Contracts as a Washington State Check on Dissemination of IP
Although, as previously discussed, federal law lays out a comprehensive system of laws regarding all facets of intellectual property law, there are times when basic principles of contract law must be added to the equation and it is the enforcement and regulation of contract where each of the several states laws touch upon and amplify the protections provided by federal law. For example, state concerns are impacted when a person has an idea for a product or work, but needs the assistance of a different party to develop or market that idea. In such a case, as an idea itself is not protectable under intellectual property law (to be protectable, there must be a physical manifestation of the idea), principles of contract law must be used to protect the idea while it is still in the stage of being converted into a protectable work. Just as naturally, where this same relationship occurs within the context of regular employment of persons to assist in developing or marketing a product, state laws regulate the relationship of each of the employee’s and the employer’s ownership of the idea as it develops. In a section below dealing with inventions, the questions applying to the pure employment relationship is treated with greater depth.
1. IP Contract Law Generally in the Context of Idea Submission The law has been poorly served by its acolytes where courts have failed to perform copyright analysis correctly. In these types of cases, which are often known as “idea submission” cases, courts will generally use contract law to protect the intellectual property interest, assuming three conditions are met:
· The idea at issue must be “novel and concrete;”
· The parties must have had an express or implied agreement under which the idea was turned over; and
· The recipient must have actually used the idea.
As an illustration of the idea submission, a look at the early case of Yadkoe v. Fields decided in 1944, is illuminating. Plaintiff had written skits and comedy routines and unbidden, submitted them to comedian/actor W.C. Fields for his consideration. Allegedly Fields later used some of the material in a film (entitled, wryly enough, “You Cannot Cheat an Honest Man”) and in several of his radio programs. The jury found for the plaintiff and awarded damages based on the reasonable value of the material used. The trial had proceeded on a theory of “implied contract”, but on appeal the court held it was really an “express contract” case because of a letter by Mr. Fields thanking the plaintiff and asserting that he would pay for the material if it proved worthy of use. The court proceeded to discuss the plaintiff’s “ideas” as “property” as though it were a copyright case. (Technically, the court ought to have labeled the plaintiff’s rights as copyright because they had been reduced to written form.)
Ultimately the appellate court affirmed the jury’s verdict in favor of the plaintiff. While the court mixed and confused the precise theories it was discussing, at least it properly held that an idea may be protected where it is the subject of what the court considered to be an express contract. This case set the stage for the 1950′s, during which the California Supreme Court launched the theory of idea-protection which is still the most prevalent theory today. In any contractual or quasi-contractual review of the case, courts have exploited the three elements listed above to create a recognizable res or right in the idea and then proceeded to treat the disposition of the res as subject to contract law. Thus, all of the general requirements for contracts (mutual assent, consideration, legal subject matter, competent parties, etc.) must also be present for a court to enforce intellectual property rights under a contract law theory.
In Washington state, the idea submission theory will not be used to create a right where the idea is not sufficiently fixed in a tangible mode to rise to a level of copyright creation. Indeed, under the influence of the “copyleft” movement and at the hands of, especially, Internet service providers, there is a movement, especially evident in electronic games, to return to the bright line that without a recognizable copyright, there is no right at all. The Copyright Act does not protect ideas; it protects only the manner in which those ideas are expressed. Ideas, on the other hand, are “as free as the air” and are unprotected except in the context of certain legally recognized relationships. The doctrine has always been fraught with difficulty; just precisely where an idea ends and the expression of the idea begins is often very difficult to determine. Unlike California, there is no Washington legal precedent to create a judicially declared right in a submitted idea such as in a fact situation like the Fields case. Only such material as gives rise to the copyright would be examined in a Washington case.
In practical terms, once a copyright is proven, the decisive factor in litigation will be how pervasive and substantial are the similarities. A successful copyright case requires that the similarities be very substantial and that there be enough of them to convince a trier of fact that all of plaintiff’s material, or at least an extensive part of it, was copied. It has been held that even though the similarities are quantitatively small, a successful claim can still be made if the similarities are qualitatively important and show sufficiency of consideration adequate invoke contract protection. Conceptually, a single material similarity can give rise to a claim for breach of implied-in-fact contract, although the jury would likely only award modest damages in such circumstances. Naturally, once the copyright is recognized, the court must proceed along theories which focus on the relationship of the parties.
While copyright has proven a “dry well” for idea submission cases, they have vitality in the area of inventions.
Consider an exemplary scenario as follows: Inventor Mike has a great new idea to improve the driving experience for car drivers by installing a feature in the steering wheel which senses the alertness of the driver. When the driver shows movements of the wheel that suggest inattention, the a warning light is triggered advising the driver to pull over. Mike thinks of a device that would allow this to become a reality, but he is completely incapable of developing a prototype and cannot even draft a design sketch for his device without the help of a professional engineer. He therefore takes his idea to his buddy, Charlie, a senior engineer, employed by a preeminent auto systems manufacturing firm. Mike believes he needs to tell Charlie about his device and to hear from someone “in the industry” just how brilliant the device is. What is to stop Charlie from listening to Mikes description and then drawing on his own extensive experience, working out the means of building and marketing it as his own? Not intellectual property law, since the idea is not protectable yet. The basis for protecting the idea will have to come from contract law, if there is any basis at all.
