Inventor Rights Statutes

People are often surprised to learn that employers sometimes try to claim ownership in an employee’s intellectual property for inventions that are not related to their job.

Like many attorneys who work with startup companies, I am a huge fan of California Labor Code 2870.  This law says that an employer in California may not require an employee to assign IP created by the employee during the time of that employee’s tenure if it’s created on the employee’s own time, without using the employer’s resources (use your own non-company owned computers and network connectivity, people!), and so long as it is not related the company’s research and development.

An untold number of start-up companies have been created by founders in California who did the initial IP development on the side while holding down a salaried job with an employer.  Statutory protection of inventor rights in independent inventions (alongside a prohibition against most post-termination non-competes) is often cited as one of the reasons the vibrant startup ecosystem in Silicon Valley and throughout California exists.

Unfortunately, I’ve seen many contracts where employers purported to own all (or much more than California allows) of the intellectual property created by the employee during their employment.  Thanks to California Labor Code 2870, the overreaching portions of those contracts are unenforceable in California.  In California, founders who create IP for their next startup (or FOSS developers who work on unrelated FOSS projects) can feel comfortable that the IP created in their moonlighting, hobbies, side hustles, etc. are their own property if they follow the rules.

I knew that a few other states had similar inventor rights statutes on the books, but it had been a while (let’s be honest, probably a decade) since I’d looked into it generally.  So, in preparation for a lecture I was giving to new engineering graduates (with job opportunities all over the United States), I did some Internet searching.

I was very surprised to learn that Delaware has an inventor rights statute.  How had I not heard about/internalized this before?

As you may know, Delaware has more corporate entities than people.

According to the Secretary of State’s 2016 Annual Report, there were more than 1.2 million corporate entities registered in Delaware, and at that time, more than 2/3 of the Fortune 500 were Delaware corporations.

In other words, Delaware is the most popular US state for corporate formations and many, many companies (especially big public companies) that employ lots of people are Delaware corporations.

Because of this, many of the contracts with overreaching IP terms I’ve reviewed in the past were with Delaware corporations.  Most of those employees were not working *in* Delaware, and I’ve always looked to the labor code of the state in which the employees were employed.  However, if a company chooses to avail itself of Delaware law by incorporating there, it is subject to Delaware law, public policy, and jurisdiction.  I don’t know why it hadn’t occurred to me that all employees who work for a Delaware corporation can point to  19 DE Code § 805 (2017) :

Any provision in an employment agreement which provides that the employee shall assign or offer to assign any of the employee’s rights in an invention to the employee’s employer shall not apply to an invention that the employee developed entirely on the employee’s own time without using the employer’s equipment, supplies, facility or trade secret information, except for those inventions that:

(1) Relate to the employer’s business or actual or demonstrably anticipated research or development; or

(2) Result from any work performed by the employee for the employer.

To the extent a provision in an employment agreement purports to apply to the type of invention described, it is against the public policy of this State and is unenforceable. An employer may not require a provision of an employment agreement made unenforceable under this section as a condition of employment or continued employment.

Those of you who know California Labor Code 2870 will find this language very familiar. The Delaware version is just a slightly different version of the same law.  In general, I think the Delaware drafting is slightly tighter, although I don’t like the lack of the “at the time of conception or reduction to practice” limitation. I do, however, love the clear final sentence, which I will be using to argue against over-reaching IP provisions in Delaware corporation employment agreements.

Sure, a greedy corporation could claim that even though Delaware won’t enforce an egregious IP assignment, perhaps another state where the employee is working will.  But it’s not a good look for the employer to intentionally go against the public policy of the state where they are availing themselves of corporate protection.  Most employers don’t sue to acquire employee IP, but rather point to contracts and demand assignment from employees who are scared to incur legal fees.  I suspect they’ll be even less likely to sue if they realize their employee is aware of a public policy of Delaware that specifically prohibits the contractual term they are trying to enforce.

