Private Equity

All private equity deal professionals know that legal diligence of a target company is a significant part of the overall diligence and deal making process.  But occasionally it is helpful to be reminded of why some of the more specialized legal diligence can be really important.  This is particularly true with respect to intellectual property and employment-related diligence.  These two disciplines can actually overlap because intellectual property created by an employee of a target company does not necessarily and automatically belong to the company (its ownership may depend on the circumstances of its development and whether the employee had actually been hired for the purpose of developing intellectual property on behalf of the company).^[1]  Thus, to avoid disputes as to ownership of intellectual property, most companies require their employees to sign agreements assigning to the company any intellectual property that is developed by employees during their employment by the company.  So determining that these agreements actually exist at (and were properly created by) the target company is a necessary part of the intellectual property and employment-related diligence, particularly where the target is heavily dependent upon the use of certain intellectual property.

But just because an agreement exists that purports to address the assignment of intellectual property by an employee of the company, doesn’t mean it actually does so.  The exact wording of the assignment provision in any such agreement is critical.  Indeed, because any such provision is addressing future inventions or creations, the tense of the purported assignment of those future intellectual property rights can be determinative of whether the provision actually accomplishes its objective.

The tense (present or future) of a purported assignment of intellectual property rights was very much the issue in a recent United States Court of Appeals for the Federal Circuit case, Advanced Video Techs, LLC v. HTC Corp., 879 F.3d 1314 (Fed. Cir. 2018).  In Advanced Video Techs, the court held that a provision providing that an employee “will assign” any intellectual property developed by the employee did not in fact effect a present transfer of the intellectual property that was thereafter created by the employee during her employment.  Thus, a patent infringement suit brought by the employer company against a third party was dismissed because a co-owner of the patent (the now former employee) had not joined in the suit.

The “will assign” provision provided as follows:

I agree that I will promptly make full written disclosure to the company, will hold in trust for the sole right and benefit of the company, and will assign to the company all my right, title, and interest in and to any and all inventions, original works of authorship, developments, improvements or trade secrets which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the company.

While that language appears to clearly reflect the intent that any intellectual property developed by the employee would ultimately belong to the company, the Federal Circuit held that the “will assign” language invoked a promise to do something in the future and did not effect a present assignment of the ownership rights to the company.  In so holding the Federal Circuit was following past precedent.  The Federal Circuit has consistently required a present tense assignment of to be created intellectual property in order to effectively assign that intellectual property when, as, and if thereafter created.^[2]  The use of future tense language such as “will assign,” or “agree to assign,” instead of present tense language such as “hereby assign,” is insufficient to effectuate the assignment of intellectual property created by an employee after commencing employment with the company.^[3]  The requirement is to make clear that the described act (the assignment) is actually accomplished presently by the language itself (without requiring a future subsequent act); what Ken Adams calls “language of performance.”^[4] 

The importance of specific words being used correctly in written agreements is nothing new.^[5]  But the technical requirements in the intellectual property arena for the present tense “magic words” of “hereby assign” seem to take the general rule that “words really matter” to a new level.  And it is critical that your IP specialists are making sure those specific words have been used in the relevant employment-related agreements relating to [purported] intellectual property assignments.