Note, that the contract may be express or implied. An implied contract in this context can arise when the parties never verbally agreed on the terms for the turning over of the intellectual property, but where the circumstances indicate that this must have been the understanding. So, in the above example, if Mike tells Charlie all about his idea and how to manufacture it, the courts may infer an implied contract between Mike and Charlie to share in the profits of the idea even if Mike could not prove the existence of an actual agreement. More likely, in Washington state courts, Mike would need proof of a more specific agreement than is indicated in the example above. Under patent law, only the work Charlie applied to move the idea to an actual means of solving the problem Mike outlined to him would be worthy of patent protection. Absent some contractual or quasi-contractual recognition that what Mike was sharing is the basis of a partnership or joint venture in the proceeds, Washington courts would uniformly find for Charlie. In general, a court will infer an implied contract when one person uses another’s invention with the inventor’s consent and with the inventor having a reasonable expectation of receiving reasonable compensation. See United States v. Palmer, 128 U.S. 262 (1888).
2. Washington Recognizes Misappropriation of IP as a Tort In a similar vein, a court may use the tort of “misappropriation” to enforce intellectual property rights that may not otherwise fall under the letter of intellectual property law. The tort of misappropriation occurs when one party generates work product (usually information) that is used for commercial purposes by another party and where the following elements are met:
· the information is gathered by the “victim” party at a cost;
· the information is time sensitive;
· the second party’s use of that information constitutes “free-riding” on the first party’s efforts;
· the party using the information is in direct competition with the product or service offered by the first party;
· the ability of the second party to “free-ride” in such a manner would reduce the incentive to acquire the information in the first place.
Still, especially within Washington state, where an idea is a res that does not rise to a level of definition that would be protectable as IP under federal standards, there is no consideration to support a contract. By way of extension, it is profitable to examine the Ninth Circuit U.S. Court of Appeals case wherein that court refused to enforce a hybrid intellectual property agreement – that is, an agreement involving a bundle of patent, trade secret, and other intellectual property rights – the agreement being subject a single royalty rate that extended beyond the expiration date of the patent included in that bundle of rights. The court in the case, Kimble v. Marvel Enterprises Inc., No. 11-15605 (9th Cir. July 16, 2013), found itself bound by the Supreme Court’s holding in Brullote v. Thys Co., 379 U.S. 29 (1964), that charging patent royalties beyond a patent’s expiration date is “unlawful per se.” The Ninth Circuit, like others, extensively criticized Brulotte, noting that applying the Brulotte rule to the hybrid agreement before it likely resulted in the agreement having less actual value than the parties likely understood when they entered into the agreement. Yet absent “a discounted rate for the non-patent rights [a “step-down”] or some other clear indication that the royalty at issue was in no way subject to patent leverage” in the agreement, even though the “patent leverage in this case was vastly overshadowed” by non-patent rights, the Ninth Circuit felt compelled to cut off the ability to collect royalties beyond the life of the patent.
The Supreme Court in Brullote held royalty payments beyond the expiration date of a patent unlawful per se, viewing such royalties as impermissibly extending the duration of a patent monopoly. The Supreme Court there rejected arguments that post-expiration royalties were merely deferred payments for use of a patent during the pre-expiration period. In addition, the Court refused to conjecture what the parties’ bargaining position would have been and what agreement might have resulted had post-expiration royalties been separated from the patent. Later in Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979), the Supreme Court clarified that patent law permits indefinite royalty payments where no patent is ultimately issued. The Aronson decision largely turned on the fact that the parties had agreed to a 5% royalty, but if a patent application was not allowed within five years, the royalty stepped-down to 2.5%. In each, a specific value of the independent elements of IP had been, presumptively, fixed by the parties.
3. Employment as a Special Case of Washington Contract Law When an inventor creates an invention while employed, who ought, in fairness, to own the right to acquire a patent: the inventor or the employer? Strong cases can be made for each and yet, in the end, the question becomes one for which the relationship between the inventor and the employer is best examined. It is from this relationship that the general rule in Washington state allows the inventor to retain the patent rights to the invention unless:
· the inventor signed an employment agreement assigning invention rights, or
· the inventor was specifically hired (even without a written agreement) to exploit inventing skills or to create the invention.
Where the relationship is not defined by either of the preceding criteria, the employer does not acquire ownership but, rather, a limited right to use any resulting patent (called a shop right) without paying for that right as the use of company resources are presumed to have been used to develop the invention. Shop rights are set out more specifically below. Factual issues springing from the relations of employment individual determine both the ownership of the patent and should no patent issue, those issues may well warrant the granting of a license by action of law. Each situation must be evaluated on its own set of facts.
Rather than to allow the circumstances to dictate the relationship, a prudent employer will address the issue in an employment agreement. Some employment agreements have a provision requiring the employee to assign any inventions to the employer. Because these employment agreements are signed before the employee creates the invention, they are sometimes referred to as pre-invention assignments. Whether employer or employee, either should examine closely the employment agreement (or other agreements the two may execute) to see if there are any pre-invention assignment clauses. These provisions might also be located in an employee manual or in other employee policy guidelines; terms of such policy manuals are often considered as legally binding as the express terms of the employment agreement. Failure to adhere to the agreement and an employee’s attempt to license, patent, or sell the invention is a breach of the employment agreement. An employer will be able to sue an inventor for breach of the employment agreement. Where an employment agreement is found valid and the employer wins the lawsuit, the perfidious inventor may have to pay monetary damages and also lose rights to the invention.
