Shop Right

A shop right is an implied, non-exclusive, royalty-free license granted by operation of law to an employer to use an invention developed by an employee: LEGAL BASIS: shop rights arise from equitable principles — specifically, equity prevents an employee who used the employer's resources to develop an invention from later excluding the employer from using it; NOT CONTRACTUAL: a shop right is implied by law, not based on any written agreement; it arises regardless of whether the parties have an employment contract addressing inventions; WHEN SHOP RIGHTS ARISE: the doctrine requires that the employee: (1) developed the invention during the employment relationship; AND (2) used the employer's resources — including the employer's time (during work hours), equipment, materials, facilities, or funding; SCOPE: a shop right is non-exclusive — the employee (patent owner) retains the right to use the invention and to license it to third parties, including the employer's competitors; ROYALTY-FREE: the employer owes no royalties or compensation to the employee for the shop right; the consideration is the employee's use of the employer's resources; NON-TRANSFERABLE: a shop right cannot be assigned or transferred to a third party; it runs with the business and follows the employer entity, but cannot be sold separately to an unrelated party; DISTINGUISHED FROM ASSIGNMENT: an assignment transfers full ownership of the patent to the employer; a shop right gives the employer only a non-exclusive license while the employee retains ownership; DISTINGUISHED FROM 'HIRED TO INVENT': if an employee is hired specifically to invent (e.g., an R&D engineer whose job is to invent), the employer may own the invention outright — not merely as a shop right licensee.

The 'hired to invent' doctrine is distinct from the shop right and creates a stronger employer claim to the patent: HIRED TO INVENT: when an employee is employed specifically to exercise inventive or creative skill (e.g., a research engineer, a staff scientist, a product designer), any invention that falls within the scope of their employment obligation belongs to the employer by assignment; the employer doesn't just get a shop right — they get FULL OWNERSHIP; STANDARD: courts examine whether the employee was specifically hired to solve the problem that led to the invention; if the employee's job was to invent or develop the technology in question, the invention belongs to the employer even without a written assignment agreement; EXAMPLES — HIRED TO INVENT: a pharmaceutical researcher hired to develop new drug formulations invents a new compound — owned by employer; a software engineer hired to build a new algorithm invents a core algorithm — owned by employer; EXAMPLES — SHOP RIGHT ONLY: an accounting employee who builds an improved inventory tracking tool using office equipment on weekends — employer gets shop right but not ownership; a maintenance worker who invents a new type of machine lubrication system while repairing equipment — employer may get shop right; GRAY AREA: many cases fall between pure 'hired to invent' and pure 'shop right'; the more closely the invention relates to the employee's assigned duties, the stronger the employer's ownership claim; EMPLOYMENT AGREEMENTS: modern employers typically require employees to sign invention assignment agreements that are broader than the 'hired to invent' doctrine — capturing ALL inventions related to the employer's business, not just those in the employee's direct job scope.

Shop rights have significant limitations from both the employer's and employee's perspectives: EMPLOYER LIMITATIONS: (1) NON-EXCLUSIVE: the employer has no right to exclude the employee from licensing the invention to third parties, including competitors; the employee can undermine the employer's competitive advantage by licensing to competitors; (2) NON-TRANSFERABLE: the shop right cannot be sold or transferred to a successor company (in some jurisdictions) — courts split on whether shop rights transfer in asset sales or mergers; if the shop right doesn't transfer, the acquiring company may not be licensed; (3) NO SUBLICENSING: the employer cannot sublicense the shop right to third parties; (4) NO EXCLUSIVITY: the employer cannot use the shop right to block competitors from obtaining licenses from the employee-inventor; EMPLOYEE LIMITATIONS: (1) CANNOT EXCLUDE EMPLOYER: despite being the patent owner, the employee cannot sue the employer for infringement within the scope of the shop right; the employer has a defense to infringement by virtue of the shop right; (2) PATENT STILL HAS VALUE: the employee can license to competitors, charge royalties from others, and enforce the patent against parties who don't have shop rights or licenses; PRACTICAL LIMITATION — EMPLOYMENT AGREEMENTS: in practice, most employers require signed invention assignment agreements that eliminate the shop right problem entirely; by contractually assigning all inventions to the employer, there is no ambiguity; employees who refuse to sign assignment agreements may be terminated; EMPLOYEE PROTECTION LAWS: some states (California, Minnesota, North Carolina, Washington, Delaware) limit how broadly employers can claim employee inventions; inventions developed entirely on the employee's own time without employer resources and unrelated to the employer's business cannot be claimed.

Modern employment practices typically replace the common law shop right with explicit contractual provisions: INVENTION ASSIGNMENT AGREEMENTS (IAAs): most technology companies require new employees to sign an IAA before or at the start of employment; IAAs typically assign to the employer: (a) inventions conceived or reduced to practice using the employer's resources; (b) inventions related to the employer's business or current/anticipated activities; (c) inventions made during the employment period; PRE-INVENTION ASSIGNMENT AGREEMENTS: the agreement typically applies prospectively to future inventions during employment; employees typically disclose all inventions to the employer during employment; STATE LAW LIMITS ON IAAs: CALIFORNIA (Labor Code § 2870): employers cannot claim inventions that: (a) do not relate to employer's current or demonstrably anticipated business; (b) do not result from any work performed for the employer; (c) are developed entirely on the employee's own time without employer equipment or trade secrets; MINNESOTA, NORTH CAROLINA, WASHINGTON, DELAWARE: similar statutes protecting employees from overbroad IAAs; PRACTICAL EFFECT: IAAs eliminate shop rights by contractually assigning the invention to the employer outright; employees who invent using employer resources and are bound by an IAA will typically have their inventions owned by the employer, not just licensed under a shop right; EQUITY vs. ASSIGNMENT: a shop right is an equitable remedy in the absence of a contract; a signed IAA displaces the shop right with a contractual assignment; CONTESTING IAA VALIDITY: employees sometimes contest IAAs as overbroad, procured under duress, or inconsistent with state statutes; these disputes are litigated in state courts.

Whether shop rights survive business transactions is a contested area of law with a circuit split: GENERAL RULE — NON-TRANSFERABLE: the traditional rule is that a shop right, as an implied equitable license, is personal to the employer and cannot be assigned to a third party; this view holds that the shop right arises from the specific employment relationship, not from the general business; EXCEPTION — BUSINESS CONTINUATION: many courts hold that shop rights transfer when the business to which they belong is transferred as a going concern; if an acquirer buys the entire business (not just assets) and continues operating it, the shop right follows because the 'employer' in the equitable sense is the continuing business, not a specific corporate entity; CIRCUIT SPLIT: some circuits hold shop rights non-transferable absolutely; others allow transfer when the shop right is integral to the business being acquired; PRACTICAL GUIDANCE FOR TRANSACTIONS: when acquiring a company, due diligence should assess: (a) whether key patents might be held as shop rights (employee invention without a formal assignment); (b) whether the employees are still employed or have left; (c) whether valid IAAs cover the relevant inventions; IF IN DOUBT — OBTAIN ASSIGNMENT: the cleanest solution is to obtain a formal patent assignment from the employee before closing the transaction; converting a potential shop right into a written assignment eliminates transfer uncertainty; PATENT PORTFOLIO DUE DILIGENCE: shop rights that are not assignable can significantly reduce the value of a patent portfolio being acquired; a patent owned by a former employee where the acquirer only has a shop right cannot be enforced to exclude others.