A Federal Circuit Lesson on the Structuring of Employment Agreements to Ensure That a Company Owns Its Employees’ Inventions

Stephen Parker | July 25, 2012

Preston v. Marathon Oil Company and Thomas Smith

July 10, 2012

Panel:  Bryson, Dyk and O’Malley.  Opinion by O’Malley.

Summary

In this case, an employee, Yale Preston (“Preston”), executed an employment agreement about one month after starting to work as an employee for Marathon Oil Company (“Marathon”).   Whether or not the execution of an agreement after starting employment requires further consideration beyond “continued employment” varies based on state law.   Here, the Federal Circuit held that no further consideration was required under Wyoming state law and that the employer, Marathon, owned the invention at issue by virtue of the employment agreement.   The Federal Circuit further held that Preston did not breach the employment agreement by failing to later sign a subsequent assignment because the employment agreement included the language “does hereby assign” in relation to future inventions, whereby the invention at issue was assigned to Marathon by the employment agreement regardless of whether the invention was after the execution of the employment agreement.

Details

Background:

The Employment Agreements:

In a letter dated February 22, 2001, Marathon offered employment to Preston as a relief pumper in Marathon’s coal bed methane well operation in Wyoming. In addition to describing Preston’s proposed responsibilities, compensation, and benefits, the letter indicated that Preston was being hired “under the policy of ‘employment at will’ whereby you or the Company is free to terminate the employment relationship at any time and for any reason without cause or liability other than as prescribed by law.” Preston countersigned the letter on February 27, 2001. Preston started working for Marathon sometime in March 2001.

On April 5, 2001, Preston signed an Employee Agreement with Marathon. The parties agree that the Employee Agreement was executed after Preston began employment and constitutes a separate employment document from the February letter.   The Employee Agreement contained the following relevant provisions:

 

Under Paragraph 4 of the Employment Agreement, Preston wrote “CH4 Resonating Manifold.”  It is undisputed that Marathon did not provide any additional consideration to Preston for signing this document beyond his continued employment by Marathon.

The Technology:

The technology at issue relates to the improvement of machinery used to extract methane gas from water-saturated coal in a coal bed methane gas well. One way to extract the gas is to pump water out of a coal seam aquifer, which relieves the pressure holding the methane and allows the methane to escape up the well. The wells include an inner tubing that runs through the center of the well casing to the surface of the coal formation. Water is pumped up through the inner tubing, allowing methane gas to be produced through the “annulus” of the well, or the area surrounding the inner tubing inside the well casing due to reducing pressure on gas allowing it to escape via the annulus.

One problem that occurs in coal bed methane gas wells is that water columns form in the annulus, which is the path by which gas flows to be released from the well.  The invention at issue in this case includes the placement of baffle plates in the annulus of the well. The baffle plates contain holes that function to separate the water and gas, thereby allowing the gas to escape more easily.

 

The Installation of the Baffles:

In August 2002, Preston first raised the idea of using baffles to reduce water in a methane well annulus to a co-employee. Preston showed him a “conceptual” drawing of his baffle system.  Over the 2002 Thanksgiving weekend, Preston created two-dimensional drawings of his baffle plates using a company computer. In December 2002, Preston met with Smith and discussed his baffle system.  Thereafter, Preston hired a company on Marathon’s behalf to make baffle plates to begin installation in Marathon’s wells.

Preston personally participated in the installation of his baffle system in three wells from January 31, 2003 through February 23, 2003. Preston’s employment with Marathon ended effective April 15, 2003. Between April 2003 and July 11, 2003, Marathon installed Preston’s baffle system in eight additional wells. Preston contends that he did not consent to or authorize the installation of his system in the eight additional wells.

On February 3, 2003, he emailed a colleague at Marathon to begin Marathon’s internal patenting process, explaining that Preston “has designed and installed a prototype downhole gas separator baffle assembly that appears to be patentable and could be a significant new technology breakthrough in the Powder River Basin for coal bed natural gas production.”  The district court found that Preston knew that the invention was going through Marathon’s patenting process, and that “at no time did Preston object to Smith being a co-inventor during Marathon’s patenting process.” On June 14, 2004, Marathon filed a patent application that ultimately issued on April 24, 2007, as the ’385 patent.

