Will former employers assert rights?
Former employers might assert outright ownership of your company’s proprietary technology, either in its present form or in an earlier version. Some circumstances to watch out for:
A) An inventor came up with an idea while working for a former employer.
B) An employee took documents or other materials from a former job.
C) Your company will compete with an ex-employer.
D) An employee has an invention-assignment agreement with a former employer.
E) Two or more employees worked for the same former employer: This might get the former employer upset and looking for a reason to sue.
In any of the above cases, your company could be hit with a patent, copyright, or trade-secret lawsuit by the employees’ former employer.
Case Study: Computer Associates v. Altai, Inc. Altai, Inc. hired a programmer to help work on a new software product. Unbeknownst to Altai, the programmer allegedly brought with him some source code from his days at Computer Associates. He supposedly incorporated that code into the new Altai software. CA sued for copyright infringement and misappropriation of trade secrets. Altai eventually prevailed, but in the meantime it was forced (1) to rewrite that portion of its code, and (2) to spend years in litigation.
Former Employers’ Shop Rights
A former employer may have provided funding or work time for development of the technology in question. If so, it may still have shop rights, i.e., a nonexclusive, royalty-free right to use the technology, and might be able to compete with your company without restriction.
Possible Due-Diligence Investigation
When hiring a contractor or employee, your company can ask the new hire about prior work experience. It might also be possible to ask the new hire to sign a written representation that she will not be bringing any work product from previous employment except as expressly approved in advance by your company.
Who Funded the Development?
Corporate Deals
Research and development joint venture agreements, or development contracts with other companies, can affect ownership of your company’s proprietary technology (either in its present form or in an earlier version).
Government Procurement Contracts
In some circumstances, a U.S. Government procurement contract must be carefully drafted to avoid automatically giving the government “unlimited rights” in your company’s technical data.
Government Research Funding
R & D funding by state or federal agencies (e.g., universities, DOD, DOE) can have ownership strings attached. For example, the federal Bayh-Dole Act sets forth specific requirements that must be met by certain federally funded entities to be able to retain title to technology they develop with that funding.
In the U.S., the non-extendible deadline for filing a patent application is one year after the first barring event, e.g., the first offer for sale, commercial / “public” use, or publication of the invention.
No such “grace period” exists in most other industrialized countries, which have “absolute novelty” deadlines for filing patent applications. Most countries, however — not all — as members of the Paris Convention will give credit for a U.S. filing date for up to one year after that date (i.e., foreign counterpart applications can be filed for up to one year after the U.S. filing date).
Your company may be using, or about to use, a product, method, or process that is covered by a patent belonging to a third party — e.g., a competitor. Likewise, a competitor of a customer or supplier may have patent coverage that could affect your company’s business. If so, your company may be vulnerable to a patent-infringement lawsuit.
Infringement searches are one way you can look for potential third-party patent problems, but searches are not foolproof. Other indications of potential problems:
Your competitors’ products may have patent-number markings, which can give some idea whether a problem might exist.
Another indication is if others in the industry are being sued (or threatened with suit) for patent infringement.
If your company receives “invitation” to take a license under a patent, or just a plain “notification” of the existence of a patent, that could be a prelude to a formal charge of infringement — or perhaps a lawsuit.
If your company is aware that it may be infringing anther’s patent rights, it (your company) has a duty to use due care to ensure that it is not infringing. Failure to use due care can lead to a finding of willful infringement, which in turn can lead to a treble-damage award and possibly an award of attorneys’ fees. Patent infringement cannot be willful, however, unless the infringer knows of the existence of the patent. Moreover, willfulness will be inferred only after consideration of the totality of the circumstances, and must be proved by clear and convincing evidence.
If you rely in good faith on what you reasonably believe to be a competent opinion of counsel that you are not infringing any valid claim of a patent, that can help you avoid being held a willful infringer. Even if you lose on the infringement issue (and thus the opinion is wrong, at least in the view of the court), your reasonable reliance on the opinion can still negate willfulness.
Case Study: In the Hayes vs Ven-Tel modem patent infringement litigation, the defendant, Ven-Tel, a modem manufacturer, received a letter from Hayes requesting that it take a license under its patent for a mechanism for detecting an escape command in a data stream.
In response, Ven-Tel helped organize a consortium of modem manufacturers that had received similar letters and which banded together for a coordinated defense against the patent.
