone, I have more questions for you than you had for me. The resolution of these questions will largely influence how your fundamental question – who owns the ideas – may be resolved.

Second, as I referenced, a second critical issue will depend on your state’s statutes regarding inventions agreements. Many states, including Minnesota where my practice is based, have statutes that attempt to balance the equities between employer and employee with regard to inventions. The basic concept is that if an employee develops ideas on his/her own time, without utilizing the employer’s resources, an employer may have a more difficult time laying claim to the employee’s invention. This is particularly true if the employee’s idea is fundamentally different from the employer’s products. On the other hand, if the employee’s idea is closely related to the employer’s products, or was highly dependent on products with which the employee worked at the employer, or was developed using the employer’s equipment or on the employer’s time, the employer may have the stronger arguments.

Look, for example, at Minnesota’s statute, Minn. Stat. § 181.78. That statutory language addresses just this situation:

Subdivision 1. Inventions not related to employment. Any provision in an employment agreement which provides that an employee shall assign or offer to assign any of the employee’s rights in an invention to the employer shall not apply to an invention for which no equipment, supplies, facility or trade secret information of the employer was used and which was developed entirely on the employee’s own time, and (1) which does not relate (a) directly to the business of the employer or (b) to the employer’s actual or demonstrably anticipated research or development, or (2) which does not result from any work performed by the employee for the employer. Any provision which purports to apply to such an invention is to that extent against the public policy of this state and is to that extent void and unenforceable.”

As you can see, an employment agreement inventions assignment provision does not apply to an employee’s inventions when the employer’s “equipment, supplies, facility or trade secret information” were not used and which were developed on the employee’s “own time.” But, to avail himself/herself of these statutory protections, certain other conditions must be met as well. The invention cannot relate “directly to the business of the employer,” OR to the employer’s actual or anticipated R & D. Further, the employee must be able to demonstrate that the invention does not “result from work the employee performed . . . for the employer.” If an employee can satisfy these statutory elements, he/she may have a compelling argument that the invention does not belong to the employer. Conversely, if the employer can demonstrate that the employee did use the employer’s equipment, supplies, etc., OR did not perform the work on his/her own time, OR that the invention related directly to the employer’s business (actual or anticipated), OR that the invention resulted from the employee’s work for the employer, a different outcome is likely. But, if the employer cannot establish these elements, the assignment provision would be void as a violation of public policy.

As with many other aspects of employment law, however, the cases are dependent on their individual facts and are not always as easy to assess as the statutory language might suggest. For example, if someone prepared a outline of his/her idea at home, but photocopied it on the company’s copier, has the employee used the “employer’s equipment or supplies”? If an employee stayed late at the office to work on his/her idea, has the employee used the employer’s “facility”? Would the employer be entitled to protection if the employee developed an idea that perhaps was contemplated at one point by the employer but to which the employer had not devoted any real resources, or which the employer had considered and rejected? As these and innumerable other questions illustrate, the statutory language has to be assessed against the actual facts of a specific case.

And, of course, the statute described above is Minnesota’s; other states have different statutory language or none at all. Hence, my oft-repeated mantra – it is imperative to consider the state’s laws in the jurisdiction where the dispute arose.

Third, as noted above, the common law in your jurisdiction also will bear upon the resolution of the question you presented. You will need to explore the legal issues involved in breach of fiduciary duty claims (including the subset of usurpation of corporate opportunity), unjust enrichment, constructive trust, and other similar causes of action. These claims may provide an independent basis for the employer’s claims.

The Ninth Circuit recently had the opportunity to consider some of these issues in the case of Mattel, Inc. v. MGA Entertainment, Inc., et al., No. 09-55673 (July 22, 2010), the highly publicized case between two competing doll manufacturers. Chief Judge Kozinski began the court’s opinion by summarizing the question presented as “Who owns Bratz?”

The opinion, with which the court had some fun, set the stage with this backdrop:

“Barbie was the unrivaled queen of the fashion-doll market throughout the latter half of the 20th Century. But 2001 saw the introduction of Bratz, “The Girls with a Passion for Fashion!” Unlike the relatively demure Barbie, the urban, multi-ethnic and trendy Bratz dolls have attitude. This spunk struck a chord, and Bratz became an overnight success. Mattel, which produces Barbie, didn’t relish the competition. And it was particularly unhappy when it learned that the man behind Bratz was its own former employee, Carter Bryant.”

