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Federal Court Clarifies Roles of Federal and State Courts in Determining When Employers Own Employee Inventions

March 12, 2008

It is a common practice for employers seeking to protect their property rights to require employees to sign employment agreements in which the employees assign their interests in their inventions to their employers. However, when a dispute arises over who owns a particular patent, an employer can find itself entangled in protracted litigation over any number of issues, ranging from the scope of the agreement itself to whether the agreement should be interpreted according to federal or state law. In an important ruling, especially for multi-state employers, the U.S. Court of Appeals for the Federal Circuit, whose jurisdiction includes Texas, recently made clear that, while the meaning and scope of an employment agreement generally is decided under state law, the issue of whether an agreement’s patent assignment clause creates an automatic assignment is determined under federal law. DDB Technologies LLC v. MLB Advanced Media LP, No. 2007-1211 (Federal Circuit, February 13, 2008).  The Court of Appeals for the Federal Circuit is the appellate court set up by Congress to consolidate patent law appellate cases in an attempt to get more uniformity of interpretation and rulings in U.S. patent law cases, as well as other types of special federal jurisdiction cases.

In the case before the Federal Circuit, the principals of DDB, two brothers, David and Daniel Barstow, brought a patent infringement lawsuit against MLB Advanced Media (MLBAM). The Barstows alleged that they held the patents on, among other inventions, a method for generating a computer simulation of a live event, such as a baseball game, on a viewer’s computer. MLBAM, however, claimed that (after DDB initiated its lawsuit) it had purchased the rights to the inventions from Schlumberger Technology Corporation, which happened to be Daniel Barstow’s former employer.

The focus of the dispute thus turned to the meaning of the employment agreement Daniel Barstow had signed when he was hired by Schlumberger in 1980. That agreement provided in part that Barstow assigned to the company all his rights to “ideas, inventions and improvements which relate in any way to the company’s business or activities or which are suggested by or result from any task or work” Barstow performed for the company.

The Barstows had created the disputed technology while Daniel was employed by Schlumberger, but they claimed that the inventions were personal projects, unrelated to Daniel’s work as a Schlumberger employee. DDB further argued that, even if the inventions at issue were covered under the agreement, Schlumberger had waited too long to assert its interests in the inventions and therefore waived any proprietary rights it may originally have had to them. In support of its position, DDB claimed that the company knew about the inventions at the time Daniel was working on them, that company officials had acknowledged that the inventions were unrelated to the company’s business, and that Schlumberger had never filed for patents on the new technology.

As to DDB’s waiver argument, MLBAM claimed, and the district found, that the employment provision created an “automatic” assignment under which Barstow’s inventions became Schlumberger’s property without the need for Schlumberger to take any further action to assert its title over the inventions. The Federal Circuit not only agreed with the district court that the language of the employment agreement created an automatic assignment, but the appellate court also held that the question of whether a patent assignment is automatic is properly decided under federal, rather than state, law.

The finding of an automatic assignment meant that there could be no waiver, as DDB had argued, but that determination did not end the matter. The Federal Circuit then turned its attention to, among other issues, DDB’s claim that the disputed inventions were unrelated to Schlumberger’s business and thus outside the scope of the employment agreement.

When DDB learned, in the midst of discovery, that Schlumberger had sold its alleged interest in the patents to MLBAM, the Barstows asked the district court to grant it additional discovery to prove that Schlumberger executives had indeed acknowledged that the inventions were a personal project and not the company’s property. The district court denied this request, but the Federal Circuit reversed.

The appeals court held that the language of the agreement was ambiguous as to precisely what kinds of inventions were “related to” Schlumberger’s business and that more evidence was needed as to the nature of both the company’s business and Barstow’s work for Schlumberger. Notably, this issue – whether the inventions were of the type the parties intended to be covered by the agreement – was to be decided under state (in this case, Texas) law. Accordingly, the case was remanded to the district court to allow for further discovery on this question.

Bottom Line

This case is significant for several reasons. First, the court’s decree that the assignability of patents is to be decided under federal law should provide uniformity in how this issue is resolved in future cases involving employers, including those in Texas and other states, as all employers will be subject to the Federal Circuit’s jurisdiction for patent purposes.

Second, the decision highlights the importance of the language used in employment agreements with respect to assignment of patent rights. If the contract language does not clearly grant the employer automatic assignment, but instead merely obligates the inventor to grant rights in the future, the employee-inventor may retain equitable (though not legal) rights in the disputed inventions. For instance, the employee-inventor could claim that the company waived its alleged rights to an invention under a “laches” argument, which is, in effect, the equity counterpart to a statute of limitations claim.

Third, the decision underscores that, notwithstanding the application of federal law to the assignability issue, state law still controls on other non-federal questions of contract interpretation. Thus, all employers, but especially multi-state employers, who rely on employment agreements to protect their property rights, should ensure that such contracts language is clear and that it comports with all applicable state law.