The United States Supreme Court reminded us again on June 6, 2011 how important employment contracts can be to companies with intellectual property. In a 7-2 decision, the Court held that the Bayh-Dole Act did not change the long-standing law that patents are initially awarded to inventors rather than to their employers. (Board of Trustees for Leland Stanford Junior University v. Roche Molecular Systems, Inc., U.S. No. 09-1959) (“Stanford v. Roche”).  

While that holding addressed the major question presented to the Court, it also illustrates a more fundamental issue that arises for employers and contractors who deal with intellectual property, especially with respect to patentable inventions. As it turned out the Court based its patent infringement holding on long-standing principles of patent ownership. The Court reminded us that the default rules for patents are different; ownership of patent rights belongs to the inventor unless very specific steps are taken to properly assign those rights to an employer or contractor.

In Stanford v. Roche, a Stanford researcher (Mark Holodniy) did some work for Stanford under a government funded contract while he was one of the employees of a contractor (Cetus) who was under a prior contractual duty to assign invention rights to Stanford. Unfortunately, Holodniy left Stanford without ever assigning rights to the invention in question to Stanford and instead assigned rights to Cetus. When Stanford sued Roche (Cetus’s successor in interest) for patent infringement, Roche’s defense was that a co-owner could not be held liable for patent infringement. The Court of Appeals for the Federal Circuit agreed with Roche, holding that Holodniy’s duty to assign rights to Stanford did not block him from actually assigning rights to Cetus so that Roche properly held title to the invention.

This surprising outcome should provide a note of caution to all employers. In common practice most employers attempt to handle this issue with employment agreements and independent contractor agreements that require employees and contractors to assign title to inventions to the employer or the company that hired the contractor. The problem with that practice—as seen in this case—is that the employer must actually perfect its patent rights in a second step by having the inventor later assign title through a written assignment agreement with the employer. Stanford argued unsuccessfully that the provisions of the Bayh Dole Act superseded this requirement because the Act states that an “invention of the contractor” at 35 U.S.C. 201(e) includes all inventions made by the contractor’s employees with the aid of federal funding. The Supreme Court held that nothing in Bayh Dole changed the default rules of patent ownership.  

While many employers might think this outcome outrageous, the Supreme Court also reminded us of the solution by pointing to Federal Circuit precedent in the 1991 FilmTec case. The Federal Circuit established a particular federalpatent- law interpretation of employment agreements in FilmTec that allows contracting parties to choose language that optionally includes either a promise to cooperate and assign rights or else an automatic assignment that occurs constructively at the moment of invention. If Stanford had chosen the more stringent automatic assignment language for its employment contract, then it would have automatically taken rights to the invention. Unfortunately, we estimate that 90% or more of employment contracts in the U.S. contain the same language used by Stanford. Perhaps it is time to dust off those employment contracts and make a few updates.