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Who Owns Patent Rights When The Inventor Is A Director Of A Company?

This presents a fairly common and important question. The issue of ownership of or entitlement to a patent is a fundamental aspect of patent validity. A patent issued to a patentee who was not entitled to the patent is a ground for invalidity and can result in the revocation of the patent.

When determining entitlement the starting point is always the inventor(s). An inventor can decide to assign their rights to another party, whereby that other party can claim to be properly entitled to the patent rights due to the assignment. However, there are situations in which the nature of an inventor’s relationship with another party can be sufficient for the other party to be properly entitled to claim ownership of patent rights from the inventor without any need for an assignment.

The most common relationship that establishes entitlement from an inventor is the employee/employer relationship.

EMPLOYEE/EMPLOYER RELATIONSHIP

When an employee devises an invention in the course of their employment duties and either the duties were such that it would be reasonable to expect the invention to be devised or the employee had a special obligation to the employer (such as a valid clause in an employment contract), the employer is entitled to the patent rights for the invention. There are pragmatic exceptions to the rule. For example, the employer of a telecommunications engineer that invented a new skateboard in their spare time should not be eligible to claim patent rights in the invention as the nature of the invention has no realistic correlation with the employee’s duties. Similarly, the employer of a person employed as a cook in a car manufacturing plant cannot reasonably expect that the person would invent something car-related as part of their employment duties and should not be eligible to claim patent rights if it happened that such an invention was devised.

 COMPANY DIRECTOR

When an inventor is a director of a company the director may not technically be an employee of the company. As a consequence, the employee/employer relationship rules may not necessarily apply when considering entitlement to patent rights in an invention invented by a director. Nevertheless, in the role of director to a company, a director does hold obligations to the company by way of fiduciary duties. The nature of these fiduciary duties and how they impact upon ownership of a patent invented by a director was considered in the equity Division of the Supreme Court of New South Wales in Breakout Barrier Release Systems Pty Ltd v Breakout Barrier Release Systems Australasia Pty Ltd [2013] NSWSC 1815.

In the case, Mr Watmough was a director of both the plaintiff and defendant companies. The business interests of both companies was in locks. Relevant to the present discussion, Mr Watmough had invented and applied for a patent in his own name in relation to a lock invention which was intended to be commercialised by the defendant company. Mr Watmough had not revealed the existence of the patent application nor the potential commercialisation of the corresponding lock product to the plaintiff company. In respect of the decision, the exact nature of the new invention was irrelevant. What was more important was the fact that it was of potential commercial interest to the business of the plaintiff company.

What comes from the case is that a director of a company that devises an invention of realistic interest to the company’s business is obliged, according to their fiduciary duties, to offer the right to exploitation of the patent rights to the company. While this does not imply an automatic transfer of ownership of patent rights between the director and the company, it does imply that the director’s ownership of the patent is more akin to a holding of the patent rights on trust for the company. Furthermore, the fiduciary duties allows the company to veto whether the patent rights can be exploited by the director or another party even if the company decides to waive its right to exploit the patent rights.

Ultimately, a patent right is a right to exploit the patented invention. If, in the case of a director invented invention of potential commercial interest to the company, the company waives the right to exploit the invention and vetos the right for the invention to be exploited by anyone else, the patent becomes effectively redundant.

In the case, Mr Watmough was found to have breached his fiduciary duties by not revealing the existence of the patent application or the potential commercialisation of the corresponding lock product to the plaintiff company. As a consequence, and in the interests of equity, Mr Watmough was ordered to assign his patent rights to the plaintiff.

In the decision, it was highlighted that if the invention had no realistic relationship with the company’s business interest, then a director could invent, own and exploit any patent rights without recourse to or any breach of fiduciary duties to the company.

SO, A DIRECTOR INVENTS SOMETHING, WHO OWNS THE PATENT?

According to patent legislation, in the absence of assignment or employee/employer relationship, the director does. However, fiduciary duties may mean that the equitable owner of the patent rights is the director’s company unless the company waives these equitable rights and provides fully informed consent to exploit the patent rights to the director.

While it is commonly the case that patent rights in an invention made by a director are intended to be owned by the director’s company, this transfer of rights between the director and the company is not necessarily established by the director/company relationship nor the fiduciary duties owed by the director to the company. Consequently, as a practical matter, the safest approach is to have an executed assignment in place between the director and the company to confirm patent rights ownership to the company.