What Can a Company Do with Patents?

You assigned the Patent rights to your idea to an entity. What can the entity, as the new owner, do with them? Who in the entity makes the decisions about what happens to your patent and your idea?

The answers to those two questions can vary depending on the surrounding circumstances. To make the differences clear, we can break down the basic and typical scenarios like this

1.Inventor assigns Intellectual Property (IP) rights to an existing employer;
2.Inventor forms an entity and assigns IP rights to it;
3.Inventor contributes IP rights as value to a new or existing entity (such as a new startup), in exchange for equity, where other equity holders are also present.

1. Inventor assigns IP rights to an existing employer

What can the employer do with the IP you assigned to the employer?
1.Use the IP to develop something of value that the company can use or sell.
2.Sell or license the IP rights to a third-party.
3.Hold the IP rights but do nothing with them.

Who can make decisions about what the company can do with the IP you assigned?
•In short: Your boss. Or his boss. Ultimately, if the IP is very important and valuable to the business, the CEO of the company or even the Board of Directors will make the decision.

Typically, an inventor would assign IP rights to his employer simply because he is forced to do so by an employment agreement. Many companies, large and small, who invest in Research and Development (R&D) draft employment agreements to force all IP procured by an employee, in the scope of employment, to be assigned to the company.

This may seem harsh, but consider the employer’s perspective. If an employee uses the resources of his employer (including time paid for, equipment used, and knowledge gained) to develop an idea, the employer may have a legitimate claim in benefitting from such investment. So, if you have an employment agreement with the company you work for, read it carefully and know what it says about your personal IP rights.

Some companies provide bonus compensation for employees when patents are filed on the employees’ behalf. In certain countries, this bonus compensation is mandatory. In the United States, it is not.

2. Inventor forms an entity (with the Inventor as the sole owner) and assigns IP rights to it

What can the entity do with the IP you assigned?
•Anything the inventor wants to do with it. Since the Inventor is the sole owner of the entity, the Inventor can dictate what the entity does or does not do with the IP it owns.

Who can make decisions about what the company can do with the IP you assigned?
•Again, the Inventor, as the sole owner of the entity.

However, if the Inventor hires managers and/or employees to work for the entity he owns, the managers and/or employees can take actions involving the IP that they are authorized to do by the Inventor.

The typical scenario here is that the inventor creates an idea and then forms an entity in the hopes of developing the idea into a functioning business or simply to license the IP rights. The Inventor then patents the idea and assigns the IP rights to the entity that he solely owns and controls.

3. Inventor contributes IP rights as value to a new or existing entity (such as a new startup), in exchange for equity, where other equity holders are also present.

What can the entity do with the IP you assigned?

Just as with the employer example, this entity can also:
1.Use the IP to develop something of value that the company can use or sell.
2.Sell or license the IP rights to a third-party.
3.Hold the IP rights but do nothing with them.

Who can make decisions about what the company can do with the IP you assigned?

Here, the decision about what the entity does with the IP may depend on:
1.A written agreement involving the Inventor, the entity, and the other shareholders. This can be part of the Shareholder/Member/Partner Agreement between the equity holders, or just a separate written contract between these parties. The agreement spells out who makes the decision.
2.The overall ownership percentages that each equity holder owns. The majority of the entity owners decide what the entity does. This can be augmented by the By-Laws for the entity, which dictates how large a majority is required to make a decision involving IP rights (ie. 51%; 75%; Unanimous Consent, etc.)
3.Delegation of Authority. If the entity has a governing Board of Directors that the shareholders or members elect, then the Board would typically decide what to do with the entity’s IP rights. Additionally, the Board or sometimes the entity owners can give authority to single person, such as a company officer to make the decision as well.

In this scenario, it is fairly common for an Inventor to start a business together with other people. Often, the Inventor contributes the idea or even a patent, while others contribute money and/or their personal services.

Such a business can be structured in many different ways. To protect his interests, he Inventor should know how the entity is structured; read and understand the documents involved; and make sure that all agreements and rights are outlined in writing.

In subsequent articles, we will address assigning rights to specific entity types; the decision-making processes typically found in those entities; and the significance of various types of contracts.

If you are interested in more detail related to your situation it is best to speak with an attorney.