Federal Circuit Looks at Intellectual Property Terms of Employment Agreement to Decide Patent Ownership

In Preston v. Marathon Oil Co., the Federal Circuit examined the terms of an employment agreement in order to determine the owner of the patents at issue. Although aspects of the agreement were interpreted under state (Wyoming) law, the decision may be relevant to many employment agreements.

Timeline of Activities

March 2001: Preston was hired as an at-will employee
April 2001: Preston signed the Employment Agreement at issue
Fall 2002: Preston prepared drawings of the “Baffle System”
February 2003: Preston’s Baffle System was installed in three Marathon Oil wells
February 2003: Marathon Oil began its patenting process for the Baffle System
April 2003: Preston left Marathon Oil
June 5, 2003: Preston filed his own patent application to the Baffle System (U.S. Patent 6,959,764)
June 14, 2003: Marathon Oil filed its patent application to the Baffle System (U.S. Patent 7,207,385)

The Employment Agreement

The Federal Circuit decision sets forth the following portions of the Employment Agreement:

1. Definitions

* * * *

(d) “Intellectual Property” means all inventions, discoveries, developments, writings, computer programs and related documentation, designs, ideas, and any other work product made or conceived by EMPLOYEE during the term of employment with MARATHON which (1) relate to the present or reasonably anticipated business of the MARATHON GROUP, or (2) were made or created with the use of Confidential Information or any equipment, supplies, or facilities of the MARATHON GROUP. Such property made or conceived by EMPLOYEE (or for which EMPLOYEE files a patent or copyright application) within one year after termination of employment with MARATHON will be presumed to have been made or conceived during such employment.

* * * *

3. Disclosure and Assignment of Intellectual Property.

EMPLOYEE agrees to promptly disclose to MARATHON and does hereby assign to MARATHON all Intellectual Property, and EMPLOYEE agrees to execute such other documents as MARATHON may request in order to effectuate such assignment.

4. Previous Inventions and Writings.

Below is a list and brief description of all of EMPLOYEE’S unpatented inventions and unpublished writings. MARATHON agrees that such inventions and writings are NOT Intellectual Property and are NOT the property of MARATHON hereunder. If no listing is made, EMPLOYEE has no such inventions or properties.

[Here, Preston had written:] CH4 Resonating Manifold

Both the district court and the Federal Circuit interpreted the agreement in accordance with state law, but primarily followed the Wyoming state law principal that, “[i]f an agreement is in writing and the language is clear and unambiguous, the intention is to be secured from the words of the agreement.”

The Disputed Issues

Preston made the following arguments which were decided against him:

• the Employment Agreement was void for lack of consideration
  The Federal Circuit certified this issue to the Wyoming Supreme Court, which explained that continued employment of an at-will employee is sufficient consideration to support an intellectual property assignment agreement.
• the Baffle System did not fall under the Agreement because he had conceived of it before he became employed by Marathon Oil
  The Federal Circuit gave deference to the district court’s findings that Preston had at most conceived of the invention prior to employment, but had not “made” it until he was working for Marathon Oil.
• the Baffle System was excluded from the Employment Agreement as the “CH4 Resonating Manifold”
  The Federal Circuit found that the evidence did not show that Preston was “in possession of an excludable invention” before he was employed by Marathon Oil.

“made or conceived”

The district court determined that, as used in the Employment Agreement, “invention” requires “both conception and reduction to practice.” While the Federal Circuit noted that this finding was based in part “on an incorrect interpretation of patent law as requiring both conception and reduction to practice for ‘invention,’” it upheld the district court’s interpretation of the agreement. The Federal Circuit focused on the “made or conceived” language, and stated:

if Preston’s invention was not both made and conceived prior to his employment, it constitutes “Intellectual Property” under Paragraph 1 of the April Employee Agreement.

Because the evidence showed that Preston had not “made” the invention until “after his employment with Marathon began,” the Baffle System was Intellectual Property encompassed by the Employment Agreement.  

“does hereby assign”

The district court determined that Preston had breached the Employment Agreement by not assigning his patent rights to Marathon Oil. The Federal Circuit vacated that judgment sua sponte, because the Employment Agreement effected an “automatic assignment” of rights.

Broader Lessons

While much of this decision turned on the specific facts of the case, there are some broader lessons for employment agreements generally. It is a basic principle of U.S. patent law that rights to an invention vest initially in the inventor(s).  Thus, it can be very important to have employment agreements in place that address intellectual property rights. In this regard, a number of Federal Circuit decisions indicate that it may be important to use “does hereby assign” (or other present tense language), rather than “agrees to assign” (or other future tense language.  (For more on the potential impact of these choices, see this article about the Supreme Court decision in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc.). The Federal Circuit’s interpretation of the “made or conceived” language also may impact other agreements. Although the court was applying state law to interpret the Employment Agreement, because it primarily was interpreting the plain language at issue, it is likely that it would reach a similar interpretation of similar language in a similar agreement under a different state’s law. Accordingly, employers may want to review their own employment agreements and consider whether the language used is appropriate to protect their interests.