Who owns IP? Employer or Employee

Disputes between employers and employees as to who owns intellectual property (“IP”) developed by an employee have been frequent causes for litigation in Australia and elsewhere.

There are some general principles that emerge from the cases but, like most areas of the law, each case depends on its own facts.

Types of IP

The types of IP that may be developed by an employee, and which can be the subject of claims by an employer, can include all forms of IP.  The IP is commonly:

• rights arising from an invention, particularly the right to apply for a patent for the invention;
• copyright, which can subsist in written materials, artistic works, such as plans or drawings or illustrations and computer software and designs which may be registrable.

Other forms of IP may also be:

• confidential information or “trade secrets”;
• plant breeder’s rights (PBR);
• trade marks;
• circuit layouts.

Principles of IP Ownership

Some of the main principles relating to the ownership of IP rights are, in brief summary:

1. The owner of IP will, initially, normally be the creator of the IP, such as the inventor of an invention or author or artist for a copyright work.
2. If IP is created by an employee in the course of the employment of the employee, the employee will hold the IP on trust (termed a “constructive trust”) for the employer.
3. An employee may be in what is known as a fiduciary relationship with the employer and be obliged to hold the benefit of IP developed by the employee for the employer. Whether the employee owes fiduciary duties, and the extent of these duties, depends on the nature and seniority of the position.
4. An employee may agree to assign IP to the employer, or to hold IP on trust for the employer, by contract. This is usually in an employment contract, but can also be in a specific IP contract, or deed or other contract.  If there is a contract, the terms of the contract, if clear, should determine ownership of the IP.
5. An employee can assign IP to an employer when it has been created, or for future copyright prospectively before it comes into existence, by a written assignment document.

The Contentious Issues

The issues that cause the most difficulty for determination by courts are normally whether IP is created in the course of employment, or whether there is a fiduciary obligation on the employee in relation to IP.

These issues and litigation relating to them can be very complex.  In one of the leading cases in Australia University of Western Australia v Gray[1]the trial lasted 50 days with 4,586 pages of transcript and over 1000 documentary exhibits.  The Judgment of the Trial Judge, Justice French (later the Chief Justice of the High Court) was 374 pages and one of the parties incurred costs of $5,633,996.00.  The case then went on appeal to the Full Federal Court, where the Judgment of French J was upheld.[2]

A selection of some of the Australian cases illustrates the principles to be applied and the difficulties that arise in the different circumstances of each case.  Obviously, because of the complexities of the cases and the judgments, this summary can only be incomplete and not deal with all of the issues.

University of Western Australia v Gray

The University of Western Australia v Gray case involved inventions made by Dr Gray, who was Professor of Surgery of the University of WA relating to microspheres to be used in radiation treatment, for controlled drug releases and for carrying ferromagnetic material for thermal treatment of cancer.

As a professor, the contract of employment of Dr Gray by the University required him, among other things:

To undertake research and to organise and generally stimulate research among the staff and students.

As well as the contract of employment of Dr Gray, there was a possibility that ownership of IP could have been vested in the University by Regulations, but, for various reasons, these were held to be ineffective, so the question of whether the IP relating to the inventions of Dr Gray vested in the University or was retained by him depended on the construction of his contract and the general law.

Whether the inventions were made by Dr Gray in the course of his employment came down, in the view of the Trial Judge and the Full Court, to whether there was “an obligation to invent”.  The Full Court approved the conclusion of Justice French, saying:

Dr Gray had no duty to invent anything.  He had a duty to undertake research and to stimulate research amongst staff and students at UWA.  He was working for a University.

French J and the Full Court both indicated that the position of an academic at a university may be different from an employee in a commercial entity.  The Full Court said:

In this important respect his employment obligations differed from those of a person employed by a private commercial entity whose inventions in the course of employment could benefit or affect the business of the employer.

It was also held that there was no breach of any fiduciary duty or any misappropriation of any opportunity or benefit of the University by Dr Gray.