Under the employment laws of Washington, an employee must be given written notice of the legal restrictions on an employer’s right to obtain an assignment of employee inventions. Washington (Washington Revised Code Annotated §§ 49.44.140, 49.44.150). If the employer fails to so warn, the assignment could be unenforceable. By statute, the disclosure required must be adequate to convey this restriction upon the employer:
The employer must, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to inventions falling under the exceptions created by this section.
While disclosure of the law is laudable, the ideal time for notification is at disclosure of the assignment agreement, rather than at the time of signature. A common form of notification is to simply provide a copy of the statute. Next, a statement of responsibility:
The employee shall bear the burden of proof in establishing that an invention qualifies under this section.
This statement sets the basic terms of an employee’s legal strategy in a dispute. The company is presumed to possess the rights, unless the exceptions created by the statute are demonstrated to apply. The State of Washington adds a further burden:
Even though the employee meets the burden of proving the conditions specified in this section, the employee shall disclose, at the time of employment or thereafter, all inventions being developed by the employee, for the purpose of determining employer and employee rights in an invention.
While the duty to disclose even personal creations during employment is ordinary, this trailing clause has no time limit. Outside of Washington State, trailing clauses are left to the discretion of the drafter of the agreement and can be altered or negotiated.
Even without a written employment agreement, an employer may own rights to an inventor’s patent under a doctrine known as “employed to invent.” If an employer hired the inventor for his or her inventing or designing skills, or the inventor was hired or directed to create an invention, your employer would own all rights to your subsequent invention. This doctrine is derived from a Supreme court ruling that stated, “Anyone employed to make an invention, who succeeds, during his term of service, in accomplishing that task, is bound to assign to his employer any patent obtained.” In one case involving a process for welding a turbine engine, an employee spent 70% of his employment time on this project and created the invention using the employer’s resources, i.e., the employer’s tools and materials. When completed, the employee acknowledged the employer’s role in the development of the invention. All of these factors, especially, the last one, were important in a court ruling granting rights to the employer under the ‘employed-to-invent’ doctrine.
Despite this ‘employed to invent’ rule, most companies prefer to use a written agreement like a pre-invention assignment agreement, which is more reliable and easier to enforce than this implied agreement.
Even in instances where the employer does not own the employee’s patent, it may have a “shop right” to use the patent on a non-exclusive, non-assignable, royalty-free basis. A shop right entitles an employer to use, without charge, an invention patented by one of its employees without liability for infringement. In addition, the employer has a royalty-free, non-exclusive and non-assignable license to use the invention. The right is based on the employer’s presumed contribution to the invention through materials, time, and equipment. In determining whether an employer has a shop right, the following factors have been considered:
· the contractual nature of the relationship between employer and employee
· whether the employee consented to the employer’s use of the invention, and
· whether the employee induced, acquiesced in, or assisted the employer in the use of the invention.
In general, an employer will have shop rights in an invention in situations where the employer has financed an employee’s invention by providing wages, materials, tools and a work place. Other factors creating shop rights include an employee’s consent, acquiescence, inducement, or assistance to the employer in using the invention without demanding compensation or other notice of restriction. Although the employer has a shop right, the employee retains full ownership of the patent and may issue licenses or even sell the patent to third-parties. However, even where the patent is sold to a third-party, the (former) employer retains its shop rights in the patent.
If an employee inventor is an officer of the employer, ownership is more likely to tip towards the company than the employee. Officers of a company have a special duty (known as a “fiduciary duty”) to the company. At least one state court has found that the officer of a corporation has a fiduciary duty to assign his employee-created invention to his employer.
Rules for independent contractors differ from those that apply to employees just as the employment relation is distinct from that of an independent contractor. For example, none of the Washington state law limitations on invention assignments discussed above apply to independent contractors; they only apply to employees. The rule recognizes that an independent contractor has greater control over the place, manner, and means of fulfilling their obligations under the respective contracts. For that reason, the contracts are presumed to have been negotiated at arm’s length making it inherently more likely that each of the parties intended the scope and nature of the assignment.
Having said that an independent contract is presumptively fair, no state’s law would allow or uphold, even in the context of an independent contractor’s relationship, an unconscionable or fraudulently obtained assignment. Washington employment law will, given sufficiently exploitive circumstances, set aside the assignment as the product of fraud. Shop rights are not necessarily limited to the employer-employee relationship. Where an independent contractor uses a company’s resources, the company may also have shop rights to the invention. Without specifically worded clauses that remove ambiguity as to ownership, facts will dictate. The facts that underlie employment disputes are often both compelling and complex. Only definition stemming from well-crafted employment contracts will assure that each of the employer’s and the employee’s expectations stemming from that relationship will be met.
4. Pointers to Drafting Washington Employment Contracts As to Employers: · Employers concerned about ownership of intellectual property stemming from employees’ inventions should include assignment provisions in employment contracts. The employee should agree that all “Work Product” conceived or reduced to practice—individually or jointly—during employment relating to the employer’s current or anticipated business or research belongs exclusively to the employer. “Work Product” should be defined broadly and defined as including, but not limited to, types of work the particular employee is likely to produce, including: inventions, plans, know-how, developments, discoveries, and experimental processes. The agreement should specify that, in addition to original Work Product, the employer exclusively owns any and all copies, improvements, rights and claims, tangible embodiments thereof, and rights in patents, copyrights, trademarks, or other intellectual property rights anywhere in the world arising from that
· Assignment provisions should clearly state that the employee assigns (rather than merely agrees to assign later) Work Product conceived or reduced to practice at any time of day during employment, and Work Product made without use of employer resources that relates to the employer’s business or research.
