Seeking a fairer approach to IP ownership

By Alistair Jones

SMU Office of Research & Tech Transfer – What is the value of a good idea and who can lay claim to it?

Ownership of intellectual property (IP) rights has become integral to the operation and strategies of innovative companies across the globe.

Accelerated by digitisation and led by the giant technology corporations, intangible assets – where IP takes the form of patents, trade secrets, software, data, copyrights and more – have become a key driver of company value.

According to research by the McKinsey Global Institute, investment in intangible assets has surged, amounting by 2019 to 40 per cent of all investment in the US and 10 European economies.

McKinsey is not alone in believing that companies’ success will be measured more by their people and their capabilities than by their machines, products, or services.

At the heart of this is the relationship between inventors and their employers. Approximately 80 per cent of all inventions in the US are made by employee inventors and the ownership of the IP they create – and the sharing of profits it can generate – is a contentious issue.

New research co-authored by Stella Park, Assistant Professor of Accounting at Singapore Management University (SMU), weighs into the debate by studying how the assignment between inventors and their employers of intellectual property rights for successful innovations influences the timing of patent disclosures to the market.

“Patent disclosure timeliness has real effects and is an important firm decision,” Professor Park says.

A landmark ruling

All patent applications filed with the US Patent and Trademark Office (USPTO) must be disclosed on its website no later than a specific deadline.

“However, each firm can time the publication of their patent applications by requesting the USPTO to publish their in-process applications even before this deadline,” Professor Park says.

“Firms have incentives to disclose patents early because they can credibly signal their innovative ability to various stakeholders. By doing so, firms may receive valuation benefits through an earlier resolution of uncertainty surrounding their innovative productivity, or they may deter the entry of their product market rivals.

“Employee-inventors have incentives to disclose early to signal their ability and human capital, thereby increasing their labour market value,” she adds.

The researchers found that firms accelerated their patent disclosures for innovations created by their inventors affected by a landmark 2002 ruling, Alcatel v. Brown.

Evan Brown, a software developer from Texas, claimed to have conceived the idea for a program to convert old code to run on modern machines in 1976, long before he joined DSC Communications (subsequently acquired by Alcatel). In 1996, Brown asked DSC to release him from his invention disclosure agreement in order to pursue development of his idea without DSC’s interference.

Both Brown and DSC recognised the value of this program and after a year of unsuccessful negotiation, DSC fired Brown and brought a breach of contract action against him. DSC claimed that Brown violated his employment agreement when he failed to disclose the idea.

DSC sought a declaratory judgment granting ownership of the idea to DSC and requiring Brown to disclose the idea in full. The 219th Judicial District Court of Texas found that the idea was an invention falling under the terms of the employment agreement between Brown and Alcatel, which entitled Alcatel to “full legal title and interests” of any inventions. In 2004, the Texas Appeals Court turned down Brown’s appeal of the 2002 decision.

Brown was not only forced to hand over his idea, but also had to pay Alcatel's $332,000 attorneys' fees.

Keep mouths closed

While the Appeals Court decision did not set a formal legal precedent outside of Texas, it arguably established a persuasive common law precedent to inform subsequent decisions by other state and federal courts in similar cases.

“Alcatel v. Brown, therefore, became a symbolic case that expanded employers’ contractual controls over human capital” Professor Park says.

“The rule for IP ownership was traditionally based on whether the inventor created the IP during working hours or off-hours. The case of Alcatel v. Brown showed that the notion of 'time' is fuzzy and that companies can win cases and take ownership of employees’ IP even when the employees had come up with ideas during their off-hours or even outside of their employment period.

“It is only reasonable that this case set a precedent for employees to keep their mouths closed if they have a promising idea.”

Nine US states specifically limit the enforceability of restrictive employment contracts. Among them is California where Silicon Valley is a leader in high-tech innovation. Could it be that the effect of Alcatel v. Brown outside the nine states has not been beneficial for innovation?

“Right. Consistent with this view, [extant research finds] that the overall patent counts and entrepreneurship decrease after Alcatel v. Brown in the affected states,” Professor Park says.

“It also finds that following the enforcement of Alcatel v. Brown, innovation activities in IT industries decrease more sharply than in other industries. These findings suggest that the conflict over IP ownership hinders innovation in organisations, providing evidence of the potentially adverse impact of the case at the societal level,” Professor Park says.

More equitable consideration

“Recently, industry has moved to a more balanced approach towards intellectual property agreements,” Professor Park says.

Among them is software code hosting service GitHub which in 2017 announced a Balanced Employee IP Agreement (BEIPA). In essence, a BEIPA only claims control of what the employee creates during the period of employment, and only creations made for or relating to the company’s business.

“Albeit slowly, the industry seems to be moving in the direction to empower employee-inventors and advocate more equitable consideration and compensation for their inventions,” Professor Park says.

“Our research findings suggest that there are multiple levers that firms can pull to hold up employees and their ideas, one of which is disclosure. While we focus on firms’ management of how their innovations get disseminated, we believe that the change in the IP rights can also have a significant impact on the way firms manage their innovations and inventors, such as where they locate their inventors or what types of innovations they encourage their inventors to work on. In doing so, we hope to contribute to a more nuanced understanding of the IP rights and the hold-up problem in employer-employee relationships.”

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