Victoria University of Technology v Wilson

The UWA v Gray case can be contrasted with Victoria University of Technology v Wilson,[3] a case in the Supreme Court of Victoria relating to a patentable invention and related computer programs for an electronic trading exchange system.  The first defendant Professor Wilson was a professor in the Graduate School of Business in the faculty of Business and Law of the University and headed the School of Applied Economics.  Another defendant, Donald Feaver, was a senior lecturer in the School of Applied Economics.

The inventions and the software were developed as a result of a request to Professor Wilson and Dr Feaver for development of such a system by a company World Trade On-line Holdings Ltd (“WTO”).

Professor  Wilson and Dr Feaver commenced the design of the trading system and later a third individual, a Mr Astill who was not a university employee, became involved.  Some time later, WTO ceased to be involved and another company, IP3 Systems, became interested in the project.

There were disputes as to whether an IP Policy of the University existed.  Although Professor Wilson and Dr Feaver may have had obligations to research, the Judge held that the sort of research which Professor Wilson and Dr Feaver undertook in developing the system was not sufficiently related to the fields of economics and international trade in which they were expected to conduct research so as to be treated for that reason alone as research which they were retained to perform.  In other words it was not within the course of their employment.

The Judge also observed:

That the mere existence of the employer/employee relationship will not give the employer ownership of inventions made by the employee during the term of the relationship.  And that is so even if the invention is germane to and useful for the employer’s business, and even though the employee may have made use of the employer’s time and resources in bringing the invention to completion.  Certainly, all the circumstances must be considered in each case, but unless the contract of employment expressly so provides, or an invention is the product of work which the employee was paid to perform, it is unlikely that any invention made by the employee will be held to belong to the employer.

However, Nettle J found that Professor Wilson and Dr Feaver did owe fiduciary duties to the University, including an obligation not to profit from an opportunity that comes to an employee through his fiduciary position, unless the employee has made a full disclosure to the person to whom the duty is owed and has obtained their consent.  The Judge found that the opportunity to design the trading system was presented to Professor Wilson and Dr Feaver in their capacities as employees of the University.  He would have held that the interests of Professor Wilson and Dr Feaver in the provisional patent application that was lodged and software developed for the trading system were held on a constructive trust for the University but for the fact that other parties, including Mr Astill, had been involved and had made contributions to the development of the technology.

The Judge accordingly ordered that Professor Wilson and Dr Feaver and their respective companies were to be held to account either by imposing a constructive trust on their shares in IP3 Systems, and payment of proceeds of sale of any other shares, rather than a direct interest in the application for patent and the software.

Spencer Industries Pty Ltd v Collins

In another case in the Federal Court of Australia Spencer Industries Pty Ltd v Collins[4] a claim was made by Spencer Industries Pty Ltd as the employer of the defendant Mr Collins that Spencer Industries was entitled to be the applicant for a petty patent for an invention for a rasp hub for the removal of tread from worn tyres.  The application was made under the Patents Act and Branson J in the Federal Court, affirming the decision of the Delegate of the Commissioner of Patents, rejected the claim of Spencer Industries and found that Mr Collins was entitled to be the applicant for a patent for the invention.

Mr Collins was employed by Spencer Industries as Sales Manager, but was a qualified first class machinist and had considerable technical skills.  He had worked with other employees of Spencer Industries to design new products, and a previous application for patent for a tyre rasp hub had been filed by Spencer Industries but was allowed to lapse.

Mr Collins thought about designing a more efficient and effective rasp hub, and presented designs to Spencer Industries, which were originally not accepted.  Subsequently, he was asked by Mr Pincott, who was described as the controller of Spencer Industries, to prepare some more detailed drawings in his spare time, and Mr Collins attended a meeting with a patent attorney instructed by Spencer Industries, resulting in the filing of the petty patent application.  The application was prepared in the name of Spencer Industries but when Mr Collins was asked to sign an assignment of the rights to apply for the parent as inventor, he refused to do so unless Spencer Industries agreed to pay royalties to him for the commercialisation of the invention.