· When an employer seeks maximum ownership of employee inventions, it may be useful to reference the relevant state law and specify that the employee assigns all inventions not prohibited by law. However, merely stating the inverse—that an agreement does not cover inventions prohibited by a Washington-type statute—likely is insufficient to effectuate the maximum assignment.
· Agreements in states with Washington-type statutes should include notice of an employee’s statutory rights.
· Attorneys alleging breach of an assignment agreement in states following the Washington model should brief the four statutory factors, focusing on the broad factor of inventions that “relate to” the employee’s business.
· Assignment agreements should specifically include “ideas” among assigned inventions, if that is the parties’ intent. Failure to clearly define inventions assigned may result in a court looking to external evidence, such as industry custom, to interpret perceived ambiguity in the agreement.
As to Employees: · Employees may bargain for pre-invention assignment agreements that assign less than the maximum amount allowed by state law. For example, an assignment provision 129 This language is adapted from Employee Confidentiality and Proprietary Rights Agreement, could exempt from assignment inventions in an employee’s area of interest that relate to the employer’s business but are outside of the scope of the employee’s work (e.g., a software engineer who works on operating systems but programs games as a hobby). · If subject to an assignment agreement, employees should work on new business ventures only during off-hours and without use of employer supplies or secrets. Specifically, would-be inventors should refrain from using company computers or other equipment to perform research, communicate, or record ideas. Even without use of employer resources, however, inventions that “relate to” an employer’s work (construed broadly) or that stem from the employee’s work, may nonetheless be assignable.
· Even if an employee’s assignment agreement in a state with a Washington-type statute purports to assign all inventions to the employer, the attorney might focus on perceived ambiguity in the agreement itself—rather than the statutory factors—in an attempt to invalidate the agreement, or raise other contract law doctrines such as lack of consideration.
5. The Special Case of Information Technology in Washington State While recent discussions on copyright protections and anti-piracy crackdowns have focused on trying to coalesce support the Stop Online Piracy Act and the Protect Intellectual Property Act, several states have also entered the fray, particularly in the area of stolen or misappropriated information technology harming competition. In Washington state where much of the local economy is based upon information technology and which is the home of Microsoft™, the need for protection is particularly felt. At least thirty-nine states have called on the Federal Trade Commission (“FTC”) to define theft or misappropriation of information technology (“IT”) as unfair competition under Section 5 of the FTC Act, while other states have enacted new statutes or amended their consumer protection laws to explicitly define piracy as unfair competition. For example, in 2010, Louisiana enacted a law making it illegal to sell products or offer services in Louisiana that were manufactured or developed using stolen IT (including pirated software). See La. Rev. Stat. Ann. § 51:1427.
In July 2011, Washington State enacted the Stolen or Misappropriated Information Technology Law. The Act is unique that it modifies existing unfair competition law under the to make it unlawful to offer for sale in Washington a product manufactured using stolen or misappropriated IT. See generally Wash. Rev. Code § 19.330 et seq. The law subjects both direct manufacturers and third party retailers or distributors to civil liability. The Act carves out a safe harbor and affirmative defenses wherein companies may avoid liability by adopting curative practices to halt or prevent the use of stolen or misappropriated IT. Although the law creates direct liability for any company that manufactures a product sold in Washington State, it is most likely that defendants will include parties in a contractual relationship with a foreign manufacturer that uses stolen or misappropriated IT.
The law limits standing to sue to the Washington Attorney General, or private party competitors of the offending manufacturer if the value of the stolen IT exceeds $20,000 and the competitor: (i) manufactures products that are in direct competition with the products manufactured by the party using the stolen IT; (ii) does not use stolen IT; and (iii) offers the competing products for sale in Washington. As is clear, the Act was not meant to implicate disputes between parties over one-off or products with limited distribution.
The legislature still intends the courts to be used for the most egregious theft cases. The IT owner must provide the user of the illegal IT with written notice that includes the details of the stolen IT, the products involved, the particular law violated, and evidence supporting the allegations. The requirement is jurisdictional and without notice, neither the Washington State Attorney General or a private plaintiff can bring suit. Upon notice, the user then has an opportunity to take remedial action, such as obtaining proper licensing or by demonstrating that the IT is not stolen or misappropriated. The circumstances where the case may be properly filed are severely circumscribed.
Following notice and an opportunity to cure, the plaintiff may then proceed with an action against the direct violators, an in rem action against the infringing products, or an action against third party distributors or retailers--in that sequence. Direct violators may face either monetary damages or an injunction to halt the sale of products manufactured in violation of the law. If a competitor-plaintiff seeks injunctive relief, then it must also demonstrate “material competitive injury,” which the statute defines as a 3% retail price difference between the illegal product and a directly competing product manufactured without the use of stolen IT. Monetary damages against direct violators may be awarded for the greater of actual direct damages or statutory damages equal to the retail price of the stolen or misappropriated IT, and treble damages are available for “willful” violations. The law also authorizes awards of costs and attorney’s fees.
If the court is unable to obtain personal jurisdiction over the direct violators, the court may proceed in rem against the products after providing 90 days’ notice to the person in possession of the offending goods. To prevent supply disruptions from any attachment order, any person for whom the products were manufactured may post a bond equal to the retail price of the stolen IT or $25,000, whichever is less. The bond must be posted within the 90-day notice period. The attachment order will then proceed against the bond, and the goods will be released.
