IP ownership for R&D companies: Cautionary tales and best practices

IP Ownership for R&D Companies:Cautionary tales and best practices

Selena Kim, Lawyer and Patent AgentJune 4, 2015

OVERVIEW

Securing title to your Intellectual Property

1. When dealing with other companies or partners

• case study: Nature Control: don’t make these mistakes!

2. When dealing with individuals

• use of Non Disclosure Agreements

• essential terms for your employment agreements

• ending the relationship

3. Prioritizing legal spend on IP ownership issues

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WHAT IP ARE WE TALKING ABOUT?

Common types generated by technology companies:

• Patentable inventions: new, useful process or apparatus that is registered with relevant government authority

• Copyright: eg. software code

• Trade Secrets: any confidential business information or technology that provides competitive advantage: eg. formulas, manufacturing methods, business methods, customer lists, financial information

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INVENTION OWNERSHIP BY DEFAULT

Inventor is entitled to own, unless inventor is:• employee who was “hired to invent”; or• party to explicit agreement to the contrary.

Implications:• employees who were not “hired to invent”, independent

consultants, volunteers, students – will own their inventions unless agreement otherwise

• other entities with whom business conducted – eg. partners, sublicensees: individual inventors will own their inventions unless agreement otherwise

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NEED FOR CLEAR AGREEMENTS

Securing IP when dealing with companies:

Need: written, clear, enforceable agreements

• No written agreement: parties more likely to dispute afterwards

• If unclear agreement: Court will have to determine what parties intended at the time of contracting

• Unenforceable: If terms are seen as unfair or obtained under duress, Court will not enforce

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NATURE CONTROL - THE TECHNOLOGY

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Compound A & B

Patents

flocculating agentswaste

water

T-Bright & NewsBright M

Patents

pulpbleaching

& brightening

clean water

+

(1) Treatment of Pulp Waste

whitened pulp

(2) Soil Remediation

chromium factory

FASPatent

aggregates chromium

contaminated soil

contamination contained

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NATURE CONTROL - TIMELINE

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Dr. Li invents Compounds A & B in China

Dr. Li immigrates to Canada, meets Mr. Chow

Parties negotiate & sign Letter of Intent, incorporate Nature-Control, are both Directors- Li will transfer patents for Compounds A and B- If “land a solid sale within 2 years” then Li will transfer technology and patent

rights

Dr. Li incorporates South Mountain to import chemicals, agrees to sell to Nature-Control at cost

Nature Control provides sales staff, warehousing, laboratory, pays for patents for Compounds A & B

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NATURE CONTROL - TIMELINE (cont’d)

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South Mountain starts:- selling bleaching products & FAS on its own, and - selling Compounds A & B to Nature-Control at a markup

Dr. Li develops bleaching products, gets patents

Chow suggests soil remediation product to Dr. Li

Dr. Li develops FAS (soil remediation), gets patent

Mr. Chow finds out, but waits more than two years to object.

NATURE CONTROL –THE PARTIES’ POSITIONS

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Nature-Control sues for:

• Breach of fiduciary duty• Assignment of all patents

Positions at trial:

South Mountain:

- Letter of Intent only provided limited distribution rights for Compounds A and B

Nature Control:

- Letter of Intent was for all technology

- Li wrongly kept opportunities that belonged to Nature Control

NATURE CONTROL: THE AGREEMENTS

1010

Letter of Intent - Li will transfer patents for Compounds A and B - If “land a solid sale within 2 years” then Li will

transfer all technology and patent rights

Service Consultant Agreement

- Extended Letter of Intent

Written Agreements:

Additional unwritten agreements:

Meeting notes in ChineseTranslated by Mr. Chow or his daughter

Typed by Dr. Li’s wife

Chow denies signing

CommissionAgreement

CollaborationAgreement

FAS Agreement

StorageAgreement

Parties signed the English version

NATURE CONTROL: THE RESULT

1111

South Mountain Owner of Compound A & B Patents- Agreement unclear; inventor owns

South Mountain Owner of Bleaching Patents- Li developed in China- No timely objection regarding South Mountain’s sales

Nature-Control Owner of Soil Remediation Patent – Mr. Chow’s idea; NC paid for development and patent. NC has beneficial ownership.- Dr. Li must assign legal title

