The Federal Circuit Court of Appeals has “reached out” to employee invention assignment agreements, ruling they should be interpreted under federal law, not under the state law that governs other clauses in the same agreement.
The decision, DDB Technologies, LLC v. MLB Advanced Media, LP (Fed. Cir. No. 2007-1211, Feb. 13, 2008), will likely strengthen employers’ rights, and warrants review of these agreements that define critical aspects of employer-employee relationships.
The case involved an employee (Barstow) of Schlumberger, the oil field services company, who signed an employee assignment agreement providing that he “agrees to and hereby does grant and assign” to Schlumberger all inventions, whether patentable or not, that he might make while employed by Schlumberger that “relate in any way” to Schlumberger’s business, or that “are suggested by or result from” his work for Schlumberger.
While employed by Schlumberger, Barstow made inventions related to computer simulation of live baseball games for display on a viewer’s computer. He brought his inventions to the attention of Schlumberger’s inhouse counsel and lab director, both of whom concluded that the inventions did not come under Barstow’s invention assignment obligations.
Nevertheless, when Barstow sued Major League Baseball for infringement of the patents 10 years later, MLB approached Schlumberger and induced it to assign its rights in the patents to MLB.
MLB then filed a motion to dismiss the Barstow lawsuit because, as an owner of the patents, it could not be sued for infringement.

Need for uniformity drives interpretation

A critical issue in the appeal was whether the Barstow invention assignment clause constituted an automatic assignment of the inventions, or whether the language was a mere obligation to assign.
State law governs the interpretation of contracts. Nevertheless, because of the need for uniformity in the national patent system, the court held that federal law controls interpretation of the relevant clause in the Barstow assignment provision (that he “agrees to and does hereby grant and assign”), and that the particular language in question constitutes an automatic assignment under federal law.
At the same time, the court also held – without any comment other than “of course” – that state law governs the interpretation of the next two clauses in the same sentence of the agreement (whether the inventions “relate in any way” to Schlumberger’s business, and whether they “are suggested by or result from” Barstow’s work for Schlumberger).

Cover all bases

Employers typically craft their invention assignment agreements with a choice-of-law provision requiring application of a particular state’s laws. In light of the Federal Circuit ruling that federal law now controls at least one portion of one sentence in these agreements, companies should review their own form of agreement in several respects.
For example, if federal law is now going to control interpretation of assignment clauses, their language should be conform to the language the Federal Circuit has blessed as an automatic assignment under federal law.
Also, state court cases, as well as federal cases, can turn on the interpretation of assignment clauses, and state courts are bound to follow state law, not the Federal Circuit. Therefore, in jurisdictions where the state and federal rules of contract interpretation differ, there is a risk of inconsistent results if the same clause becomes an issue in cases in both court systems.
To minimize this risk of inconsistent results, the assignment agreement’s choice-of-law provision might be tailored to call upon all courts, both state and federal, to apply federal law when interpreting the portion of the assignment clause that was at issue in the DDB decision.
This approach would also lessen a litigant’s motivation to forum shop between federal and state courts.

Singling out of the trade secret

Another aspect of invention assignment agreements that warrants review arises from many forms of agreement (including the Barstow agreement) using the same assignment clause to cover all inventions, including trade secrets.
Trade secrets do not involve the patent system, so the Federal Circuit’s legal justification for applying federal law – the need for uniformity in the patent system – does not apply when the same contract language comes up in a trade secret dispute. Nevertheless, if a single assignment clause is used to cover both trade secrets and patents, federal courts are likely to apply federal law in both contexts. Therefore, in states with favorable law covering trade secret assignments, it might be helpful to use a separate assignment provision for trade secrets.
There was a sharply worded dissent in the DDB case and it remains to be seen if the decision will be modified or narrowly construed in future cases. At least for now, however, it is the law in federal courts and it raises questions that call for attention.

David J. Brody is a principal with Hamilton Brook Smith Reynolds. For 35 years he has practiced as a litigator in complex business disputes and intellectual property litigation. David can be reached at [email protected].