Finally, if the competitor-plaintiff is unable to collect damages from the direct violator or in an in rem action, the law permits the collection of damages from a third party retailer or distributor with a contractual relationship with the defendant-manufacturer in an amount equal to the lesser of the retail price of the stolen IT or $250,000, minus any amounts recovered from the user of illegal IT. Damages are only available if the user of illegal IT made the final product sold by the third party or produced a component equal to 30% or more of the value of the final product. The Act is configured to make Washington state a very hospitable home for the manufacturers of IT products by protecting them against egregious theft of their particular IT secrets.
1. IP Contract Law Generally in the Context of Idea Submission The law has been poorly served by its acolytes where courts have failed to perform copyright analysis correctly. In these types of cases, which are often known as “idea submission” cases, courts will generally use contract law to protect the intellectual property interest, assuming three conditions are met:
· The idea at issue must be “novel and concrete;”
· The parties must have had an express or implied agreement under which the idea was turned over; and
· The recipient must have actually used the idea.
As an illustration of the idea submission, a look at the early case of Yadkoe v. Fields decided in 1944, is illuminating. Plaintiff had written skits and comedy routines and unbidden, submitted them to comedian/actor W.C. Fields for his consideration. Allegedly Fields later used some of the material in a film (entitled, wryly enough, “You Cannot Cheat an Honest Man”) and in several of his radio programs. The jury found for the plaintiff and awarded damages based on the reasonable value of the material used. The trial had proceeded on a theory of “implied contract”, but on appeal the court held it was really an “express contract” case because of a letter by Mr. Fields thanking the plaintiff and asserting that he would pay for the material if it proved worthy of use. The court proceeded to discuss the plaintiff’s “ideas” as “property” as though it were a copyright case. (Technically, the court ought to have labeled the plaintiff’s rights as copyright because they had been reduced to written form.)
Ultimately the appellate court affirmed the jury’s verdict in favor of the plaintiff. While the court mixed and confused the precise theories it was discussing, at least it properly held that an idea may be protected where it is the subject of what the court considered to be an express contract. This case set the stage for the 1950′s, during which the California Supreme Court launched the theory of idea-protection which is still the most prevalent theory today. In any contractual or quasi-contractual review of the case, courts have exploited the three elements listed above to create a recognizable res or right in the idea and then proceeded to treat the disposition of the res as subject to contract law. Thus, all of the general requirements for contracts (mutual assent, consideration, legal subject matter, competent parties, etc.) must also be present for a court to enforce intellectual property rights under a contract law theory.
In Washington state, the idea submission theory will not be used to create a right where the idea is not sufficiently fixed in a tangible mode to rise to a level of copyright creation. Indeed, under the influence of the “copyleft” movement and at the hands of, especially, Internet service providers, there is a movement, especially evident in electronic games, to return to the bright line that without a recognizable copyright, there is no right at all. The Copyright Act does not protect ideas; it protects only the manner in which those ideas are expressed. Ideas, on the other hand, are “as free as the air” and are unprotected except in the context of certain legally recognized relationships. The doctrine has always been fraught with difficulty; just precisely where an idea ends and the expression of the idea begins is often very difficult to determine. Unlike California, there is no Washington legal precedent to create a judicially declared right in a submitted idea such as in a fact situation like the Fields case. Only such material as gives rise to the copyright would be examined in a Washington case.
In practical terms, once a copyright is proven, the decisive factor in litigation will be how pervasive and substantial are the similarities. A successful copyright case requires that the similarities be very substantial and that there be enough of them to convince a trier of fact that all of plaintiff’s material, or at least an extensive part of it, was copied. It has been held that even though the similarities are quantitatively small, a successful claim can still be made if the similarities are qualitatively important and show sufficiency of consideration adequate invoke contract protection. Conceptually, a single material similarity can give rise to a claim for breach of implied-in-fact contract, although the jury would likely only award modest damages in such circumstances. Naturally, once the copyright is recognized, the court must proceed along theories which focus on the relationship of the parties.
While copyright has proven a “dry well” for idea submission cases, they have vitality in the area of inventions.
Consider an exemplary scenario as follows: Inventor Mike has a great new idea to improve the driving experience for car drivers by installing a feature in the steering wheel which senses the alertness of the driver. When the driver shows movements of the wheel that suggest inattention, the a warning light is triggered advising the driver to pull over. Mike thinks of a device that would allow this to become a reality, but he is completely incapable of developing a prototype and cannot even draft a design sketch for his device without the help of a professional engineer. He therefore takes his idea to his buddy, Charlie, a senior engineer, employed by a preeminent auto systems manufacturing firm. Mike believes he needs to tell Charlie about his device and to hear from someone “in the industry” just how brilliant the device is. What is to stop Charlie from listening to Mikes description and then drawing on his own extensive experience, working out the means of building and marketing it as his own? Not intellectual property law, since the idea is not protectable yet. The basis for protecting the idea will have to come from contract law, if there is any basis at all.
Note, that the contract may be express or implied. An implied contract in this context can arise when the parties never verbally agreed on the terms for the turning over of the intellectual property, but where the circumstances indicate that this must have been the understanding. So, in the above example, if Mike tells Charlie all about his idea and how to manufacture it, the courts may infer an implied contract between Mike and Charlie to share in the profits of the idea even if Mike could not prove the existence of an actual agreement. More likely, in Washington state courts, Mike would need proof of a more specific agreement than is indicated in the example above. Under patent law, only the work Charlie applied to move the idea to an actual means of solving the problem Mike outlined to him would be worthy of patent protection. Absent some contractual or quasi-contractual recognition that what Mike was sharing is the basis of a partnership or joint venture in the proceeds, Washington courts would uniformly find for Charlie. In general, a court will infer an implied contract when one person uses another’s invention with the inventor’s consent and with the inventor having a reasonable expectation of receiving reasonable compensation. See United States v. Palmer, 128 U.S. 262 (1888).
