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Is An Express Contract Always Better? Law360, New York (October 03, 2011, 1:23 PM ET) -- Much commentary respecting Stanford v. Roche, 563 U.S. ___ (June 6, 2011) (No. 09-1159) has focused on the holding that declined to construe the Bayh-Dole Act to award employers with superior ownership rights in the inventions of their employees. Implicit in the decision is an unrealized potential that could nevertheless have secured Stanford the result that the university hoped federal law would award. The title of this article poses a generic question that most lawyers would answer, “Of course it’s better to have an obligation expressed in writing.” That necessarily assumes that the language embodying the terms of the obligation accurately and enforceably express the terms of the obligation. We suggest here that Stanford might have taken a different tack to achieve the objective of securing ownership of the rights to the patent its employee gained. Although the Roche decision solidifies the strength of an inventor’s patent rights, it also emphasizes the importance of a well-executed assignment agreement. Stanford would perhaps have benefited had it never entered into an assignment agreement in the first place, relying instead on an alternative basis for patent ownership: the employed-to-invent doctrine. That doctrine may have given Stanford an immediate ownership interest in the inventions, and possibly mandated a different outcome. None of this is to suggest that Stanford or its counsel overlooked something or made wrong decisions; what it does caution, however, is that in the increasingly important area of contractual ownership rights to intellectual property, the basis for assignment obligations should be viewed prismatically from a host of perspectives, including reliance on obligations implied in law, even absent a written agreement.

Background Facts In 1988, Dr. Mark Holodniy was hired by Stanford University specifically to develop a procedure for quantifying blood-borne levels of human immunodeficiency virus (HIV). To do so, Holodniy was to use a technique called polymerase chain reaction (PCR), which allows for billions of copies of DNA sequences to be made from a small blood sample. Id. (slip op., at 4). The PCR process was invented by research scientists at an organization called Cetus, whose work earned a Nobel prize.

Holodniy entered into a written assignment with Stanford at the time of his hire in which he promised to assign his rights and title in any future inventions resulting from his employment with the University to Stanford. Id. After Holodniy’s hiring, his supervisor, who was also a Cetus board member, arranged for Holodniy to conduct research at Cetus. The remote research made sense because Cetus had pioneered the PCR process, and Holodniy needed to become more familiar with it before he could use it him to accomplish what Stanford had hired him to do. Cetus and Stanford both knew why Stanford had hired Holodniy and why he would be conducting research at Cetus. Before Holodniy was granted access to the Cetus labs, however, he was required to enter into an additional assignment agreement with Cetus. Id. Holodniy, however, was never a Cetus employee. Holodniy then spent nine months at Cetus and did succeed in developing a method for quantifying blood-borne levels of HIV. He continued his work at Stanford where he perfected the method. Id. Stanford applied for and secured three patents in the measurement process. Id. Later, all of Cetus’s PCR-related assets, including Holodniy’s assignment, were acquired by Roche. Id. Roche commercialized Holodniy’s improved measurement process, prompting Stanford to bring suit for patent infringement. Id. Stanford argued that Roche had no rights in the process because, under the Bayh-Dole Act, the inventions of federally funded contractor employees vest in the contractor immediately and that, therefore, Holodniy had nothing to convey in his assignment to Cetus. Conversely, Roche argued that Stanford had no rights because Holodniy’s assignment to Cetus was valid and trumped the Stanford assignment agreement. Federal Circuit Decision The Federal Circuit held in favor of Roche, as a matter of contract law, finding that the Cetus agreement language (“do hereby assign”) indicated a present assignment whereas the language of the Stanford agreement (“agree to assign”) indicated a future assignment. Stanford v. Roche, 583 F.3d 832, 841 (Fed. Cir. 2009). The Federal Circuit also rejected Stanford’s Bayh-Dole argument. Stanford had argued that because it was a federally funded employer governed by the Bayh-Dole Act, it had prior invention ownership rights despite an arguably weaker assignment. Stanford argued that Bayh-Dole vested the rights to Holodniy’s inventions in Stanford automatically. That argument failed because Stanford was unable to identify any “authorities or reasons why ... BayhDole had the power to void any prior, otherwise valid assignment of patent rights.” Id. Thus, because Holodniy assigned his present interest to Cetus, he had nothing left to assign to Stanford in the future. Accordingly, Stanford did not own the patents and lacked standing to bring an infringement suit against Roche. Id. at 848.

U.S. Supreme Court Decision — Interpretation of the Bayh-Dole Act The Supreme Court granted certiorari and affirmed the Federal Circuit’s decision, but did not undertake examination of the assignment agreements. Stanford v. Roche, 563 U.S. ___ (slip op., at 6 n.2).