Prior to commencement of Ven-Tel’s own infringing activities, the consortium obtained what the court evidently believed was a too-cursory oral opinion of another company’s counsel that the patent was invalid. That opinion was followed up several months later, after commencement of the infringing activity, by what the appellate court apparently viewed as an inadequate written opinion. The jury found that Ven-Tel had willfully infringed the patent; the appeals court affirmed.
If your company is held liable for patent infringement, it could be subjected to an injunction against further infringement. “It is the general rule that an injunction will issue when infringement has been adjudged, absent a sound reason for denying it.
If the patent owner proves, among other things, that it is likely to succeed on the merits of an infringement lawsuit, a court can enter a preliminary injunction against the infringing activity pending a full trial.
If found to be an infringer, your company could be forced to pay patent infringement damages — potentially the patent owner’s lost profits and not less than a reasonable royalty.
Example: In the famous Polaroid Corp. v. Eastman Kodak Co., case, the total damage award against Kodak was in excess of $900 million.
Patent infringement damages may be increased, up to threefold; this often occurs in the case of willful infringement. Whether to increase the damage award is within the discretion of the trial judge.
Individuals who direct or actively take part in infringing activities by a corporation could be jointly and severally liable for the infringement. At this writing the law is unsettled on this point. It appears, however, that for an individual to be personally liable there must either be (1) evidence to justify piercing the corporate veil, or (2) at least some “culpability” on the part of the individual, e.g., bad faith, fraud, or culpable intent.
When using outsiders for technology development, an important rule of thumb is to try to nail down ownership (and/or licensing rights) in writing with an assignment clause in a contract. Such a clause such as this can be useful in an employment agreement with employees, too (keeping in mind that state law may regulate the extent to which an employer can require employees to assign their rights in inventions and the like).
In the patent arena, a non-employee who does not have a written invention- assignment agreement — or an employee who does not have such an agreement and was not “hired to invent” or “set to experimenting” — might be the owner or an independent joint owner of part of your company’s technology.
A joint owner of a patent or invention could have the right to use or license the technology without the consent of and without accounting to the other owner(s).
In the copyright arena, an outside contractor who writes computer software without a work-for-hire or assignment agreement may own the copyright in the software. Such a contractor could have the right to limit your company’s use of the software that your company paid to have developed.
Even an outside contractor is not the sole owner of a copyright, it could still be a “joint author” and thus a co–owner of the copyright. Such a joint author/co-owner might be free to go into competition with your company.
Joint authors of a copyrighted work must account to one another for their respective uses of the copyrighted work, i.e., share the proceeds of their uses.
Documentation for company-developed computer software can be subject to the same copyright ownership issues as the software itself.
A U.S. export license is necessary for all exports of commodities and “technical data” (including software) unless a License Exception applies. Restriction of exports of encryption software is a particular bone of contention in the software industry. Failure to comply with export licensing requirements can result in criminal penalties.
If your company will be distributing software intended to be a work-alike competitor to another product, a copyright lawsuit alleging infringement of “look and feel” or of “structure, sequence, and organization” may be a possibility.
If your company’s product/service involves the use of a proprietary database of facts (e.g., names, addresses, catalog part numbers, and so forth), the source of the facts should be investigated. Facts per se are not copyrightable. However, copying of others’ data bases (e.g., yellow-page telephone books, maps) can lead to liability for copyright infringement if the selection or arrangement of the data is sufficiently “original,” i.e., if it is the result of at least minimal creative effort.
If your company’s product or service traces its origins to a patient’s tissue samples, blood by-products, or the like without the patient’s consent, the patient may be able to assert breach of fiduciary duty by the treating physician or researcher.
Trademark rights in the U.S. are based on use of the mark (although a federal registration application can be filed on the basis of bona fide intent to use the mark). Consider checking whether your company has filed any registration applications.
Infringement of another’s trademark rights, through the use of a “confusingly similar” mark, can lead to a preliminary injunction, a permanent injunction, destruction of infringing articles, and up to treble damages in some circumstances.
A trademark search for similar marks (registered and unregistered) is usually advisable if a significant investment will be made in promoting a new mark. It is not enough to check corporate-name records, state trademark records, or county DBA filings. Consider looking into whether your company has had a search done.
If your company has chosen a highly “descriptive” trademark, the mark may be difficult or impossible to protect legally.
Assignments or other transfers of a mark cannot be accomplished independently of the goodwill symbolized by the mark. Any such transfer without goodwill could be deemed an “assignment in gross” that destroys the trademark.