California adopted Labor Code Section 2870 in 1979.  Delaware adopted Labor Code Section 805 in 1984.  I’ve confirmed that as of today, at least the following states (I need to do a 50 state survey) have an inventor rights statute:

Including the weight of all of the Delaware corporations plus employees working in and corporations incorporated in all of the other green states above means that inventor rights statutes are not a leading-edge policy that only applies to a few select states and companies.  Inventor rights is actually a legal norm that applies across the majority of large technology employers in the United States, and even employers who are not expressly required to respect them should consider that failing to do so is likely to cause them to lose out on top talent in their employment pool.

For more information, see the redline below for a detailed display of the differences between California’s and Delaware’s statutes, or click on the links to see the specific statutes for each state.

California https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=LAB&sectionNum=2870

Washington http://apps.leg.wa.gov/rcw/default.aspx?cite=49.44.140

Nevada https://law.justia.com/codes/nevada/2010/title52/chapter600/nrs600-500.html

Utah https://le.utah.gov/xcode/Title34/Chapter39/C34-39_1800010118000101.pdf

Kansas https://law.justia.com/codes/kansas/2006/chapter44/statute_18289.html

Minnesota https://www.revisor.mn.gov/statutes/?id=181.78

Illinois http://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2238&ChapterID=62

North Carolina https://www.ncga.state.nc.us/EnactedLegislation/Statutes/PDF/ByArticle/Chapter_66/Article_10A.pdf

Delaware http://delcode.delaware.gov/title19/c008/index.shtml

Intellectual Property Law For Engineering and Science Students

I gave a lecture at the University of Alaska, Fairbanks today, as a guest of Professor Daisy Huang.

The attendees had great questions and were very smart and engaged on the subject matter.  I struggled to boil down everything I wished science and engineering students knew about IP law into 40 minutes.  I probably cut at least 4 or 5 other potential 40 minute talks from the material before I settled on these concepts.  It was a fun exercise and the enthusiasm of the students (and faculty) made the experience very rewarding.

Slides available here (Intellectual Property for Engineers and Scientists) in case others may find them useful.  (As usual, feel free to use, quote, distribute, etc. so long as you leave my copyright notices in place for substantially similar works and note my presentation as the source for any material you may use in derivative works you may create.)

Free and Open Source Overview and Commercial Best Practices

I regularly consult with companies who need help with their open source software policies, procedures, or releases (both commercial and open).

I am lucky enough to have several law firms that refer me this work when it becomes a bit too time consuming and complex for a general law firm to be the right fit.

Recently, one of those firms asked me to give a presentation — just a general overview on Free and Open Source Software as well as a discussion around current commercial best practices.

So, in the interests of sharing — here are the slides from my presentation.

(Warning — the last 2 slides have *real* world language, from *real* world programmers, which means there are some curse words).

Enjoy!
FOSS 2014.03.04 FINAL

Big, Important Legal Issues

In the last two months, I’ve received two calls that reminded me that start-up founders, employees, and the self-employed have huge legal issues outside of traditional start-up law.

So, I’ve decided to make a Public Service Announcement:  If you are self-employed or involved in an early-stage start-up, consider the following issues and seek the appropriate professionals to address them if appropriate.

1. LIFE INSURANCE. If you are:

a) an American citizen who is a start-up founder, an early stage start-up employee, or self-employed;

b) not financially independent (Note: you are financially independent *only* if you work because you want to, but you don’t have to, and you won’t have to work anytime in the future, either);

c) and you have dependents;

then you need life insurance. Period.  Unlike many more traditional careers, these groups don’t have any form of pre-negotiated survivor benefit plan. If you are a major financial contributor to your dependents’ needs, then even if you are fully vested into social security, unfortunately, it is almost certain that SS survivor benefits will not be sufficient to support your family if you die.

