Using Patents as Blackmail
A case study on why you need the right inventors agreements for a startup: a former employee turns patent troll.
My company finances patents for small to medium sized companies, so I often get inquires from people who want to build out a patent portfolio. A while ago, I received a call from an inventor who wanted to file a bunch of patent applications, then sell them back his former employer.
In this case, the inventor was previously the key technology innovator in a small, ongoing business. He was the CTO for a while but was pushed out a couple years ago. The company was not doing well for a period, and a new CEO – an angel investor – was brought into clean things up and get the company back on track.
The inventor had a lot of ideas for what the company should be doing, and he was talking to me about writing a bunch of patents that outlined his new direction for the company.
The inventor saw these patents as “helpful,” because it paved a new road for the company. He did not see it this way initially, but he was essentially blackmailing his former company. He wanted to become a “helpful” patent troll and force the company’s hand.
My impression was the former CTO wanted to be the company’s savior. He wanted to regain the respect he had when founding the company.
The CTO/inventor still had considerable stock in the company. As one of the original founders, the inventor was a relatively big shareholder at one time, although with dilution over several rounds of financing, his share was smaller.
Before we met in person, I asked the inventor if he had signed a Proprietary Information and Inventions Agreement with the company when he co-founded it. It turns out that the founders “trusted” each other and did not think they needed it. Legally, the inventor had every right to create patents that would block his former company – unless they paid him.
I happen to know the CEO/angel investor of the company. I explained the situation and asked if the company had any agreements in place with the founders (and, by extension, every employee, consultant, or advisor). The company did not. The company was completely vulnerable to a rogue, disgruntled employee who could create some patents and essentially shut down the company.
The company was very vulnerable.
Before meeting the inventor, I recommended that the CEO bring the inventor back into the fold. The last thing we wanted was someone to be essentially blackmailing the company into buying some patents in their space.
I met the inventor face to face.
When I met with the inventor, the inventor was very angry about how he was treated. This was not just a matter of money. It was a matter of pride. He felt like he was treated badly, and I do not doubt that being thrown out as a co-founder was not pleasant.
Before the inventor met with the CEO, I emphasized to the CEO that the company can give the inventor something more than money: he wants recognition. I suggested that they bring in the inventor as a consultant, but absolutely make sure they get the inventor under a PIIA agreement and maybe include a non-compete clause.
I told the inventor that nobody responds favorably to blackmailing. If I were the CEO, I would try to shoot down the ideas, move the company in a completely opposite direction, or sue the inventor. Also, if I were the CEO, I would spend every dime I had fighting the inventor rather than giving in.
The inventor was somewhat shocked about this response, but he was not too shocked. I think he knew in his heart that this kind of approach is not terribly honest or forthright, and he had not thought out the possible responses.
How the company handled it
The inventor asked nicely for an appointment to see the CEO, who gladly made time for the inventor. Rather than being hostile to each other, the CEO welcomed the inventor to contribute to the company directly – and had the inventor sign an assignment and non-compete agreement right there in his office.
The patent assignment came in the form of a Proprietary Information and Inventions Agreement. This is an essential part of a consulting agreement and every employment agreement.
By blackmailing the company, the inventor wanted to force the company to go in his direction, and he was going to collect some money on the way. What could possibly go wrong? Everything.
How to avoid these kinds of problems
These kinds of problems pop up all the time, especially for disgruntled employees who do not feel valued. Inventors are weird birds, but most of them do not necessarily want the money. They want respect. Inventors want to feel like they are important to the company, and they can get angry if the company is not moving in their direction.
It is critically important to handle this issue in two ways. The first is to remember that inventors might take a little extra attention to keep happy. The second is to make sure you have agreements in place that ensure the company owns the inventions well before you need that agreement.
This is merely one example of inventors who leave a company then want to create patents on the company’s technology. It happens all the time. I have seen inventors leave huge, multinational companies and two weeks later, they file a dozen patents. Do you think the company will take that lightly?
Learn more about Proprietary Information and Invention Agreements here (and you can download a Word version for your own use).