Patents:

Monetary Award:• South Mountain ordered to pay $78,000 to Nature-Control for breach of

fiduciary duties (value of markup on Compounds A and B)

• Legal fees at trial: hundreds of thousands $

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NATURE CONTROL - THE RESULT

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8 LESSONS FROM NATURE CONTROL

1. Clearly written agreements are crucial. • Lawyer should at least review.

2. Clarify ownership of pre-existing IP:“Whereas Li invented and owns Compound A and B patents, and the parties agree that this will continue beyond termination . . . “

3. Decide who will pay for and own IP generated during the relationship.• who will pay for R&D, patent applications, etc.

• Important for dealing with sublicensees: likely to generate improvements to your IP

4. If you are a Director, you are a fiduciary. • Must act in best interests of the corporation.

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8 LESSONS FROM NATURE CONTROL

5. Get both legal and beneficial ownership of IP.

“Nature Control is granted all legal and beneficial title to the intellectual property generated by Dr. Li, who will promptly and diligently sign any further documentation to record the transfer of rights. . .”

6. Remember ownership defaults to inventor if agreement not clear.

If dealing with company, get IP assignment from company and each person on the project

7. If learn of breach, object promptly in writing.

8. Update agreements as situations evolve.

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SECURING IP IN THE EMPLOYMENT RELATIONSHIP

Remember: Inventor owns the invention unless: 1. Hired to invent or

2. Express agreement otherwise

Contra preferendum: “against the offeror”:

If agreement unclear, preferred interpretation is one that is against the interests of the company.

Therefore: To protect IP and reduce risk, R&D companies require robust employment agreements and processes

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TERMS FOR THE EMPLOYMENT CONTRACT

If “hired to invent” – employer will be presumed to own the employee’s inventions• Usually someone hired to create for the benefit of the

company – engineer, programmer, scientist• If employee hired to solve a specific problem or work

on a project, refer to this in contract

Other types of employees • Even if not “hired to invent” – include requirement to

transfer inventions

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HIRED TO INVENT

Case study: Comstock v. Electec • Hyde not an R&D employee (was a manager)

• made invention: system to interconnect light fixtures

• Consulted with other employees, used materials from employer, but worked on his invention at home

• Comstock found out about the invention, filed a patent for it, naming another employee. Hyde sued.

Result: Hyde declared to be the inventor. Not “hired to invent”, no agreement otherwise, therefore ownership stays with him.

Lesson: Agreements with all employees should require assignment of inventions.

OTHER IMPORTANT TERMS FOR THE EMPLOYMENT CONTRACT

Agree to not use IP of prior employers“Because the Company understands the importance of protecting confidential information and proprietary property, we expect and direct you to honour any confidentiality and ownership of inventions/proprietary property obligations that you owe to your former employer(s) or other third parties.”

Define what IP will be owned by the Employer“Any work product you create or contribute to, alone or jointly with others, during the course of your employment, is “Proprietary Property” that also belongs entirely to the Company. You hereby assign all of your right, title and interest in and to any Proprietary Property to the Company, and hereby waive all moral rights (as defined in the Canadian Copyright Act) you may have in any Proprietary Property.”

Consent to informing future employers about NDA/IP obligations

“I hereby authorize the Company to notify any of my future employers of the terms of this NDA and my responsibilities under it.”

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OTHER IMPORTANT TERMS FOR THE EMPLOYMENT CONTRACT

NDA and IP obligations survive post-departure

“You agree that both during your employment and after it ends: (1) you will maintain the Company’s Confidential Information as confidential, and you will only use or disclose it for the benefit of the Company or as otherwise expressly authorized by the Company (unless compelled by law); and (2) you will not make or take or retain copies, extracts or reproductions of Confidential Information, except to the extent strictly necessary for you to perform your work for the Company.”

Will assist with perfecting IP ownership even after departure

“Both during my employment and after the cessation of my employment for whatever reason, without any additional compensation to me, I will assist the Company to perfect its rights in my Inventions throughout the world, including, by executing in favour of the Company or any of its designees, assignments to my Inventions.”