The Bayh-Dole Act governs the priority of patent ownership rights of “subject inventions” between the federal government and federally funded contractors. Stanford was a federally funded contractor because it was being funded through the National Institute of Health. Id. (slip op., at 5). The act states that “*a+ ‘subject invention’ is defined as ‘any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement.’” Id. (slip op., at 7) (quoting 35 U.S.C. § 201(e)). Stanford argued that “invention of the contractor” includes the inventions of the contractor’s employees and that ownership of Holodniy’s inventions should vest in the university automatically. Id. (slip op., at 8). That reading meant that Stanford was, for all intents and purposes, the inventor and entitled to patent ownership rights as a matter of federal law. It would also leave Holodniy with nothing left to convey to Cetus, rendering his assignment to Cetus meaningless: a legal nullity. Id. The court refused to go so far, holding that “a contractor’s invention ... does not automatically include inventions made by the contractor’s employees.” Id. (slip op., at 8). The court found that the act’s language “stating that contractors may ‘elect to retain title’ *of its patent rights over the federal government+ confirms that the Act does not vest title.” Id. (slip op., at 9) (quoting 35 U.S.C. § 202(a)). The court interpreted “retain” to mean keep what you already have. Id. Thus, since Stanford could only “retain” what it already had and its agreement was ineffective, there was nothing for it to “retain”. Indeed, the Bayh-Dole Act does not even come into play in such a situation because the act only “serves to clarify the order of priority of rights between the Federal Government and a federal contractor in a federally funded invention that already belongs to the contractor. Nothing more.” Id. The court also observed that if Congress intended to alter the priority of patent/invention ownership and to divest the rights of the actual inventor, it would have done so explicitly in the act as it has done previously. Id. (slip op., at 7) Accordingly, without additional help from the act, and because the Federal Circuit interpreted the Cetus agreement as controlling, Roche alone had ownership rights and Stanford had no standing to sue. Need this have been the result? Could Stanford have acted somehow differently and thereby preserved its right to the invention of its employee? An alternative course might well have given Stanford what it thought it had bargained for and thereby deprived Roche of the benefits of Stanford’s employee’s invention.

Employed-to-Invent Doctrine Had Stanford never entered into an assignment agreement in the first place and argued that it owned the patent rights based on its employment relationship with Holodniy that trumped the deficient assignment, what might have been the likely result? Neither the Federal Circuit, nor the Supreme Court overruled any prior precedent. Consequently, Stanford may have been advantaged had it not entered into an assignment agreement at all — at least not expressly. The reason for this observation is the so-called employed-to-invent doctrine applied by the Supreme Court, the Federal Circuit, and several state and federal courts: “*w+ithout ... an express assignment, employers may still claim an employee’s inventive work where the employer specifically hires or directs the employee to exercise inventive faculties.” Teets v. Chromalloy, 83 F.3d 403, 407 (Fed. Cir. 1996). See also Standard Parts v. Peck, 264 U.S. 52, 58 (1924).

Teets v. Chromalloy In Teets, General Electric Aircraft Company (“GE”) entered into a contract with Chromalloy Gas Turbine Corporation to develop a stronger fan blade that could withstand the power of GE’s newest jet engine. Chromalloy assigned J. Michael Teets as the chief engineer on the project, and he spent the majority of his time (over 70 percent) working on the new fan blade. There was no written employment contract between Teets and Chromalloy addressing invention ownership. Still, the Federal Circuit found that Teets was employed specifically to invent the new fan blade and it was understood that Teets compensated for that task. Therefore, Teets was not entitled to the patent rights in the invention, but rather such rights belonged to Chromalloy by virtue of an implied-in-fact contractual obligation to assign the invention. Teets, 83 F.3d at 408-09. Standard Parts v. Peck Similarly, in Standard Parts, William Peck was hired by Hess-Pontiac Spring & Axle Co. to develop a process, and the machinery for, producing a better front spring for automobiles. Peck had an employment contract specifying that he was being hired for this specific reason, but it did address the invention ownership issue. Standard Parts produced the front spring that Peck invented, and Peck sued for patent infringement. The Supreme Court found that although the contract did not discuss patent ownership rights, it was still clear that Peck was hired — as Stanford’s employee was here — specifically to invent the subject matter of the patent at issue. Accordingly, a present assignment went to Hess at the moment Peck’s employment began and the patent rights vested in Hess as soon as the invention was created. Hess’s subsequent court ordered assignment of its patent rights to Standard Parts was accordingly valid. Standard Parts, 264 U.S. at 58 In both Teets and Standard Parts, the Court found that a present assignment existed in the employment contract. These cases differ from the scenario where an employee is hired to invent generally absent explicit instructions or evidence of a clear understanding between the parties. That situation was addressed in United States v. Dubilier Condenser, 289 U.S. 178 (1933). United States v. Dubilier Condenser In Dubilier, Francis Dunmore and Percival Lowell were employed by the U.S. government to invent generally. At no point were they led to believe that ownership in the patents to their inventions would vest in the government or that they would have to assign them. Nor were they instructed to dedicate their time to inventing. Yet, when Dunmore and Lowell perfected an invention surrounding radio frequencies while on the job, the government argued that rights in the patent vested in it under the employed-to-invent doctrine. The Supreme Court disagreed. The court upheld the Standard Parts line of cases by holding that a contract of employment can very well act as a present assignment. “The respective rights and obligations of employer and employee, touching an invention conceived by the latter, spring from the contract of employment.” Id. at 187. The court further held that when one is hired to make an invention and succeeds in doing so, he must assign any patent obtained to his employer because “he has only produced that which he was employed to invent. His invention is the precise subject of the contract of employment. A term of the agreement necessarily is that what he is paid to produce belongs to his paymaster.” Id.