2.DESIGNATED DECISION MAKERS.  You need a designated decision maker who can manage things for you if you become incapacitated or die.  Yes, thinking about this is not pleasant.  But many of the individuals I work with do not have estate plans and are unmarried.  In the event something happens to them, their next of kin will be involved in all aspects of their life (including their business).  If you are not absolutely certain that every state/country where you have assets, business, contracts, or potential health issues recognizes the person you want as your next-of-kin decision maker, then you *need* to visit an estate planning attorney to figure out what documents are necessary to ensure that the person you want in charge is able to make decisions (either financially, health-wise, or both).  Founders, in addition to seeking input from an estate planning attorney, you should discuss this potential issue with your corporate attorney to understand what provisions already exist in your corporate formation documents regarding exercise of a founder’s voting rights in the event of a Founder’s death or incapacity.

3.  CENTRALIZED DOCUMENT/ACCOUNT MANAGEMENT.  In the event of an emergency, you need one location where your decision maker knows to go that outlines where and how to access all important online and physical bank, investment, credit card, billed accounts, title documents, health documents (advance care directives!), insurance policies, and anything else that may be critical.  The actual rights and responsibilities that your decision maker will have with respect to the information you store varies in each situation (again, see an estate planning attorney), but if you don’t have the information in a location where your decision maker can access it, they will be completely unable to act on your behalf.

4.  HEALTH INSURANCE AND DISABILITY INSURANCE.  The self-employed often struggle with health and disability insurance as it is can be very expensive outside of the guaranteed issue employer market (try large industry organizations or NASE). Some early stage start-ups don’t offer medical insurance due to budget constraints and many early stage start-ups don’t offer disability insurance.  Much like life insurance, if you have dependents, you should seriously consider whether you need one or both of these insurance products before you are working the start-up or self-employed sprint and unable to focus on anything outside of the business’s growth trajectory.

**NOTE:  I do not practice estate planning law, insurance law, or corporate law outside of technology transactions.  This post, like all of my posts, does not contain legal advice and I did not become your lawyer solely because you read it.  It is very possible that your situation is unique and that all of the issues I raised for consideration above do not apply to you.

Laws Of Nature Are Not Patentable

Yesterday, the U.S. Supreme Court released its unanimous opinion in Mayo v. Prometheus. I was pleased to see the Court affirm and clarify the unpatentability of laws of nature.

Here’s a generalized statement of the law of nature at issue in this case: Certain concentrations of a specific drug metabolite in the blood indicate (a) toxic levels to humans (too high); or (b) ineffective therapeutic levels (too low).

The method claims included a step of (i) administering the drug; (ii) determining the level of the drug metabolites in the blood; and (iii) increasing or decreasing the administration dose in accordance with prescribed tolerances for efficacy and toxicity.

A long line of case law makes it clear that laws of nature, natural phenomena, mathematical algorithms, and abstract ideas are not patentable subject matter under 35 U.S.C. Section 101. This doesn’t mean that adding additional steps to natural phenomena, or applying a law of nature in a unique way may not be patented, but we now have guidance that says those steps must be more than just the run of the mill application of standard processes regularly used in the field of the claims.

In reversing the Federal Circuit Court and affirming the District Court’s ruling, the Supreme Court clarified why these claims were not directed to patentable subject matter:

[T]he claims inform a relevant audience about certain laws of nature; any additional steps consist of well understood, routine, conventional activity already engaged in by the scientific community; and those steps, when viewed as a whole, add nothing significant beyond the sum of their parts taken separately.

In other words, you can’t add well understood, routine, conventional steps to a natural phenomenon or law of nature and have a valid patent claim. In explaining the rationale behind the conclusion, the court stated its concern and pointed out that Prometheus was in good company:

The Court has repeatedly emphasized this last mentioned concern, a concern that patent law not inhibit further discovery by improperly tying up the future use of laws of nature. Thus, in Morse the Court set aside as unpatentable Samuel Morse’s general claim for “‘the use of the motive power of the electric or galvanic current . . . however developed, for making or printing intelligible characters, letters, or signs, at any distances,’”

Great Job SCOTUS!

The anti-NDA

In the last two weeks, I’ve seen a surprising glut of Non-Disclosure Agreements that were exactly the *opposite* of what my clients expected to see.

What to do I mean?