2. Washington Recognizes Misappropriation of IP as a Tort In a similar vein, a court may use the tort of “misappropriation” to enforce intellectual property rights that may not otherwise fall under the letter of intellectual property law. The tort of misappropriation occurs when one party generates work product (usually information) that is used for commercial purposes by another party and where the following elements are met:
· the information is gathered by the “victim” party at a cost;
· the information is time sensitive;
· the second party’s use of that information constitutes “free-riding” on the first party’s efforts;
· the party using the information is in direct competition with the product or service offered by the first party;
· the ability of the second party to “free-ride” in such a manner would reduce the incentive to acquire the information in the first place.
Still, especially within Washington state, where an idea is a res that does not rise to a level of definition that would be protectable as IP under federal standards, there is no consideration to support a contract. By way of extension, it is profitable to examine the Ninth Circuit U.S. Court of Appeals case wherein that court refused to enforce a hybrid intellectual property agreement – that is, an agreement involving a bundle of patent, trade secret, and other intellectual property rights – the agreement being subject a single royalty rate that extended beyond the expiration date of the patent included in that bundle of rights. The court in the case, Kimble v. Marvel Enterprises Inc., No. 11-15605 (9th Cir. July 16, 2013), found itself bound by the Supreme Court’s holding in Brullote v. Thys Co., 379 U.S. 29 (1964), that charging patent royalties beyond a patent’s expiration date is “unlawful per se.” The Ninth Circuit, like others, extensively criticized Brulotte, noting that applying the Brulotte rule to the hybrid agreement before it likely resulted in the agreement having less actual value than the parties likely understood when they entered into the agreement. Yet absent “a discounted rate for the non-patent rights [a “step-down”] or some other clear indication that the royalty at issue was in no way subject to patent leverage” in the agreement, even though the “patent leverage in this case was vastly overshadowed” by non-patent rights, the Ninth Circuit felt compelled to cut off the ability to collect royalties beyond the life of the patent.
The Supreme Court in Brullote held royalty payments beyond the expiration date of a patent unlawful per se, viewing such royalties as impermissibly extending the duration of a patent monopoly. The Supreme Court there rejected arguments that post-expiration royalties were merely deferred payments for use of a patent during the pre-expiration period. In addition, the Court refused to conjecture what the parties’ bargaining position would have been and what agreement might have resulted had post-expiration royalties been separated from the patent. Later in Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979), the Supreme Court clarified that patent law permits indefinite royalty payments where no patent is ultimately issued. The Aronson decision largely turned on the fact that the parties had agreed to a 5% royalty, but if a patent application was not allowed within five years, the royalty stepped-down to 2.5%. In each, a specific value of the independent elements of IP had been, presumptively, fixed by the parties.
3. Employment as a Special Case of Washington Contract Law When an inventor creates an invention while employed, who ought, in fairness, to own the right to acquire a patent: the inventor or the employer? Strong cases can be made for each and yet, in the end, the question becomes one for which the relationship between the inventor and the employer is best examined. It is from this relationship that the general rule in Washington state allows the inventor to retain the patent rights to the invention unless:
· the inventor signed an employment agreement assigning invention rights, or
· the inventor was specifically hired (even without a written agreement) to exploit inventing skills or to create the invention.
Where the relationship is not defined by either of the preceding criteria, the employer does not acquire ownership but, rather, a limited right to use any resulting patent (called a shop right) without paying for that right as the use of company resources are presumed to have been used to develop the invention. Shop rights are set out more specifically below. Factual issues springing from the relations of employment individual determine both the ownership of the patent and should no patent issue, those issues may well warrant the granting of a license by action of law. Each situation must be evaluated on its own set of facts.
Rather than to allow the circumstances to dictate the relationship, a prudent employer will address the issue in an employment agreement. Some employment agreements have a provision requiring the employee to assign any inventions to the employer. Because these employment agreements are signed before the employee creates the invention, they are sometimes referred to as pre-invention assignments. Whether employer or employee, either should examine closely the employment agreement (or other agreements the two may execute) to see if there are any pre-invention assignment clauses. These provisions might also be located in an employee manual or in other employee policy guidelines; terms of such policy manuals are often considered as legally binding as the express terms of the employment agreement. Failure to adhere to the agreement and an employee’s attempt to license, patent, or sell the invention is a breach of the employment agreement. An employer will be able to sue an inventor for breach of the employment agreement. Where an employment agreement is found valid and the employer wins the lawsuit, the perfidious inventor may have to pay monetary damages and also lose rights to the invention.
Under the employment laws of Washington, an employee must be given written notice of the legal restrictions on an employer’s right to obtain an assignment of employee inventions. Washington (Washington Revised Code Annotated §§ 49.44.140, 49.44.150). If the employer fails to so warn, the assignment could be unenforceable. By statute, the disclosure required must be adequate to convey this restriction upon the employer:
The employer must, at the time the agreement is made, provide a written notification to the employee that the agreement does not apply to inventions falling under the exceptions created by this section.
While disclosure of the law is laudable, the ideal time for notification is at disclosure of the assignment agreement, rather than at the time of signature. A common form of notification is to simply provide a copy of the statute. Next, a statement of responsibility:
The employee shall bear the burden of proof in establishing that an invention qualifies under this section.