Dubilier was distinguishable because Dunmore and Lowell were not employed to invent the specific thing they invented. Rather they were employed to invent generally. Accordingly, the facts of Dubilier were readily distinguishable from Standard Parts, Teets and even Roche. Even there it appeared clear from the start that any compensation was consideration for ownership rights in the patents of the ultimate inventions. Peck, Teets and Holodniy knew from day one what they were being employed to do and that they would not own the patents to their inventions; rather, their employers would. Application of the Employed-to-Invent Doctrine to Roche In light of the foregoing and because the Federal Circuit was charged with determining whether the Stanford/Cetus assignments were for present or future purposes, the absence of what the Federal Circuit held was an explicit present assignment could have opened the door for Stanford to apply the employed-to-invent-doctrine as a basis for implying the existence of a present contractual assignment obligation between Holodniy and Stanford in their employment contract. There appears to be no doubt that Stanford hired Holodniy for the sole purpose of accomplishing precisely what he did — developing an improved procedure for quantifying blood-borne levels of HIV. Cetus was aware of that fact when it permitted Holodniy to perform his initial work at its laboratory. Arguably, finding for Roche is no different than finding for Peck in Standard Parts. 264 U.S. at 60: Cetus did provide instruction to Holodniy as well as access to its facilities and materials. But it did so in cooperation with Stanford and with full knowledge of Holodniy’s employment arrangement with Stanford. Significantly, Cetus did not pay Holodniy, Stanford did; he was Stanford’s, not Cetus’s employee. Thus, by applying the employed-to-invent doctrine to the facts of Roche case, Roche, Stanford’s competitor, should not have been rewarded with a benefit that Stanford had paid to receive, but was denied. Still, Cetus did contribute and whether that contribution would be enough to distinguish a Roche scenario from a Standard Parts/Teets scenario is unclear. Although the facts in Roche may very well have favored Stanford under the employed-to-invent doctrine, Stanford could not have avoided a written assignment agreement even if it wanted to because its funding agency, the NIH, requires it. See Roche, 563 U.S. ___ (slip op., at 10). Nevertheless, it would have been an interesting alternative argument for Stanford to base its patent ownership claims. Later cases may explore this context.

Conclusion Roche reaffirmed the notion that an inventor’s ownership rights enjoy the highest priority by refusing to interpret a federal statute in a manner that would alter that order unless it does so unambiguously. Roche also confirmed that the Federal Circuit will continue to have the last word in the interpretation of patent assignment agreements. Best practices moving forward may dictate that employers always require a written assignment from employees/independent contractors explicitly stating that it is for present purposes and vests ownership in the employer immediately. Prudence also suggests that the assignment agreement should use the precise words identified by the Federal Circuit, “do hereby assign” as opposed to “agree to assign.” Another approach would be to include language that expresses that the rights assigned as a present intention are intended to be no less than those rights vesting under the employed to invent standard. Thus, such an agreement would purport to incorporate the implied obligation with the express obligation. Perfecting rights to an employee’s invention may ultimately require reliance on both explicit and implied duties.

--By Marc Lieberstein (pictured), Frederick Whitmer and Jeremy Schachter, Kilpatrick Townsend & Stockton LLP Marc Lieberstein and Frederick Whitmer are partners in Kilpatrick Townsend’s intellectual property department in the firm’s New York office. Jeremy Schachter was a 2011 Kilpatrick Townsend summer associate and is currently a law student at the Cardozo School of Law. The opinions expressed are those of the authors and do not necessarily reflect the views of the firm, its clients, or Portfolio Media, publisher of Law360. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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