United States: Seventh Circuit Emphasizes The Necessity Of A Written Invention Assignment Agreement

Key Takeaways:

• Written invention assignment agreements provide critical protection for employers because without one, employees generally own patent rights to employment related inventions. Assignment agreements can also be necessary to prosecute trade secret claims against former employees who use or disclose research or inventions developed while employed.
• To successfully litigate a trade secrets claim, a plaintiff must identify the precise contours of its alleged trade secret and how it provides independent economic value.

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In July 2022, the Seventh Circuit issued an opinion making it clear that employers must put in place written invention assignment agreements if they want to ensure ownership of employee inventions. Employers bringing trade secret misappropriation claims cannot rely on an implied contract to secure ownership of inventions created by employees, except in very limited circumstances. REXA, Inc. v Chester, 2022 U.S. App. LEXIS 20893 (7th Cir. July 28, 2022). The Court also reconfirmed that identifying broad areas of technology is insufficient for a trade secrets claim. Instead, a plaintiff must give specific descriptions of the new invention and identify the specific aspects that were unknown in the field and have independent economic value. Id.

Background

REXA sued a former engineer of an affiliate, Koso America, Inc., for misappropriation of trade secrets and breach of an "implied" invention assignment contract. The former engineer had worked on a prototype valve for a hydraulic actuator (a component responsible for making something move). Koso shelved the project in 2002 and the employee departed the company. A decade later, the former engineer created a successful actuator, called the Hawk, for another company, MEA, Inc. MEA filed a successful patent application. The district court granted the former engineer summary judgment on both REXA's trade secret claim and its implied assignment contract claim.

Implied Assignment Contract

The Seventh Circuit upheld the dismissal of REXA's implied contract claim, holding that "an individual owns the patent rights to the subject matter of which he is an inventor, even though he conceived it or reduced it to practice in the course of his employment." Id. at *26 (citation omitted). Parties can contract around this principle using an assignment provision—which provides broader employer protection. No such agreement was entered by REXA and the engineer.

REXA relied on a common-law exception to this general rule found in many states< sup>1 Massachusetts law, which applied, provides that "[w]hen an employee—even if hired in a general capacity—is specifically 'directed during the course of his employment to develop or perfect new or existing machinery or processes, his employer becomes the owner of resulting inventions and may compel the assignment of patents taken in the employee's name.'" Id. at *23 (citing Steranko v. Inforex, Inc., 362 N.E.2d 222, 233–34 (Mass. App. Ct. 1977)). But REXA's claim failed because the Court found that "REXA did not direct Chester to invent anything remotely resembling the 2002 actuator prototype, much less the Hawk[.]" Id. at 28. The former engineer's 2002 efforts were "unrelated to any portion of the [later] patent application." Id. at 29.

To rely on this exception the employer must have specific evidence that it directed a particular type of invention to be pursued by the employee and that the invention falls within that direction. Given the nature of scientific research, this would be a difficult burden for an employer seeking ownership of an invention. Only a written invention assignment agreement can give the employer comfort that it owns employee developments.

Misappropriation of Trade Secrets

The Seventh Circuit also upheld the dismissal of REXA's misappropriation of trade secrets claim for additional reasons beyond its not owning the invention. First, the Court reasoned that REXA failed to "show concrete secrets rather than broad areas of technology." Id. at *10 (citations omitted). "When a plaintiff presents complex or detailed descriptions of methods and processes but fails to isolate the aspects that are unknown to the trade, no trade secret has been identified." Id. at *12-13 (citation omitted). REXA had contended that its "2002 Designs" were trade secrets, but failed to specify what information within those designs were actually trade secrets. Id. at *14.

The Court also held that REXA's misappropriation claim failed because REXA conceded that "several aspects of the shelved 2002 actuator prototype were and are widely known in the hydraulic-actuator industry." Id. at *14.

The Court concluded there was no reason to draw an inference that REXA's alleged trade secret was commercially valuable: "the eleven-year gap renders the inferences that REXA asks us to draw exceptionally unreasonable." Id. at *20.

Conclusion

Invention assignment agreements provide critical protection for employers to secure ownership of new technologies developed by employees. Without an express, written agreement, employees may not be obliged to assign patent rights to an employer and employers may not be able to proceed with trade secret claims against employees who later use or disclose trade secrets created during their employment.

The Seventh Circuit's decision also reinforces case law requiring trade secrets to be proved with specificity, including identification and proof of the precise contours of the trade secret and how it provides independent economic value. The alleged secrets in REXA failed to meet this demanding standard, as discussed in a prior update.

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