This statement sets the basic terms of an employee’s legal strategy in a dispute. The company is presumed to possess the rights, unless the exceptions created by the statute are demonstrated to apply. The State of Washington adds a further burden:
Even though the employee meets the burden of proving the conditions specified in this section, the employee shall disclose, at the time of employment or thereafter, all inventions being developed by the employee, for the purpose of determining employer and employee rights in an invention.
While the duty to disclose even personal creations during employment is ordinary, this trailing clause has no time limit. Outside of Washington State, trailing clauses are left to the discretion of the drafter of the agreement and can be altered or negotiated.
Even without a written employment agreement, an employer may own rights to an inventor’s patent under a doctrine known as “employed to invent.” If an employer hired the inventor for his or her inventing or designing skills, or the inventor was hired or directed to create an invention, your employer would own all rights to your subsequent invention. This doctrine is derived from a Supreme court ruling that stated, “Anyone employed to make an invention, who succeeds, during his term of service, in accomplishing that task, is bound to assign to his employer any patent obtained.” In one case involving a process for welding a turbine engine, an employee spent 70% of his employment time on this project and created the invention using the employer’s resources, i.e., the employer’s tools and materials. When completed, the employee acknowledged the employer’s role in the development of the invention. All of these factors, especially, the last one, were important in a court ruling granting rights to the employer under the ‘employed-to-invent’ doctrine.
Despite this ‘employed to invent’ rule, most companies prefer to use a written agreement like a pre-invention assignment agreement, which is more reliable and easier to enforce than this implied agreement.
Even in instances where the employer does not own the employee’s patent, it may have a “shop right” to use the patent on a non-exclusive, non-assignable, royalty-free basis. A shop right entitles an employer to use, without charge, an invention patented by one of its employees without liability for infringement. In addition, the employer has a royalty-free, non-exclusive and non-assignable license to use the invention. The right is based on the employer’s presumed contribution to the invention through materials, time, and equipment. In determining whether an employer has a shop right, the following factors have been considered:
· the contractual nature of the relationship between employer and employee
· whether the employee consented to the employer’s use of the invention, and
· whether the employee induced, acquiesced in, or assisted the employer in the use of the invention.
In general, an employer will have shop rights in an invention in situations where the employer has financed an employee’s invention by providing wages, materials, tools and a work place. Other factors creating shop rights include an employee’s consent, acquiescence, inducement, or assistance to the employer in using the invention without demanding compensation or other notice of restriction. Although the employer has a shop right, the employee retains full ownership of the patent and may issue licenses or even sell the patent to third-parties. However, even where the patent is sold to a third-party, the (former) employer retains its shop rights in the patent.
If an employee inventor is an officer of the employer, ownership is more likely to tip towards the company than the employee. Officers of a company have a special duty (known as a “fiduciary duty”) to the company. At least one state court has found that the officer of a corporation has a fiduciary duty to assign his employee-created invention to his employer.
Rules for independent contractors differ from those that apply to employees just as the employment relation is distinct from that of an independent contractor. For example, none of the Washington state law limitations on invention assignments discussed above apply to independent contractors; they only apply to employees. The rule recognizes that an independent contractor has greater control over the place, manner, and means of fulfilling their obligations under the respective contracts. For that reason, the contracts are presumed to have been negotiated at arm’s length making it inherently more likely that each of the parties intended the scope and nature of the assignment.
Having said that an independent contract is presumptively fair, no state’s law would allow or uphold, even in the context of an independent contractor’s relationship, an unconscionable or fraudulently obtained assignment. Washington employment law will, given sufficiently exploitive circumstances, set aside the assignment as the product of fraud. Shop rights are not necessarily limited to the employer-employee relationship. Where an independent contractor uses a company’s resources, the company may also have shop rights to the invention. Without specifically worded clauses that remove ambiguity as to ownership, facts will dictate. The facts that underlie employment disputes are often both compelling and complex. Only definition stemming from well-crafted employment contracts will assure that each of the employer’s and the employee’s expectations stemming from that relationship will be met.
4. Pointers to Drafting Washington Employment Contracts As to Employers: · Employers concerned about ownership of intellectual property stemming from employees’ inventions should include assignment provisions in employment contracts. The employee should agree that all “Work Product” conceived or reduced to practice—individually or jointly—during employment relating to the employer’s current or anticipated business or research belongs exclusively to the employer. “Work Product” should be defined broadly and defined as including, but not limited to, types of work the particular employee is likely to produce, including: inventions, plans, know-how, developments, discoveries, and experimental processes. The agreement should specify that, in addition to original Work Product, the employer exclusively owns any and all copies, improvements, rights and claims, tangible embodiments thereof, and rights in patents, copyrights, trademarks, or other intellectual property rights anywhere in the world arising from that
· Assignment provisions should clearly state that the employee assigns (rather than merely agrees to assign later) Work Product conceived or reduced to practice at any time of day during employment, and Work Product made without use of employer resources that relates to the employer’s business or research.
· When an employer seeks maximum ownership of employee inventions, it may be useful to reference the relevant state law and specify that the employee assigns all inventions not prohibited by law. However, merely stating the inverse—that an agreement does not cover inventions prohibited by a Washington-type statute—likely is insufficient to effectuate the maximum assignment.
· Agreements in states with Washington-type statutes should include notice of an employee’s statutory rights.
