Electronic Design

An IP Attorney's View Of Pre-Assignment Agreements (...And What's In It For Venture Capitalists)

The engineers in the company's R&D division understand the drill. When they have a novel idea that they consider worthy of seeking formal IP protection, they call on the legal staff. Together, normally with assistance from outside legal counsel, the team prepares a patent application. The inventor or inventors sign the formal papers for filing the application.

Thereafter, periodically, the inventors receive calls or e-mails from the legal staff for assistance in connection with communications from the U.S. Patent Office regarding the patent application. Eventually, a patent is approved to add to the company's intellectual-property portfolio. The inventors may receive a "reward" (such as money) for adding to the company's patent base.

Importantly, the formal papers at the time of filing the patent application almost always contain an assignment of patent rights to the company. That is, the company, not the engineer inventors, ultimately owns all patent rights.

In the U.S., inventors are presumed to own the patent rights, but the rights are transferable (such as by assignment) to the company. Because the inventors invented on company time, the company rationally seeks to own the patent rights.

Variations certainly exist. Universities often have widely varying policies relating to the procurement and ownership of patent rights for inventions by professors. It often depends on the context in which the professor came up with the idea, such as university grant time or on their own. Add a U.S. government grant to the mix, and the contractual situation can become more complex to sort out. The U.S. government may only seek rights to use the patented technology—essentially a license. The true owner remains the university/professor.

But other employment situations can be more amorphous. Smaller companies, especially those in their infancy or initial formative years, may not have any established rules or procedures governing patent rights. Before even getting their first patent application on file, such companies often turn to outside legal counsel to act as "in-house counsel" and assist them in setting up appropriate rules and procedures.

Take a further step back to the person, or people, starting a company who needs venture-capitalist (VC) funding. These people present their concepts and business models to the VCs, who hopefully will love the idea and seek to invest money in the company. All parties involved must carefully consider how to handle IP rights. The company—that person or small group of people—should seek to retain ownership of rights to the basic technical advancement ideas upon which the company was formed.

The VCs will likely do the same, because an important source of return on investment is often the patent rights. In fact, should the company not survive, the patent rights may be the most valuable asset in sight. Licensing patent rights, even where the patent owner doesn't produce products themselves, can be quite lucrative if others are practicing the patented ideas.

Lots of issues exist. Remember that presumptive owners are the inventors. The VC will likely seek some ownership interest in the patent rights. The VC may require employees to assign all rights to the company, so the VCs obtain patent ownership rights through their equity ownership in the company. The company should seek to gain ownership rights as well.

The parties may decide to share patent rights, meaning each is an owner and can take actions, such as granting another party a license or suing a third party for patent infringement, without requiring consent from the other owner. The parties must consider the scope of the ownership rights for the VC. Will it extend infinitely in the future?

Certainly the VCs must be fairly compensated for the risk they take in initially funding the company, but the company may need to put some limits on those rights. Maybe the VCs only get ownership rights for a certain period of time. Even if the VC gets rights to the basic ideas, how should improvements on those ideas be handled? How about rights to new ideas in different technical areas that the company may seek to pursue? Further, should joint consent be necessary to go after a third party for patent infringement?

Possibilities abound when it comes to handling the patent rights. The key is recognizing the potential issues at formation and investment and directly addressing this issue in the contract to avoid future conflicts.

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