On June 5, 2003, about two months after his employment ended, Preston filed his own patent application covering his baffle system. That application ultimately issued on November 1, 2005, as the ’764 patent. Preston is listed as the sole inventor on the ’764 patent.

Discussion:

Preston primarily argued on appeal that he did not assign his rights in the ’764 or ’385 patents to Marathon because the April 5, 2001 Employee Agreement (1) is invalid for lack of consideration on the basis that continued at-will employment is insufficient consideration, and (2) even if enforceable, did not function to assign rights in his invention to Marathon on the basis that a) it did not operate to assign the particular invention because he “conceived” the invention before working at Marathon and that b) it was excluded under Paragraph 4 of the agreement.  The Federal Circuit held that both of these arguments failed for the following reasons.

First, as to (1) above, the Federal Circuit upheld the District Court’s decision that at under Wyoming law further consideration is not required beyond “continued employment.”  Notably, for this question under state law, after the oral argument, the Federal Circuit “certified a question” to the Wyoming Supreme Court specifically asking whether or not such further consideration was required under Wyoming law.  The Wyoming Supreme Court responded that such was not required, explaining that in contrast to another Wyoming Supreme Court case in which public policy favored separate consideration beyond continued at-will employment to support a non-compete agreement, “the stability of the business community is best served by ruling …that no additional consideration is required to support an employee’s post-employment execution of an agreement to assign intellectual property to his employer.”

Second, as to (2)(a) above, the Federal Circuit held that under the Employment Agreement, the plain language of Paragraph 1(d) indicates that any invention that any invention that is “made or conceived” by an employee while employed is automatically assigned under Paragraph 3; noting that as “Preston’s invention was not both made and conceived prior to his employment,” it was assigned to Marathon.

Third, as to 2(b) above, the Federal Circuit held that the language inserted under Paragraph 4 “CH4 Resonating Manifold” was insufficient, stating that “an invention necessarily requires at least some definite understanding of what was invented” and noting that the district court found that “Preston’s testimony regarding the level of development of the CH4 resonating manifold is not credible,” and that he had, at most, little more than a vague idea before his employment with Marathon began.  The Federal Circuit further noted that Preston provided no evidence – other than his own testimony – that corroborated his claim of invention prior to employment with Marathon and that “Preston admits …that he never discussed a ‘resonating manifold’ with his co-employees or mentioned that the baffle plates he had drawn were part of a ‘resonating manifold.’”

Fourth, the Federal Circuit further explained that because the assignment clause in the Employee Agreement states that the employee agrees to “hereby assign” all “Intellectual Property,” it is an express assignment of rights in future inventions that automatically assigned rights to Marathon without the need for any additional act, citing DDB Techs., L.L.C. v. MLB Advanced Media, L.P., 517 F.3d 1284, 1290 (Fed. Cir. 2008) (holding that if the contract expressly grants rights in future inventions, no further act is required once an invention comes into being, and the transfer of title occurs by operation of law).

Accordingly, the Federal Circuit held that Marathon owns the rights to both of the ’385 and ’764 patents.

Practice Tips and Lessons:

  1. A first practice tip is to be mindful of the variation in law based on jurisdiction in relation to assignments executed after employment.  Accordingly, it can be helpful to seek to 1) include such assignments within employment agreements prior to starting employment and/or 2) include additional consideration beyond continued employment within later executed assignments.
  2. A second practice tip is for an Employer to include an exclusionary clause similar to Paragraph 4 under the Employment Agreement in this case, which clause can help to support that no prior invention has been made in the absence of any indication or in the absence of a clear indication under the agreement.
  3. A third practice tip is for an Employer to define inventions that are assigned in as “conceived or made” during the employment because in view of this decision such language can operate to assign an invention that was even conceived prior to employment.
  4. A fourth practice tip for an Employer is to be sure to include a present assignment of future inventions, such as, e.g., by the language “hereby assigns.”
  5. A fifth practice tip for an Employer is to consider including a clause similar to that in the assignment of this case, which recites that if the Employee files a patent or makes or conceives of an invention within one year after termination, such will be presumed to have been made or conceived during such employment.  While the Court did not discuss this clause, the clause would appear to further support the presumption that an employee’s subsequently filed patent application (as in this case with Preston’s application filed after termination of employment) would be owned by the Employer.

Full Opinion

Further reading on assignments (AIPLA)

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