The Judge held that as Sales Manager, his responsibilities were principally in relation to sales.  Although he could be given specific directions to use his technical skills in areas outside his ordinary duties, the Judge found that:

It was no part of Mr Collins’ ongoing duties to invent products for Spencer Industries.  Mr Pincott, the evidence discloses, on more than one occasion reminded Mr Collins that his ongoing duties were exclusively sales-related.  Nor was the Invention the outcome of a direction given to Mr Collins within what I had described as the residual area in which he could be directed to perform tasks other than sales tasks.  Mr Collins was not directed by Mr Pincott, or anyone, to invent a new rasp blade or to undertake any inventive activities which resulted in the Invention.  Mr Collins advised Mr Pincott of the Invention, which he had conceived and developed on his own time, only when the inventive steps concerning it had been completed.  The Invention was not, in my view, a product of the work which Mr Collins was paid to do.

The Royal Children’s Hospital v Robert Alexander

Another case illustrates the fine line between developments of IP which may fall within, or outside, the course of employment of an employee.  In a decision of the Australian Patent Office in Royal Children’s Hospital v Robert Alexander[5]the Hospital argued that it was entitled to be the applicant for two inventions for which applications for patents had been filed by Dr Alexander.  Dr Alexander was the Senior Scientist in charge of the Virology Laboratory of the Hospital.  The inventions claimed in the two applications were for a viral recovery medium and a well device for use in a viral assay.

The delegate of the Commissioner for Patents found that the Hospital was beneficially entitled to the patent application for the viral recovery medium, but that Dr Alexander was solely entitled to the application for the well device.

The issue was whether Dr Alexander had a duty to invent, following the reasoning in UWA v Gray, in his position as Head of Virology.

The delegate found that there would be a duty to invent where “there was a clear motivation which arose in the course of his employment”.  This would include:

Where there was a recognised problem which he would have been reasonably expected to resolve.

In relation to the viral recovery medium, it was held that the invention:

Addressed a recognised problem in the art and was the product of research which a virologist would undertake when trying to optimise the techniques used at the hospital.

In contrast, the well device did not address any known problem with prior art well design, and there would have been no motivation to improve the well device in the course of the employment of Dr Alexander.

The Importance of Contracts

The cases mentioned above are only a small selection of those in Australia and elsewhere relating to the often contentious issues of ownership as between employers and employees.  What these cases do illustrate is that if there is to be certainty as to the ownership of IP developed by an employee, then an appropriately drawn contract, whether a contract of employment or another form of contract, is essential.  This is the case from the point of view of both the employer and the employee.

As noted above, the contract may define IP that is developed by an employee and which is to be held on trust by the employee for the employer, and assigned, if required, by the employee to the employer.

A properly drawn contract may make it clear that IP which is developed by an employee and which arises out of, or is suggested by, work which is performed by the employee for the employer will be the property of the employer, and that the employee must inform the employer of the development of the IP.  This may include IP which is not necessarily within the course of employment of the employee, but there may be questions about the enforceability of a condition which is drawn so widely as to require all IP developed by an employee during the period of employment to be held for the employer.

From an employee’s point of view, the conditions of a contract relating to IP should be carefully considered.  Often, concerns of an employee will arise not so much in relation to the ownership of IP but rather for fair remuneration, by way of royalties or otherwise, for any commercialisation or use of the IP.

Just as the cases in this area can be complex, so too can the provisions of contracts dealing with IP development and ownership.  It is strongly recommended that these contracts should be drawn or reviewed by legal practitioners with experience in this area.

By: Sandy Donaldson, Director, DW Fox Tucker Lawyers        +61 8 8124 1811

Sandy.Donaldson@dwfoxtucker.com.au          https://www.dwfoxtucker.com.au

[1] University of Western Australia v Gray (No 20) [2008] FCA 498.

[2] University of Western Australia v Gray [2009] FCAFC 116.

[3] Victoria University of Technology v Wilson (2004) 60 IPR 392.

[4] Spencer Industries Pty Ltd v Collins [2003] FCA 542.

[5] The Royal Children’s Hospital v Robert Alexander [2011] APO 94.