I mean, these NDAs all had express permissions for the receiving party to use or disclose the information they receive in the course of their business. In other words, these contracts had the standard confidentiality obligations one would expect to see in an NDA but then also included some carve-outs. However, the effect of the carve-outs was so big that they turned the NDA on its head.

Essentially, August 2011 has been the month where the big company form Non-Dislcosure Agreements I received morphed into a Permission to Compete With My Client (By Using Their Disclosures) Agreement.

In several cases, given the business realities and the difficulty of getting big company legal time to review my edits, I recommended that my clients refuse to sign and limit their disclosure to only those things they’d feel comfortable disclosing without an NDA.

Thankfully, this approach worked against several large companies. Apparently, the message that’s been conveyed to the random middle/high-level project/product manager at several Fortune 50 Companies is: “Get ’em to sign our terrible form if you can. If not, don’t sign anything, but have a limited meeting anyways.”

This is a shift for me. Historically, my experience with large companies was that they wanted you to sign their form before the meeting, no matter what. Several years ago, however, their forms weren’t draconion permission to compete agreements with free perpetual non-assert clauses (I’m not exaggerating, one form I received included an non-assert clause for all IP rights associated with everything disclosed by my client in connection with the agreement).

Moral of the story? NDAs, while typically boilerplate and uninteresting, can occasionally contain provisions that give up the ghost. My August clients are very happy they were safer rather than sorrier (and several reported back with entertaining tales of embarrassing their business counterparts at the big companies when they pointed out why they just couldn’t sign the new version of Fortune 50 company’s NDA)

A Novel Open Source License

I’m in London, finishing up a European vacation with a visit to a couple of clients for work before heading back to Silicon Valley.

Today, one client’s CEO showed me around and introduced me to one of the tech guys. After shaking my hand, one of them immediately enlarged the newest open source license he wanted to get approved for his project:

The Do What the Fuck You Want License.

I had never encountered this license in the past and was a little flabbergasted to encounter it on-site on-screen for immediate approval.

I am happy to report, I managed to maintain some semblance of composure and let them know that for this particular client’s needs, this license was acceptable.

Also, I immediately went back to my hotel and looked up the history, as I couldn’t believe that this license was already on Version 2.0 after only a decade or so… The GPL is only on 3.0 after 23+ years!

Amazon Calls California’s Cards

Wednesday, California’s Governor signed a bill into law that modifies the definition of “doing business in the state” for the purposes of collecting sales tax.

The bill explicitly includes retailers

entering into agreements under which a person or persons in this state, for a commission or other consideration, directly or indirectly refer potential purchasers, whether by an Internet-based link or an Internet Web site, or otherwise, to the retailer, provided the total cumulative sales price from all sales by the retailer to purchasers in this state that are referred pursuant to these agreements is in excess of $10,000 within the preceding 12 months, and provided further that the retailer has cumulative sales of tangible personal property to purchasers in this state of over $500,000, within the preceding 12 months

Amazon responded today by terminating all of its California Affiliates.

Internet taxation by States is an ongoing conflict on many fronts, and no doubt there will be many battles that will be fought in the future.

For example, The Performance Marketing Association is currently challenging a similar law in Illinois on the grounds that it is unconstitutional.

For the meantime, the end result is that California will not be collecting any sales tax from Amazon, *and* it won’t be getting any income tax from the terminated affiliates either.

A Second Facebook Movie?

Paul Ceglia’s allegations regarding his role in the founding of Facebook are grandiose.

The legal response from the Facebook team is similarly fantastic.

No matter how it plays out — it’s shaping up to be a huge fight and will likely make a great story.  I can’t help but wonder if this scenario might find its way to the big screen as well.

Year in Review

Wow!  That was fast.

I”ve been running my own law firm for over a year.  It’s been a blast and I’ve been very fortunate — quite a bit of exciting and interesting work came to my door last year.