The Bratz case provides an excellent illustration of the intersection between employment law and IP law. As the quotation above reveals, the Bratz doll line was conceived by an individual who worked for Mattel, at the time he worked for Mattel. Bryant pitched his idea utilizing some preliminary sketches and a crude dummy made from a doll head from a Mattel bin, and a few other Mattel doll items. MGA liked the concept and signed Bryant to a consulting contract. At that point, he gave Mattel his 2-weeks’ notice, after which he joined MGA. During the 2-week notice period, Bryant (foolishly) continued working with MGA to develop the Bratz line.

When Mattel found out who had created the Bratz dolls, it sued MGA and others, claiming that it was the rightful owner of the preliminary ideas developed by Bryant and arguing that the later Bratz line infringed on these ideas. The jury found for Mattel, although it awarded only a fraction of the monetary relief Mattel sought. Based on the jury’s findings, however, the District Court then awarded significant equitable relief to Mattel, largely transferring the rights of the Bratz trademark portfolio to Mattel and prohibiting MGA from producing or marketing Bratz dolls. As the appellate court observed, “In effect, Barbie captured the Bratz.”

The key document in the case was the Mattel inventions assignment agreement signed by Bryant. That agreement referenced discoveries, improvements, processes, developments, designs, know-how, data computer programs and formulae, whether patentable or not. As the Ninth Circuit pointed out, however, the agreement did not reference “ideas,” which, it noted, were “markedly different” from most of the listed examples. The Ninth Circuit further observed, “we conclude that the agreement could be interpreted to cover ideas, but the text doesn’t compel that reading. The district court thus erred in holding that the agreement, by its terms, clearly covered ideas.” (Interestingly, contracts utilized by Mattel with other employees did include the word “ideas,” a problematic fact in the eyes of the appellate court.)

The Ninth Circuit also vacated the broad constructive trust imposed by the District Court. The Court of Appeals found that it would have been inequitable to “transfer this billion dollar brand – the value of which is overwhelmingly the result of MGA’s legitimate efforts – because it may have started with two misappropriated names.” I won’t belabor the appellate court’s analysis of the constructive trust issue but it’s insightful and should be reviewed if you hope to make a constructive trust claim.

Two other aspects of the Mattel opinion are worth noting. First, again turning to the language of the contract, the court found the phrase, “at any time during my employment,” to be ambiguous. Did it include time spent away from work including evenings and weekends or should it be interpreted more narrowly (during the work day itself)? The District Court had given the phrase a very broad interpretation, granting summary judgment on this issue. The appellate court felt this issue should have been resolved by the jury and reversed.

Second, the Ninth Circuit addressed the copyright issues. The court found that even if Mattel had a legitimate copyright to “its particular expression of the bratty doll idea,” it could not claim the idea itself. As the court humorously observed, “Otherwise, the first person to express any idea would have a monopoly over it. Degas can’t prohibit other artists from painting ballerinas, and Charlaine Harris can’t stop Stephanie Meyer from publishing Twilight just because Sookie came first. Similarly, MGA was free to look at Bryant’s sketches and say, “Good idea! We want to create bratty dolls too.”

As the discussion above reveals, the District Court’s decision was largely reversed. The case was sent back to the lower court for further proceedings “consistent with” the Ninth Circuit’s analysis. As a parting shot, the Ninth Circuit observed, “America thrives on competition; Barbie, the all-American girl, will too.”

The takeaways from the opinion and the analysis above are many. Briefly summarized, they are:

1) begin your analysis with the contract language; it is is critical;

2) evaluate the scope of the inventions assignment agreement – is the language used clear or ambiguous;

3) evaluate whether your company has used different agreements, with different language, for different employees; if so, this could prove problematic;

4) consider your state’s statutes, particularly if there are specific provisions addressing limitations on invention assignment agreements, particularly for work done by the employee on his/her own time and without utilizing the employer’s resources;

5) even if the employee may have utilized some of the employer’s resources, consider whether this was a de minimus use or was substantial;

6) if the employee developed the ideas on his/her own time and without using your resources, evaluate whether the ideas developed were linked to your business or your actual or anticipated product line;

7) consider your state’s common law claims; do they provide your company a legitimate challenge to the actions of your ex-employee;

8 ) understand the overlap between employment and IP law and involve individuals with expertise in both disciplines; and

9) recognize that your efforts to enforce an inventions assignment agreement may be viewed by the courts as inhibiting competition.

As the Mattel case illustrates, the stakes in these kinds of cases may be quite high. That fact alone may drive litigation, even when the claims are less meritorious than they might first appear. Before plunging into a lawsuit, make a careful effort to assess the issues above. You won’t regret that up-front investment, even if you conclude your company was wronged and litigation is absolutely justified.