Shop Right Doctrine

The shop right doctrine is a judicially created equitable doctrine protecting employer interests: DEFINITION: the shop right is an implied, non-exclusive, royalty-free, non-transferable license that an employer acquires by operation of law to practice an employee's patented invention, when the employee used the employer's resources to develop the invention; HISTORICAL DEVELOPMENT: the shop right doctrine was developed by US courts in the 19th and early 20th centuries; the leading cases predate comprehensive employment agreement practice; the doctrine was created to address the equitable problem of an employee using company time and resources to invent something, then potentially excluding the company from using its own resources' output; THEORETICAL BASIS: the shop right is based on equitable estoppel; the employee's use of employer resources implies a license to the employer to use the resulting invention; the employer's investment in the conditions that enabled the invention justifies a license; PRESENT STATUS: the shop right doctrine is still valid law in all US states; however, it is largely superseded in practice by comprehensive invention assignment agreements (IAAs); companies with good IP practices use IAAs, making the shop right a fallback only for situations where IAAs are absent or invalid; KEY LIMITATIONS: the shop right is NOT patent ownership; the shop right is personal to the employer (cannot be transferred to buyers, licensees, or assigns of the employer's business); the employee retains all ownership rights; the shop right does NOT enable the employer to enforce the patent or license it.

Courts evaluate several factors in determining whether a shop right exists: ELEMENT 1 — USE OF EMPLOYER RESOURCES: the employee used company time, materials, equipment, facilities, or information to develop the invention; this is the core factor; 'resources' broadly includes: salaried time during working hours; company computer systems; lab equipment; company-funded research; company data or information; part-time use of company resources may be sufficient; ELEMENT 2 — EMPLOYER'S ACQUIESCENCE OR ENCOURAGEMENT: the employer was aware the employee was developing the invention (or reasonably should have been aware); the employer did not prohibit or object to the development; the employer may have encouraged or supported the work; ELEMENT 3 — NO EXPLICIT ASSIGNMENT AGREEMENT: the shop right applies only when there is NO valid IAA covering the invention; if a valid IAA exists, the assignment governs (the employer owns the patent, not just a license); ELEMENT 4 — THE INVENTION IS RELATED TO THE EMPLOYER'S BUSINESS: the invention is within the scope of the employer's business or the work the employee was engaged to do; BALANCING OF EQUITIES: courts balance the interests of the employer (who funded the conditions for invention) and the employee (who conceived the invention); CASES WHERE SHOP RIGHT WAS FOUND: employee used company materials and tools during working hours to develop a new machine; employee used company's R&D data to develop an improvement; employee invented while on the job using company laboratory equipment; CASES WHERE SHOP RIGHT WAS NOT FOUND: employee invented on weekends at home using personal tools; employee used de minimis company resources (one company pen); the invention was entirely conceived before the employment relationship.

The shop right is narrower than full patent ownership in important ways: WHAT THE EMPLOYER CAN DO WITH A SHOP RIGHT: PRACTICE THE INVENTION: the employer can make, use, sell, and import products or use processes covered by the patent without infringing; the shop right is a complete defense to an infringement suit by the employee-inventor; CANNOT BE ENJOINED: the inventor (patent owner) cannot obtain an injunction against the employer from practicing the invention; the employer's shop right is an affirmative defense to infringement; WHAT THE EMPLOYER CANNOT DO WITH A SHOP RIGHT: CANNOT TRANSFER THE SHOP RIGHT: the shop right is personal to the employer; if the employer sells its business, the buyer does NOT automatically get the shop right; the shop right is extinguished upon transfer of the business (generally); EXCEPTION: some courts have held that a shop right may transfer with a sale of the entire business (an ongoing concern, not just an asset sale); CANNOT LICENSE TO THIRD PARTIES: the employer CANNOT grant sublicenses under the shop right to third parties; CANNOT EXCLUDE OTHERS: only the patent OWNER (the employee-inventor) can exclude others from practicing the invention; the employer with a shop right cannot sue infringers; cannot license the patent to generate revenue; CANNOT SELL OR ASSIGN THE SHOP RIGHT: the shop right is not an asset that can be separately transferred; CANNOT BLOCK THE EMPLOYEE FROM LICENSING COMPETITORS: the employee-inventor retains full patent ownership; the employee can license the patent to the employer's competitors; the competitors will then have a license, while the employer only has a shop right; THIS IS THE KEY PRACTICAL PROBLEM: a company relying on a shop right instead of an assignment agreement can find that: its inventors licensed the patent to competitors; the company is defending against a competitor with a full exclusive license while the company has only a non-exclusive shop right.