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2020

EVEN BEFORE THE FIRST DAY OF WORK:

Job interviewing stageUse an NDA if there is any chance that confidential information will be disclosed

“During your (interview/employment) with the Company, you will have access to non-public confidential and proprietary information about the Company. You agree that all such confidential information, in any form belongs exclusively to the Company. You will forever refrain from disclosure of such confidential information unless authorized by the Company or compelled by law.”

No oral offer and acceptance• Oral offer from company and acceptance by employee creates

a contract• Oral contract has implied terms which are unfavourable to the

employer: limited obligations regarding non-disclosure, ownership of IP

• No oral offers! Use a written offer with a reasonable signing

deadline.

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GET IT RIGHT THE FIRST TIME

Once employment agreement signed, difficult to add additional terms

Case study: Techform v. Wolda• Wolda had worked for Techform (auto parts company) as consultant

since 1989.• In 1993, he signed an “Employee Technology Agreement” in which he

agreed to assign all inventions to Techform• Wolda created and patented a 3D hinge in 1996, refused to assign.

Techform sued.

Result: At trial (reversed on appeal) Court refused to uphold Employee Technology Agreement – signed under duress, and no consideration.

Lesson: get your employment agreements right, because difficult to add terms later

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TERMINATION OF THE RELATIONSHIP

Think about the end of the agreement

Non Disclosure Agreements

Will generally be enforced

Non-solicitation clauses: departing employee agrees to refrain from soliciting employer’s customers

Will generally be enforced

Restrictive covenants: a restriction in employee’s ability to work in a particular competitive field for a specified time and in a specified geographical area:

Not usually enforced. Don’t count on them.

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RESTRICTIVE COVENANTS

Case study: Terra Engineering v. Stewart• Stewart was a materials engineer.

• Signed an employment agreement including a restrictive covenant:

20 month restriction from working in materials engineering within a 150 km radius

• Resigned and told Terra that he was going to work contrary to those terms.

• Terra sued to prevent breach of the restrictive covenant.

Result: Court held that restrictive covenant was too broad and was result of imbalance in bargaining power. Unenforceable.

Lesson: Don’t count on restrictive covenants. Use other means to protect company’s confidential information.

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RESTRICTIVE COVENANTS

Unwise to rely on restrictive covenants – but if you must:

• make them as narrow and specific as possible to increase chances they would be upheld

• Include specific language in the employment agreement to show parties of comparable bargaining power. Reduce the risk that Court will perceive duress, unfairness

• Even with all of these measures, still a good chance that Court would not enforce

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SUMMARY: PROTECTING IP IN THE EMPLOYMENT RELATIONSHIP

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Job Interview

Job Offer

Package

Written Acceptance

Starts Work Departure

NDA

Employment Agreement

At the end:

A B C D

At least

48 h

– Confirm confidentiality obligations

- Secure all assignments

– help with future documentation to perfect IP ownership

– employer to own all inventions

- NDA and IP obligations survive post-departure

– “Hired to invent” terms, if applicable

During the relationship:- Keep employment agreements current; new agreements if needed- individual assignments of inventions

– Will keep anything learned at the interview confidential

SUMMARY ON IP OWNERSHIP

If IP is your most valuable asset, secure your ownership through clear, written, enforceable agreements

With other companies: • All agreements in writing

• Get a lawyer to draft or at least review

• If you get into legal dispute: be reasonable and try to settle early

With individuals:• Get signed NDA as soon as possible in the relationship

• All employment agreements to include assignment of IP

• Use NDA combined with non-solicitation clauses to protect confidential information. Don’t count on restrictive covenants.

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PRIORITIZING LEGAL SPEND

1. Creation of IP:

Clear written agreements with business partners and employees, assigning IP to company.

2. Protection of IP:Strategy depends on your business model. • For some businesses: instead of patenting, may be more important to invest resources in getting to market faster, and innovating the next generation.

• If you are a consumer-facing business: branding may take priority over patents.

3. Disputes regarding IP:• Spend up front at the demand letter/negotiation stage

• Be reasonable, try to settle as early as possible

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Thank You

montréal · ottawa · toronto · hamilton · waterloo region · calgary · vancouver · beijing · moscow · london

Selena KimTel: 416-862-4681

Email: [email protected]