Who Owns the Invention?
The first step is often ‘skipped’ by startup founders.
Many startups fail to have the basic agreements in place so that the company owns its inventions. Part of this is a failure to put the basic agreements in place for a startup company, and often the failure of the founders to commit to the company at all.
When we look at patent portfolios to provide financing, we always start with the ownership. If there is not clear title to the assets, we immediately stop any further investigation.
A company owns a patent when there is an assignment from the inventor to the company.
In the US, an invention is owned by a person: the inventor. Until the inventor assigns their rights to a company, the invention is owned by the inventor.
When there are multiple inventors, each inventor has full rights to the IP.
If one inventor assigns their rights to a company, the other inventor can sell their rights to a competitor.
This makes a mess of licensing when a license is painfully negotiated by one inventor, and the other inventor walks in at the last minute to offer the same terms but 10% less.
This is why it is critical that IP is owned – in full – by one company.
Assignment clauses or Proprietary Information and Inventions Agreements are key.
Virtually all companies in the US have an assignment clause in their employment agreements that automatically transfer inventions to the company. But many entrepreneurs “forget” to do this.
For a solo inventor in the garage, the assignment is not important. But once the inventor forms a company with investors and partners, it is critical that the company owns the IP assets.
Some inventors want to keep the patents in their name and have some kind of “handshake” deal with their startup company. This gives the inventor an exit plan if things do not work out – they just leave with their patents and re-start the company again, or they might license or sell the patents. Some inventors will try to extract an extra royalty from their startup because they own the patents.
No angel or venture capital investor would ever invest in a company where the company does not own the assets. Right? It happens a lot more than you think. Sometimes the inventors knowingly and intentionally avoid signing a patent assignment. Sometimes, they just do not think about it, or their corporate attorneys overlook it. (Most likely, the corporate attorneys don’t even think about IP ownership.)
I have done due diligence on many companies, both large and small, only to find out that the companies do not own their patents.
What to do when the company does not own the patent?
The CEO must go get assignments from the inventors if the invention has not been previously assigned. Are the inventors still around? Have they left the company and refuse to sign? It begins to become a logistical nightmare.
Also, the CEO cannot just force someone to hand over their rights.
The CEO will have to pay the inventors something so there is “consideration” for the transaction. If the inventor works for the company, the company needs to pay the inventor something, like $100, for the transfer.
What if the inventor refuses to sign?
What if they say that they want to hold out for $1,000,000 or 50% equity in the company or some other arbitrary demand? It certainly is their prerogative to do so, and the company must negotiate with them. If the patent has published or has issued, the inventor has a very solid hand for negotiating and can extract huge demands from the company.
It may come down to whether or not the company should pay the inventor. The company needs to consider the option of walking away from the patent if an inventor becomes very demanding.
One scenario that frequently occurs is where several friends file a patent as part of starting their company. None of them want to embarrass the others by forcing them to sign over their rights, and the patent rights might even be the thing that binds the friends together.
At some point in the company’s history, one of the friends leaves voluntarily, or is forced out by the others. Sometimes this is amicable, sometimes very nasty.
Now, when the company needs to raise capital from angel or venture groups, someone discovers that the patent is not owned by the company. Obtaining a signature from the disgruntled former cofounder might be impossible.
In every case, getting formal agreements early in the company’s history is crucial for the long term.
You can learn more here.
An example of why PIIA agreements are critical.
One of my larger clients had an inventor who filed his own patent application, then came into work to brag about it. The inventor thought he was doing a good thing and wanted to be congratulated. Turns out, he could go to jail for it.
The client is a large, international corporation who is based in a foreign country. The inventor was a novice on the patent process, but obviously read some blog posts or books about filing a patent application. He was successful at filing a provisional patent application, then he filed an assignment to his company. By filing an assignment, he transferred the patent application to his employer. The inventor was hoping for a bonus from his company because he filed a patent.
Turns out that the patent application was terribly written and gave away some trade secrets of the company, trade secrets that management did not want to have disclosed. Once we found out about it, the attorneys from the client company contacted me and we went about the process to clean up the ownership and expressly abandon the patent application before it published.
The interesting part is that the inventor did not realize that his country requires a foreign filing license to file a patent application outside of the country.[1] The process of a foreign filing license is to send the patent office a brief description of the invention, typically a 150 word abstract, and they grant the license. The license will only be withheld if it relates to a technology the country deems critical, such as military defense related, atomic energy, and the like.
This country, however, considers transferring patentable information outside of the country without a foreign filing license to be a criminal matter. In other words, the inventor can go to jail for skipping the license. This is not the outcome the inventor was planning.
[1] The United States also has a foreign filing requirement. If the invention happened in the US, you are required to obtain a Foreign Filing License prior to filing the same application in another country.