The shop right is vastly inferior to a formal assignment in every dimension: COMPARISON TABLE: SHOP RIGHT: creation = by operation of law (implied); nature = non-exclusive license; ownership = employee retains; transferability = NOT transferable; sublicensing = NOT allowed; enforcement = employer cannot sue infringers; licensing revenue = none; employee can license competitors = YES; strength = extremely limited; ASSIGNMENT: creation = by written agreement (IAA); nature = full ownership transfer; ownership = employer owns; transferability = fully transferable; sublicensing = allowed; enforcement = employer can sue infringers; licensing revenue = employer can license for revenue; employee can license competitors = NO (employer owns the patent); strength = maximum protection; WHY THE SHOP RIGHT IS INADEQUATE FOR COMMERCIAL PURPOSES: the company cannot prevent competitors from obtaining licenses; the company cannot generate licensing revenue; the company cannot enforce the patent against infringers; the company cannot sell or transfer the patent (as it does not own it); upon acquisition, the buyer may not get the shop right; BUSINESS CONTEXTS WHERE SHOP RIGHT FAILURES ARE MOST DAMAGING: M&A: the acquiring company discovers that key patents are owned by former employees (not the target company); the employees may have already licensed the patents to others; the acquisition value is severely impaired; STARTUP IP TRANSFERS: a startup that did not properly get inventor assignments cannot properly assign patents to investors or acquirers; SPIN-OFFS: when a company spins off a business unit, the shop right may not transfer with the unit; PREVENTION: the answer is simple — use a properly drafted IAA for every employee with R&D responsibilities; use a patent assignment clause in every consultant/contractor agreement; record all assignments at the USPTO within 3 months of execution.

Shop right doctrine reveals important lessons about IP ownership management: FOR COMPANIES — LESSON 1: NEVER RELY ON THE SHOP RIGHT: the shop right is entirely avoidable with proper documentation; if a company has employees doing R&D without IAAs, fix it immediately (new consideration may be required in some states); FOR COMPANIES — LESSON 2: IAA TIMING: use IAAs at hire (not after employment begins); post-hire IAAs may require additional consideration; California Labor Code § 2872 requires providing employees with a copy of § 2870 before signing; FOR COMPANIES — LESSON 3: COVER CONTRACTORS AND CONSULTANTS: the shop right does NOT arise for independent contractors (it is an employment-based doctrine); contractors with no assignment agreement = contractor owns the patent outright, with no shop right for the company; ALWAYS use written patent assignment clauses with contractors; FOR COMPANIES — LESSON 4: M&A DUE DILIGENCE: during due diligence, verify: all key inventors have signed valid IAAs; all IAAs are properly recorded at the USPTO; no patents are owned by individuals rather than the company; no shop right situations exist (patents held by former employees who used company resources); FOR INVENTORS — LESSON 1: UNDERSTAND WHAT YOU SIGNED: if you signed an IAA at hiring, you have assigned your inventions to the employer; if you signed AFTER hiring without additional compensation, the IAA may be challengeable in some states; FOR INVENTORS — LESSON 2: LIST PRE-EXISTING INVENTIONS: always list pre-existing inventions when signing an IAA; if not listed, the employer may claim them; FOR INVENTORS — LESSON 3: KNOW YOUR STATE LAW: in California, Delaware, Illinois, Minnesota, North Carolina, and Washington, inventions developed entirely on personal time without company resources and unrelated to the employer's business belong to you; document that such inventions meet these criteria.