Companies often have policies requiring employees to transfer rights to inventions developed by the employee on company time using company resources. To protect their rights, many companies utilize lengthy assignments drafted by legal counsel. Understandably, managers often ignore the details of the agreements, and are primarily concerned that the agreements are properly executed by the employee. As a result, companies with seemingly comprehensive assignments can develop a false sense of security about their rights to the inventions of their workforce. However, to paraphrase George Orwell’s Animal Farm, while all assignment agreements may be created equal, some are more equal than others.
That is one way to look at the recent decision from the United States Court of Appeals for the Federal Circuit which addressed an employee’s challenge to an intellectual property assignment agreement with his employer. In Preston v. Marathon Oil Co., Yale Preston worked for two years on Marathon Oil’s coal bed methane wells located in Wyoming. In connection with his hiring in 2001, Preston received an offer letter that described Preston’s responsibilities and compensation and expressly designated the employment relationship as “at will,” meaning that both he and the company had the ability to terminate the employment relationship at any time. About one month after starting work, Preston signed a seemingly comprehensive document requiring him to assign any intellectual property “made or conceived” by him while he worked for Marathon. The agreement also permitted Preston to identify his prior existing inventions that would not be deemed the property of the company. Utilizing this provision, Preston generically referred to one item to be excluded from the scope of the agreement, but he did not provide any description of the device listed by him, and the company apparently did not obtain any additional details to understand what he had listed.
Within months of beginning work, Preston disclosed to fellow employees his idea for a potential improvement to coal bed methane wells, which utilized baffle plates to increase the separation of water and gas to allow the gas to be collected more quickly. Preston’s idea took off, and the company soon began installing baffle plates at several of its coal bed methane wells. The company also initiated its internal patenting process to seek protection of Preston’s system and informed Preston that it was doing so. Not long after, Preston quit his job and filed his own application with the United States Patent and Trademark Office (USPTO). Indeed, Preston was able to obtain an earlier filing date on his patent application and a much earlier issuance date than did Marathon. (Interestingly, the USPTO eventually allowed both Preston’s and Marathon’s patents to issue, but not before the company’s application overcame objections based on Preston’s earlier applied-for and issued patent.)
Both parties sued each other, seeking declarations that they owned exclusive rights to the invention, and after much procedural wrangling, the case ended up being heard by a Wyoming federal court. Marathon based its claim primarily on its assignment agreement with Preston. Preston argued that the assignment did not apply because he had conceived of his invention prior to working for Marathon and because he had listed it in the assignment and that it was therefore excluded from the agreement’s scope. The trial and appellate courts held that Marathon’s assignment agreement was effective despite Preston’s challenges. The case deserves a close look because it exposes pitfalls that can render employment assignment agreements vulnerable.
First, the court recognized that assignment agreements are creatures of contract and should be construed according to state contract law. However, knowing which state law to consult is not always easy. The determination can depend on several factors, including where the agreement is signed, where the agreement is to be performed, and where the lawsuit over the agreement will likely occur. Many assignment agreements attempt to overcome these problems by designating the state law to be applied, but such “choice of law” provisions are not always enforced. Consequently, especially for companies with locations in multiple states, it is wise to consider the law of the state in which the individual is employed and would most likely bring any legal action against the agreement.
This proved important in Preston when the employee received nothing of value when he executed the assignment about one month after he began working. One of the key issues in the case was whether an assignment agreement executed after the commencement of the employment relationship requires additional consideration beyond merely the continuation of at-will employment. The Federal Circuit looked to Wyoming law and ruled that continued employment is sufficient. However, the outcome would probably have been different in other states which require more than continued employment to enforce certain types of employment agreements executed during the term of the employment relationship.
There are steps that companies can take to address the problem of consideration, which should work in most states. One option is to have the assignment executed at the commencement of (but not before) the employment. A related option is to reference the assignment agreement in any hiring or offer letter given to the prospective employee, making the hiring decision expressly conditioned on the future execution of such agreements. Still another option is to provide remuneration to the employee at the time of the execution of the assignment, or at least to schedule the execution of the agreement in conjunction with the employee’s periodic performance appraisal especially if the appraisal is accompanied by an increase in the employee’s compensation or payment of other benefits.
One thing is certain: all courts will construe assignments to give effect to the plain language of the agreement. It is therefore critical to review periodically the language of the key provisions in the assignment. In Preston, the court held that the employee had agreed to assign any invention that he “conceived or made” during his employment. That is, “or” means “or” according to the Federal Circuit, which found that Preston had at least made the invention while at Marathon and his argument that his conception of the invention occurred prior to his beginning to work there was irrelevant. An interesting question would arise had the agreement used “and” instead of “or.” Some courts apply rules of interpretation that construe the use of the word “and” in contracts to be broad enough to encompass “or.” On the other hand, in the context of the Preston assignment, the use of “and” arguably would have altered the meaning of the agreement.
Likewise, the Court emphasized that the agreement’s key assignment provision contained present-tense language resulting in the automatic transfer of Preston’s ownership to Marathon without the need for additional acts by Preston. This serves as a reminder that each word in a contract can have significant effect on the agreement’s interpretation and enforcement, particularly the operative language that accomplishes the transfer of rights. Although every situation is different, and legal counsel should be consulted, the following assignment provision was deemed to be effective as an automatic transference of rights in Preston:
EMPLOYEE agrees to promptly disclose to [company] and does hereby assign to [company] all Intellectual Property, and Employee agrees to execute such other documents as [company] may request in order to effectuate such assignment. (emphasis added)
Lastly, in siding with Marathon, the Court also concluded that Preston had failed to prove that his generic notation in the exclusion provision captured the invention that was actually reduced to practice during his employment term. In other words, companies need to be careful to require that any invention expressly excluded from the scope of an assignment agreement should be fully disclosed and defined to avoid future conflict about what is not being assigned.
As noted, the assignment at issue in the Preston case appears to have been relatively comprehensive, much like many agreements used by companies seeking to protect intellectual property developed on company time. It is easy to see how companies believe that the execution of such detailed agreements will provide full and enduring protection. However, even though the employee’s challenge to the assignment in Preston was unsuccessful, the decision shows that employers should periodically review assignments and give consideration—not only to what the agreement says, but also when and where it is executed. Otherwise, a company will be left with an assignment that is less than equal to the task.