It has been well settled that the interpretation of contracts, including particularly the provisions of employment agreements, is a matter of state law. Accordingly, a federal court interpreting an employment agreement applies applicable state law principles and precedent. However, in DDB Technologies, L.L.C. v. MLB Advanced Media, L.P., 517 F.3d 1284 (Fed. Cir. 2008), the Federal Circuit held that federal law, not state law, governs whether patents have properly been assigned pursuant to the language of an employment agreement.

The DDB Technologies decision.

Dr. David Barstow and his brother were the named inventors of four patents concerning a method of generating computer simulations of live events and a method to search for related information. The brothers formed DDB Technologies, LLC (“DDB”) to commercialize the patented inventions and assigned their rights in the patents to DDB.

Before forming DDB, Dr. Barstow worked for Schlumberger Technology Corporation (“Schlumberger”). His employment agreement stated, in relevant part, that “[Dr. Barstow] agrees to and does hereby grant and assign to [Schlumberger] his entire right, title and interest in and to ideas, inventions and improvements,” which were in any way related to Schlumberger’s business or activities, or were suggested by or resulted from Dr. Barstow’s work for Schlumberger. Id. at 1286. The governing law provision of the employment agreement provided that the agreement “shall be interpreted and construed in accordance with the laws of that jurisdiction in which enforcement in[sic] sought,” which in this case was Texas.

Some time later, DDB filed suit against MLB Advanced Media LP (“MLB”) alleging infringement of these patents. Before the close of discovery, MLB purchased from Schlumberger “all of Schlumberger’s rights and interests in the patents in suit” and obtained a retroactive license to practice under the patents.

Applying Texas state law, the District Court found that the patents were within the scope of the employment agreement between Dr. Barstow and Schlumberger, DDB Techologies, L.L.C. v. MLB Advanced Media, L.P., 465 F. Supp. 2d 657, 667 (W.D.TX 2006), and that the language in the employment agreement effected an automatic assignment of ownership rights. Id. at 669. Following this finding, the District Court granted MLB’s motion to dismiss for lack of subject matter jurisdiction since DDB had not joined all the owners of the patents in suit, specifically Schlumberger prior to the assignment to MLB and MLB thereafter. Id. at 670.

The Federal Circuit identified the ultimate question to be whether the patents at issue had been assigned by Dr. Barstow to Schlumberger. 517 F.3d at 1286. However, before addressing this assignment issue, the Federal Circuit indicated that it first needed to address whether state or federal law governed the question. Id. at 1289.

After noting that state law generally governs the interpretation of contracts, a majority of the Court nonetheless concluded that the question of whether the patents were automatically assigned pursuant to the language in the employment agreement was governed by federal law, not state law, because the question “is intimately bound up with the question of standing in patent cases.” Id. at 1290.

Applying federal law, the Court noted that the literal language of the contract is determinative of “whether an assignment of patent rights in an agreement is automatic, requiring no further act on the part of the assignee, or merely a promise to assign.” Id. The Court noted that if the contract expressly assigns rights in future inventions to the employer, the rights automatically belong to the employer by operation of law. On the other hand, if the contract “merely obligate[s] the inventor to grant rights in the future,” equitable rights might vest in the employer, but legal title to the patents does not pass automatically. Id.

The Federal Circuit found that, under federal law, the effect of the assignment language in the employment agreement was to assign automatically to Schlumberger ownership of any inventions covered by the employment agreement. Id. The Court then addressed the separate question of which patents were covered by the employment agreement, an issue governed by applicable state law. Id. The Federal Circuit proceeded to vacate and remand that part of the District Court’s decision that improperly restricted jurisdictional discovery, finding that DDB should have been granted greater latitude in its discovery efforts to prove that the patents at issue were not covered by the scope of the employment agreement. Id. at 1291.

What does this mean for employers?

The DDB Technologies decision should provide comfort to employers that the effect of language assigning patents in employment agreements will be interpreted uniformly pursuant to federal law and will not be subject to differing interpretation under varying state law. The decision creates a roadmap by which employers can be reasonably certain that if their employment agreements contain language that expressly assigns rights in existing and future inventions, this assignment language will be interpreted under federal law to vest automatically ownership of the inventions with the employer, regardless of the state law governing the agreement or the domicile of the employee.

The holding in DDB Technologies that federal law, not state law, determines the effect of patent assignment language in an employment agreement may have limited precedential impact given the narrow procedural context of the decision. Nevertheless, employers should ensure that patent assignment provisions effect a current and express assignment of present and future inventions in their employment agreements in light of the decision in DDB Technologies. In addition, employers should continue to carefully select and specify the state law that governs their employment agreements, given that state law will continue to control the interpretation of the employment agreement generally, including the determination as to which inventions are subject to the assignment language in the first place.