Shop Rights

Shop rights is a common law doctrine (equitable in origin, not statutory) that gives an employer a non-exclusive, royalty-free, irrevocable license to use an employee's patent when the employee developed the invention using the employer's time, resources, or facilities. HOW SHOP RIGHTS ARISE: shop rights arise by operation of law (not by contract) when two conditions are met: (1) the employee developed the invention during the course of their employment; AND (2) the employee used the employer's time, resources, facilities, or materials in developing the invention; the employer need not have directed the employee to create the invention — the mere use of employer resources creates the shop right; WHAT SHOP RIGHTS GIVE THE EMPLOYER: a non-exclusive license to practice the patent — meaning the employer can make, use, sell, and import products practicing the invention; royalty-free — the employer pays nothing to the employee/inventor for using the patent; irrevocable — the employer's license cannot be terminated by the employee, even if the employee later assigns the patent to a third party; non-assignable — shop rights cannot be transferred to a third party (they stay with the original employer); WHAT SHOP RIGHTS DO NOT GIVE: shop rights do NOT give ownership of the patent — the employee remains the patent owner; shop rights do NOT give the right to sub-license to third parties; shop rights do NOT prevent the employee from enforcing the patent against third parties; POLICY BASIS: shop rights are an equitable doctrine preventing unjust enrichment — if an employee used the employer's resources to develop a commercially valuable patent, it would be inequitable to allow the employee to then exclude the employer from practicing it.

The key inquiry for shop rights is whether the employer's resources were used in developing the invention: SHOP RIGHTS ARISE WHEN: the employee developed the invention during working hours while being paid by the employer; the employee used the employer's laboratory, equipment, computers, or materials to develop the invention; the employee used other employees' time (paid by the employer) to develop the invention; the employee was hired to solve the specific problem that led to the invention (though this often also creates ownership rights, not just shop rights); SHOP RIGHTS DO NOT ARISE WHEN: the employee developed the invention entirely on their own time using only their own resources and materials; the invention is in a completely unrelated field from the employee's work (even if developed partly on company time, de minimis use may not trigger shop rights); the employee developed the invention after leaving the company (post-employment activities do not create shop rights); HIRED TO INVENT: if an employee was specifically hired to invent (e.g., a research scientist or engineer whose job description includes inventing), many courts go further than shop rights and find the employer OWNS the resulting patents as a matter of employment contract and agency law — even without an express assignment agreement; this is the 'employed to invent' doctrine (different from shop rights); SHOP RIGHTS vs. EMPLOYED TO INVENT: shop rights = employee owns the patent but employer has a non-exclusive license; employed to invent = employer owns the patent outright (no license needed); THE EMPLOYER'S PREFERRED POSITION: smart employers do not rely on shop rights — they use written IP assignment agreements (see below).

Because shop rights are only a non-exclusive license (not ownership), employers who rely solely on shop rights are in a vulnerable position — the employee can still assign the patent to a competitor or enforce it against third parties. WRITTEN IP ASSIGNMENT AGREEMENTS: the standard approach is to require employees to sign an intellectual property assignment agreement as a condition of employment; a typical IP assignment clause requires: the employee to assign to the employer all inventions, discoveries, and improvements made during the period of employment; assignments covering inventions that: (a) relate to the employer's current or anticipated business; or (b) result from work performed for the employer; SCOPE LIMITATIONS — EMPLOYEE PROTECTION LAWS: some states limit the scope of IP assignment agreements; California (Labor Code § 2870), Washington (RCW 49.44.140), Minnesota, North Carolina, Delaware, and Illinois have statutes protecting employees from over-broad IP assignment clauses; these statutes generally provide that an assignment agreement cannot apply to inventions: developed entirely on the employee's own time; without using the employer's equipment, supplies, facilities, or trade secret information; that do not relate to the employer's business or research and development; CONSULTING AGREEMENTS: similar IP assignment provisions are used in independent contractor and consulting agreements; without such provisions, a consultant who invents something owns the patent (contractor exception to work-for-hire doctrine, which applies in copyright but not patent); WHAT TO DO IF NO AGREEMENT EXISTS: if an employment agreement doesn't address IP ownership, the employer may still have shop rights (non-exclusive license) but may not own the patent; consult counsel about obtaining a written assignment after-the-fact.

Shop rights, while broadly protective of employers, have significant limitations: (1) NON-EXCLUSIVE ONLY: the employer's license under shop rights is non-exclusive; the employee can grant the same or other licenses to third parties, including competitors; this is a major limitation compared to full ownership; (2) NON-ASSIGNABLE: the employer cannot transfer shop rights to a third party; if the employer is acquired, the shop rights may or may not transfer to the acquirer depending on whether the transfer constitutes a 'transfer of the underlying business'; courts are split on whether corporate acquisitions transfer shop rights along with the business; (3) IRREVOCABLE BUT BOUNDED: shop rights cannot be revoked by the employee-inventor; however, they may not survive in all successor contexts; (4) GEOGRAPHIC SCOPE: shop rights typically cover only the jurisdiction where the employment occurred; an employee who develops an invention in the U.S. using U.S. employer resources may give the employer shop rights in the U.S. patent, but not necessarily in foreign patents; (5) NO RIGHT TO SUE INFRINGERS: the employer with only shop rights cannot sue third-party infringers on the employee's patent — only the patent owner (the employee) can sue; WHEN SHOP RIGHTS END: shop rights don't technically 'end' during the patent term — they are irrevocable while the patent is in force; however, if the patent expires or is invalidated, the shop rights become moot; if the employer's business is sold in a manner that doesn't transfer the shop rights, the acquiring entity may not be able to use the former employer's shop rights.

Shop rights are frequently relevant in startup and university-spinout contexts: STARTUP FOUNDERS WHO WERE PREVIOUSLY EMPLOYEES: a common scenario — an employee develops a technology at their employer (using company resources), then leaves and founds a startup based on that technology; if the IP assignment agreement didn't cover the specific invention (or if no agreement existed), the former employer may have shop rights; alternatively, the former employer may OWN the patent if the employee was hired to invent; due diligence for startup investors should always investigate the IP history of founding inventors and whether any prior employers could have shop rights or ownership claims; UNIVERSITY PROFESSORS AND RESEARCHERS: universities typically require faculty and staff to assign patent rights to the university through an IP ownership policy (analogous to an employment IP assignment agreement); university shop rights to student inventions are more complex: graduate students funded on research grants typically must assign inventions; undergraduate students with minimal university resource involvement may retain inventions; many universities publish their IP policies online; FREEDOM TO OPERATE POST-EMPLOYMENT: when a founder or employee leaves and starts a new venture based on prior work, they should conduct a 'freedom to operate' analysis considering: (a) what did the employment agreement say? (b) were employer resources used? (c) does the prior employer claim ownership?; BEST PRACTICE — IP AUDIT AT STARTUP FORMATION: at the time a company is formed (or receives investment), each founder should provide a complete IP history, including prior employment and any inventions developed during prior employment; investors should require representations and warranties that the company owns or has the right to use all material IP free of claims by prior employers.