It's Mine Because I Made It! Who owns employee inventions?

by Simone Szalmuk-Singer

Imagine the scenario. Your star employee is employed to research and develop new products for your company. This employee loves to invent new things. You find out that this employee has, mainly in her own time and partially during work hours, invented a product with huge profit potential. The employee has patented the product and has set up a company to sell the product.

In a recent Victorian Supreme Court decision (Victoria University of Technology v Wilson & Ors [2004] VSC 33 (18 February 2004) the employer’s ability to reap the fruits of the employee’s inventions was examined.

The Facts

Victoria University of Technology (the “University”) employed a professor and a senior lecturer. Both employees held very senior academic positions within the University. In 1999, the employees were contacted by an external company and asked to consider the merits and possibility of developing an online international trade exchange and two related computer programs. In exploring these possibilities, the two employees commenced developing a complex IT system which would be needed.

After some time the two employees were approached by a former student to work together to develop the new product. At this time the two employees and the former student incorporated a separate company in which the intellectual property split of the invention was to be 40% to each of the employees and 20% to the former student. In March 2000 they lodged a patent for their invention.

The development of the system used a lot of the employees’ own time as well as their time at the University. They were initially approached to develop the system because they were academics at the University. For some time, the development and promotion of the system was done using their time and positions at the University.

The University commenced proceedings against the two employees and various other parties to assert its rights over the invention.

The Decision

The Court decided that the University had no direct rights in the invention. However, as it was determined that the two employees breached their fiduciary duties to their employers, the University could be compensated for the lost opportunity to develop the invention. This compensation was to take the form of either a constructive trust to be imposed on the employees’ shares in the company set up by the two employees or payment equal to the value of their existing shares plus the proceeds of any previous sales. An allowance needed to be made for the money and out-of-hours time the two employees spent in developing their product.

The Court considered the following arguments in reaching its decision:
  1. The University’s Intellectual Property Policy
    The University sought to rely on its Intellectual Property Policy which provided that it owned all inventions and resulting patents by employees. Further, the employees’ contracts of employment referred to the Policy.

    However the Court determined that the Policy was not a term of the employees’ contracts and accordingly, of no assistance to the University. The Court found that there was no evidence that the Policy was formally approved, ratified, or published by the governing authority of the University, the University Council. Further, the Policy was never published in the University’s Human Resources manual or any other staff manual.


  2. The work was done in the University’s time and using the University’s resources
    The University argued that the employees had made extensive use of the University’s time and resources in developing the products therefore entitling the University to the invention.

    The Court rejected this argument as the mere existence of an employer/employee relationship does not give an employer ownership of inventions made by employees during the term of the relationship. The Court determined that this was the case even when the invention would be considered to be useful to the employer’s business, and the employee had made use of the employer’s time and resources to invent the product. The Court stated that it was unlikely that any invention made by an employee would be held to belong to the employer unless the contract of employment expressly provided for it, or an invention was the product of work that the employee was paid to perform.

    Interestingly, in considering this argument the Court accepted that the employees had arguably breached the University’s mobile telephone policy and the computer policy as well as obligations of good faith and fair dealing not to misuse the University’s resources for private matters. However, the Court noted that the remedy for such breaches of contract is damages and not a right to the invention itself.


  3. The work was within the scope of the employees’ employment
    The University argued that these senior employees were paid to be researchers and the invention was the product of the research. In the University’s view, it was irrelevant that neither had previously engaged in this sort of research.

    The Court disagreed with this argument on the basis that the nature of the research that the employee is retained to do is determinative. The Court concluded that the research involved in developing the invention in question was not sufficiently related to the fields of research that these particular employees were employed to perform.


  4. The employees breached their fiduciary duty to the University
    The University argued that the employees owed it fiduciary and other equitable duties of loyalty and good faith and these were breached by the employees when they put themselves in a position where their interests and duties conflicted.

    The Court determined that the employees had indeed breached their fiduciary duties to the University. The Court noted that the employees had obtained the opportunity to develop the invention because of their academic positions at the University.

    Further, work on the invention was initially done in their capacities as employees and only later did the employees themselves decide to continue in their own capacity. The effect of that decision was to take away from the University the opportunity to design the invention. Finally, the Court determined that there was no full and true disclosure by the employees to the University that might have relieved the employees from the consequences of acting as they did.

Implications for Employers

The case was not a definitive win for either employer or employee. The University wanted to own the patent to the invention and instead was given shares in the company which owned it.
Employers need to ensure that their contracts expressly assign to them employee inventions. When relying on policies to achieve this, employers must ensure that their policies are clear, published and that all employees are aware of their existence.


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