· Attorneys alleging breach of an assignment agreement in states following the Washington model should brief the four statutory factors, focusing on the broad factor of inventions that “relate to” the employee’s business.
· Assignment agreements should specifically include “ideas” among assigned inventions, if that is the parties’ intent. Failure to clearly define inventions assigned may result in a court looking to external evidence, such as industry custom, to interpret perceived ambiguity in the agreement.
As to Employees: · Employees may bargain for pre-invention assignment agreements that assign less than the maximum amount allowed by state law. For example, an assignment provision 129 This language is adapted from Employee Confidentiality and Proprietary Rights Agreement, could exempt from assignment inventions in an employee’s area of interest that relate to the employer’s business but are outside of the scope of the employee’s work (e.g., a software engineer who works on operating systems but programs games as a hobby). · If subject to an assignment agreement, employees should work on new business ventures only during off-hours and without use of employer supplies or secrets. Specifically, would-be inventors should refrain from using company computers or other equipment to perform research, communicate, or record ideas. Even without use of employer resources, however, inventions that “relate to” an employer’s work (construed broadly) or that stem from the employee’s work, may nonetheless be assignable.
· Even if an employee’s assignment agreement in a state with a Washington-type statute purports to assign all inventions to the employer, the attorney might focus on perceived ambiguity in the agreement itself—rather than the statutory factors—in an attempt to invalidate the agreement, or raise other contract law doctrines such as lack of consideration.
5. The Special Case of Information Technology in Washington State While recent discussions on copyright protections and anti-piracy crackdowns have focused on trying to coalesce support the Stop Online Piracy Act and the Protect Intellectual Property Act, several states have also entered the fray, particularly in the area of stolen or misappropriated information technology harming competition. In Washington state where much of the local economy is based upon information technology and which is the home of Microsoft™, the need for protection is particularly felt. At least thirty-nine states have called on the Federal Trade Commission (“FTC”) to define theft or misappropriation of information technology (“IT”) as unfair competition under Section 5 of the FTC Act, while other states have enacted new statutes or amended their consumer protection laws to explicitly define piracy as unfair competition. For example, in 2010, Louisiana enacted a law making it illegal to sell products or offer services in Louisiana that were manufactured or developed using stolen IT (including pirated software). See La. Rev. Stat. Ann. § 51:1427.
In July 2011, Washington State enacted the Stolen or Misappropriated Information Technology Law. The Act is unique that it modifies existing unfair competition law under the to make it unlawful to offer for sale in Washington a product manufactured using stolen or misappropriated IT. See generally Wash. Rev. Code § 19.330 et seq. The law subjects both direct manufacturers and third party retailers or distributors to civil liability. The Act carves out a safe harbor and affirmative defenses wherein companies may avoid liability by adopting curative practices to halt or prevent the use of stolen or misappropriated IT. Although the law creates direct liability for any company that manufactures a product sold in Washington State, it is most likely that defendants will include parties in a contractual relationship with a foreign manufacturer that uses stolen or misappropriated IT.
The law limits standing to sue to the Washington Attorney General, or private party competitors of the offending manufacturer if the value of the stolen IT exceeds $20,000 and the competitor: (i) manufactures products that are in direct competition with the products manufactured by the party using the stolen IT; (ii) does not use stolen IT; and (iii) offers the competing products for sale in Washington. As is clear, the Act was not meant to implicate disputes between parties over one-off or products with limited distribution.
The legislature still intends the courts to be used for the most egregious theft cases. The IT owner must provide the user of the illegal IT with written notice that includes the details of the stolen IT, the products involved, the particular law violated, and evidence supporting the allegations. The requirement is jurisdictional and without notice, neither the Washington State Attorney General or a private plaintiff can bring suit. Upon notice, the user then has an opportunity to take remedial action, such as obtaining proper licensing or by demonstrating that the IT is not stolen or misappropriated. The circumstances where the case may be properly filed are severely circumscribed.
Following notice and an opportunity to cure, the plaintiff may then proceed with an action against the direct violators, an in rem action against the infringing products, or an action against third party distributors or retailers--in that sequence. Direct violators may face either monetary damages or an injunction to halt the sale of products manufactured in violation of the law. If a competitor-plaintiff seeks injunctive relief, then it must also demonstrate “material competitive injury,” which the statute defines as a 3% retail price difference between the illegal product and a directly competing product manufactured without the use of stolen IT. Monetary damages against direct violators may be awarded for the greater of actual direct damages or statutory damages equal to the retail price of the stolen or misappropriated IT, and treble damages are available for “willful” violations. The law also authorizes awards of costs and attorney’s fees.
If the court is unable to obtain personal jurisdiction over the direct violators, the court may proceed in rem against the products after providing 90 days’ notice to the person in possession of the offending goods. To prevent supply disruptions from any attachment order, any person for whom the products were manufactured may post a bond equal to the retail price of the stolen IT or $25,000, whichever is less. The bond must be posted within the 90-day notice period. The attachment order will then proceed against the bond, and the goods will be released.
Finally, if the competitor-plaintiff is unable to collect damages from the direct violator or in an in rem action, the law permits the collection of damages from a third party retailer or distributor with a contractual relationship with the defendant-manufacturer in an amount equal to the lesser of the retail price of the stolen IT or $250,000, minus any amounts recovered from the user of illegal IT. Damages are only available if the user of illegal IT made the final product sold by the third party or produced a component equal to 30% or more of the value of the final product. The Act is configured to make Washington state a very hospitable home for the manufacturers of IT products by protecting them against egregious theft of their particular IT secrets.