The Importance of Employment Agreements

The Federal Circuit issued a decision regarding ownership of a patent invented by an employee in Preston v. Marathon Oil Co.

In February 2001, Preston signed a letter agreement to begin employment with Marathon.  His employment actually began in March 2001. 

On April 5, 2001, he signed a standard Marathon employment agreement.  The agreement provided a definition of “Intellectual Property” that included all inventions made or conceived during the term of employment that relate to present or anticipated company business or that were created with company information, factilities, material, etc.  The agreement further provided that the employee “promptly disclose” and “does hereby assign” all such Intellectual Property to the company. 

Finally, the agreement gave the employee the opportunity to provide a list and brief description of any unpatented inventions that would not become Intellectual Property under terms of the agreement.  Under this section, Preston wrote “CH4 Resonating Manifold.”

In late 2002, Preston developed an invention related to improved machinery for extracting methane gas from a gas well.  During 2003, a baffle system based on his idea was developed and installed in several Marathon wells.  Preston’s employment ended April 15, 2003.  Prior to that, he had overseen some of these installations, which continued after his employment ended.

After leaving Marathon, Preston filed a patent application based on his idea that issued as the ’764 patent in 2005.  Marathon filed an application on the invention in 2004 that issued as a patent in 2007.  During prosecution, Marathon was required to distinguish its patent claims from those of the ’764 patent.

Litigation

The parties began these legal proceedings in 2007 and 2008 regarding ownership of the patents and associated rights.

First, Preston argued that the April 5, 2001 agreement regarding IP rights was invalid because he wasn’t given any additional value (called “consideration”).  He signed the original letter employment agreement as a condition for beginning employment.  He was already employed in April 2001 and didn’t get anything else of value for giving up his rights as recited in that agreement.

The Federal Circuit asked for an interpretation of Wyoming law in determining that continued employment is sufficient consideration for signing an agreement that includes an IP assignment clause.  Thus, the April 2001 agreement was valid.

Next, Preston argued that he specifically excluded the inventions claimed in the patents by his writing “CH4 Resonating Manifold” as an exclusion to the April 2001 agreement.  The parties disputed what Preston meant by this phrase.  He was not able to produce any evidence, such as drawings or written descriptions, of the inventions dated prior to his employment with Marathon.  During testimony, he indicated that he had such drawings but that he “lost them” in 2005 or 2006.  The court discredited this testimony and found that he did not conceive of the inventions prior to his employment.

Finally, the terms of the April 2001 agreement indicate that Preston “hereby assigns” his IP rights to Marathon.  Therefore, this assignment occurs automatically.  His later refusal to execute an assignment is irrelevant because the patents have already been assigned.

Lessons

This case provides a number of lessons for employers (and potential employees) who may have employees that create valuable IP during their employment.

First, be certain to have IP disclosure and assignment clauses in employment agreements for all employees.  Have all new employees sign such agreements prior to employment or at least on the first day.  Some states may require additional consideration once employment has already commenced for such clauses to be valid.

There was some dispute in the case as to what the agreement meant by “conceive” and “make” an invention.  Try to stick with the definitions that are common to patent law.  “Conception” refers to “formation in the mind of the inventor, of a definite and permanent idea of the complete and operative invention, as it is thereafter to be applied to practice.”  This is more than just a vague idea, it requires definite plans for how to implement the invention.  “Make” or “reduction to practice” refers to the act of actually making the invention work for its intended purpose.

Next, to avoid a dispute as to whether the employee developed the invention prior to employment, when executing the agreement, give the employee the opportunity to indicate that he developed the invention prior to commencing employment.  Require that he prove this development by providing sufficient detail that he can’t later argue that vague statements constiatute conception.

Finally, use language that requires the employee to promptly disclose inventions to the company and to “hereby assign” all future inventions.  The assignment is not required later once the employment has ended and you need to chase the employee and potentially sue him.  Instead, make it effectual as soon as inventions are conceived.

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One Response to “The Importance of Employment Agreements”

  1. Joseph Gross Says:

    One lesson for the inventor ready to start a new job: it is probably best to file a patent application directed to your invention, at the very least a provisional patent application, prior to signing the employment contract. That way the employee inventor can reference a serial number on the employment agreement to unambiguously single out the prior invention. Also, filing the patent application prior to employment would probably constitute proof of prior invention, even in the absence of referencing the application on the employment agreement.

    It might not otherwise be in the best interests of the employee to provide the “sufficient detail” to the employer required to establish prior invention, especially under the first-to-file regime.

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