The Aftermath of Stanford v. Roche: Which Law of Assignments Governs?

Sean M. O’Connor is a Professor of Law, Faculty Director of the Law, Business & Entrepreneurship Program at the University of Washington School of Law, and a Research Affiliate of IP Osgoode.[1]

[IP Osgoode: Professor O'Connor's full article on this topic will be published in issue 24:1 of the Intellectual Property Journal later this year.]

Earlier on this blog, I posted a summary of the issues involved in the United States Supreme Court case of Board of Trustees of Leland Stanford Junior University v. Roche Molecular Systems, Inc. (“Stanford v. Roche” or “Stanford”).[2] Now that the case has been decided, I want to follow up on the decision and, more importantly, remaining open issues.

In line with my positions on the issues, the Supreme Court affirmed the United States Court of Appeals for the Federal Circuit (Federal Circuit) by rejecting Stanford’s argument that the Bayh-Dole Act is a “vesting statute” (such as the Atomic Energy Act, in which title to relevant inventions is vested in designated agencies by act of law). It also reaffirmed its earlier holdings that rights in an invention belong to the inventor, absent some express transfer between the inventor and his employer or another.[3] To reach these conclusions, it focused on the definition under Bayh-Dole which requires that a “subject invention” (those inventions subject to the provisions of Bayh-Dole) be an “invention of the contractor.”[4] Under the majority’s view, the emphasized portion would be superfluous if any invention arising under federal funding were subject to Bayh-Dole. Instead, the Court held that a subject invention is one to which the contractor lawfully has rights or title. Most importantly, the title allocation rules under Bayh-Dole, which leave the inventor with only a conditioned residual interest where neither the government nor the contractor elect to take title, only apply to subject inventions.

While the Court was constrained to the Bayh-Dole issue by Stanford’s petition for certiorari, a concurrence and a dissent expressed concern over the Federal Circuit’s holding on the VCA issue.[5] Under these views, the majority’s holding on the Bayh-Dole issue, combined with the Federal Circuit case law, provides opportunity and incentive for inventors—and contractors—to circumvent Bayh-Dole’s title allocation system. For these justices, the Federal Circuit’s 1991 ruling in FilmTec Corp. v. Allied Signal, Inc.[6] should be revisited.

In that case, the court asserted that the assignment of rights in an invention that does not yet exist is an assignment of an expectant or future interest and grants at most equitable title until the invention is actually made and a patent application filed.[7] However, immediately upon the filing of a patent application on the invention, legal title to the invention rights vests in the assignee with no further action required.[8] At the same time, actual assignments of expectant interests must be distinguished from mere obligations to assign rights in the future.[9] The latter are often used when the prospective assignee does not know in advance whether it wants title to the future invention and thus establishes what is essentially a call option. In contrast to the present assignment of future interests, when an obligation to assign is entered into and an invention is later made (and a patent application is filed), no transfer of title occurs until and unless the option is called. In the meantime, the inventor may legally assign any of her rights to third parties. Of course, if and when the holder of the call option calls it in, then the assignor will not be able to honor that option and convey the invention rights (unless she can reacquire them from the current assignee). At this point, she would be in breach of her option agreement. But the counter party to that agreement would only be able to sue for contract damages and not for an equitable remedy that would require conveyance of the inventions rights.

The FilmTec court did not state whether it was basing its decision on an application of state law—which normally governs contract law interpretation—or establishing a rule of Federal common law. This remained murky through later decisions,[10] until the 2008 decision in DDB Technologies, L.L.C. v. MLB Advanced Media, L.P.[11] In that case, the Federal Circuit squarely held that invention assignment agreements are governed by federal common law because they are integral to the question of standing in federal patent cases.[12]

The concurring and dissenting Supreme Court justices in Stanford seemed concerned as to both the rule that federal common law governs invention assignment agreements and that rule’s distinction between assignments of future interests and obligations to assign. Their concern appears rooted in how Stanford lost control of Holodniy’s rights and potentially jeopardized the Government’s rights in the invention.

But, when Holodniy executed the CPA, FilmTec had not been decided and at least one major California university system -- the Regents of the University of California -- appears to have believed that “agree to assign” effected an immediate transfer just as “hereby assign” did.[13] This, however, had been an incorrect understanding of the law, although the California state courts may not have cleanly addressed the issue until 1997. Once FilmTec was decided in 1992, though, all employers were on constructive notice that they should use the “hereby assign” language if they wanted to lock in a title transfer. If they continued not to use it, then they were either ignorant of the law or selecting the risk of the option agreement.

The bigger question is why some universities—including Stanford—continued using the “agree to assign” language even after FilmTec.[14] Holding aside the case where the universities might simply have remained ignorant about the state of the law, there are a few reasons why these universities may have chosen to take the risks of continuing to use the obligation to assign language. One is that the university will not know at the time of a researcher’s hire whether all, or even which, of her future inventions should be university property. Second, the university may (incorrectly) believe that it cannot take title to things that do not yet exist.[15] Third, the university may be confusing the federal tax exempt rules prohibiting the assignment of expectant interests by the entity to others with the permissible assignment of expectant interests from an employee or contractor to the entity.

All three of these are simply misunderstandings of the law. The first potentially remains a problem, but has three straightforward solutions. First, universities can use the “hereby assign” language in assignment agreements and then simply assign back inventions as needed. As an alternative to this, the agreement could have the researcher assign her future inventions to an escrow agent who would operate under the same rules as the university would use in later determining whether to take title to inventions as they arose. Then, as the inventions arose and were disclosed by the inventor to the escrow agent, the latter would apply the rules and assign the invention rights to the university or inventor, as applicable. Second, universities can craft a scope of future interests that have been presently assigned upon execution of the patent agreement. For example, the clause could state “faculty member hereby assigns all rights, title, and interest to future inventions developed in total or in part under federal funding agreements.” This could of course contain other factors, such as corporate sponsored research agreements. Third, universities can institute a “supremacy clause,” such as that upheld by the Delaware Court of Chancery in Cephalon, Inc. v. Johns Hopkins University.[16] In that case, Johns Hopkins required employees to include a clause in their outside consulting agreements stating that the outside entity agrees that the employee is under an obligation to assign her inventions to the university and that this obligations is senior to any invention assignments the outside entity might impose. In the case at issue, the researcher had done just that and the Court of Chancery upheld the validity and enforceability of this clause as against Cephalon. The challenge with this approach is that it is only as good as the diligence of employees in implementing it. Further, employees may not realize that assignment language may be in other kinds of agreements, such as the VCA in Stanford.

In the end, Stanford may be more important for what the Supreme Court did not decide than for what it did. The practice of relying on Bayh-Dole as a backstop to assignment problems should never have developed. Further, universities’ failure to adapt their agreements after FilmTec have left them vulnerable to the kinds of intervening conveyances that occurred in Stanford. However, these are entirely preventable provided that universities put in place appropriate assignment terms. Even if the Supreme Court overturns the Federal Circuit’s federal common law—as a general principle or specific to the assignment issue—this author is unaware of any state law that holds “agree to assign” language as having the same legal effect as “hereby assign” language. Thus, in the end, the debate over whether there should be federal common law on this point or not should be of no legal moment.