Some of the highlights include:

  • Managing a dispute from initial demand letter to arbitration award — on my first day running my own firm, one of my clients received a cease and desist letter which we believed was invalid.  We pitched the case to litigators, hired them, and I was able to act as in-house counsel for the 7 month JAMS arbitration: editing and adding factual clarity to filings, attending all depositions and hearings, and eventually delivering the news after judgment.  In general, this is not my day-to-day practice, but it was very educational and modified my perspective on how contracts should be drafted and disputes relating to contracts should be approached.
  • Acting as on-site in-house technology counsel one day a week — sitting in the legal department of one of my larger clients gave me a very different understanding of the role that attorneys play within an organization.  I supported the third party inputs to software (reviewing both open source and third party proprietary licenses) and the enterprise licensing division and often witnessed first-hand the delicate balance that must be maintained between legal risk and business risk within a corporation.
  • Negotiating against the big guys — it’s part of the typical start-up experience.  Sure, you often negotiate and partner with other start-ups, but at some point, you will need something from one of the big established players.  It may just be Internet connectivity.  Or, large companies may be your sales targets.  Regardless, negotiating against a large company who insists that *we never change our forms*,  *everyone signs this without edits* and *this is completely standard* requires the expertise of someone who has seen many *standard* offerings in the applicable industry.  Over the years, I’ve dealt with Fortune 100 and Fortune 1000 companies in almost every industry, and this year was no exception.  Examples from this year include: Advertising Agencies, Amazon, Barclays, Blue Cross Blue Shield (of America and of various States), Bank of America, Chubb, Credit Suisse, CUNA Mutual Insurance, Discover, DOE Pacific, Earnst and Young, Experian, Facebook, Fidelity, Google, Honeywell, Horace Mann, Humana, JP Morgan Chase, KPMG, Lloyds, Lockheed Martin, Mass Mutual, Microsoft, Morgan Stanley, NBC Universal, Nationwide, PWC, Safeway, Samsung, State Farm, T-Mobile, Toys R US, Viacom, Walmart, and Warner Brothers.
  • Setting up the legal side of the business (forms) — a large portion of my job is limiting the amount of work I do.  I try to get my start-up companies into a position where their internal IP creation departments, online systems, sales forces, and business development teams can function with minimal legal input.  This involves an up-front investment of time to create forms that are correct for their business models.  I talk to my clients and truly understand their businesses before drafting, which avoids the extra legal fees companies often incur when their attorney starts with a square hole for a round peg.  Examples include:  Enterprise license agreements, Software-as-a-Service Agreements, trademark license agreements (branding/endorsement/certification programs), software development agreements, click-throughs (standard terms, privacy policies, API license agreements, payment obligations, revenue share, and more), commission agreements, reseller agreements, professional services agreements, master purchase agreements, NDAs, partner program agreements and technology assignment agreements.
  • Open Source — I went to law school because I was fascinated by the legal rights issues in Open Source Software.  I even wrote an award winning student note on the topic.  This year, I continued my commitment to Open Source legal issues with projects in several areas:  (i) aided a client in cleanly open sourcing a proprietary language they had developed (open source license evaluation and selection, branding issues, IP contribution agreements); (ii) performed open source audits of client codebases with the engineering teams and cleaned up any issues found; (iii) acted as special open source counsel in an Asset Purchase and Leveraged Buy-Out to help the acquirors become comfortable with the state of my clients’ open source uses; (iv) represented (and continue to represent) two clients whose business models are built around open source software projects that they manage (with monetization through professional services, support, maintenance, priority bug fixes, and bespoke development); (v) aided clients in the development of open source policies and approval processes to maintain the codebase in the proper state.
  • Everyday advice, counseling and communications — this catch all category is where the most surprises come.  Sometimes it’s just a phone call asking for a sanity check — Can we do this?  But sometimes there are more exciting issues such as requests from law enforcement, lawsuits that have been filed against clients, high level discussions about IP strategy (should we talk to patent counsel?  Should we file a TM?), letters hinting that lawsuits may be filed, formal letter writing in response to unfortunate situations, termination of contracts, privacy concerns, and much more.

Overall, last year was a great year full of good work, great learning opportunities and wonderful clients.  I can’t wait to see what this year brings.