Employee Invention Assignment Agreements Face Stricter Scrutiny Under New York Employee Protection Laws

Overview

Employment agreements, particularly intellectual property rights assignment provisions, are essential tools for employers to secure their valuable intellectual property assets. Well-crafted IP assignment provisions usually ensure that any invention created by an employee during their employment automatically belongs to the employer. However, new employee-protection laws, such as New York Labor Law Section 203-f (“Section 203-f”), require employers to reevaluate and carefully review the IP assignment provisions in agreements with their employees to address how “inventions” are defined and handled.

Specifically, Section 203-f enacted in 2023 in New York renders unenforceable a provision in an employment agreement that would require an employee to assign to the employer the employee’s rights to inventions that:

The employee developed entirely on the employee’s own time and
Without using the employer’s equipment, supplies, facilities, or trade secret information.

However, there are some exceptions to this blanket prohibition, and employers can still require an assignment from the employee under one of two conditions, namely if the invention in question:

Relates directly to the employer’s actual or “demonstrably anticipated” research or development (“at the time of conception or reduction to the employer’s business”) or
Results from any work an employee performs for the employer.

Suppose an engineer of a large motor vehicle company that focuses on sports car production signed an employment agreement assigning their inventions to the company and works on developing automobile-related products as part of their job duties. After work hours, the engineer continues working on this project using all information available as part of their job duties. The result of this work will fall under either exception, and the company would likely have valid ownership rights to the inventions created by the engineer. However, if the engineer, without using any company’s resources or confidential information, creates an innovative motorcycle in their garage, the company would likely be unsuccessful in claiming any ownership rights on this unrelated invention.

The most challenging cases, however, would arise when an employee uses certain confidential information or resources of the employer (e.g., engineer had access to auto manufacturer employer information on how to use a transmission to improve fuel mileage and acceleration in a car) to work on otherwise an unrelated project (e.g., development of motorcycles with certain similar features) or, quite the opposite, creates on their own a substantially similar development (e.g., works on automobile’s safety improvements) but based on totally different information and sources than those provided by the employer. In these not so clear-cut cases, the chances for the employer to secure the rights on the developed IP asset directly depend on the proper drafting of the IP assignment provisions as well as formalization of other employment-related and confidentiality documents. Overall, Section 203-f impacts agreements with employees involved in development and production requiring employers to carefully review all processes aimed at protecting assets.

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Key Takeaways

Employers might benefit from reviewing and redrafting specific provisions in employment agreements (e.g., specifying certain definitions (such as “invention”) and including clear severability provisions). Also, it might be helpful to ask employees at the time of hiring to disclose any prior and current independent inventions that might arguably be related to the company’s business, to make clear that the identified inventions are outside the scope of the employee’s obligation to assign inventions to the employer.
There is little guidance on the scope of “freedom to invent” statutes even though New York and ten other states (California, Delaware, Illinois, Kansas, Minnesota, Nevada, New Jersey, North Carolina, Utah, and Washington) have enacted similar statutes. We will see whether emerging case law interpretations will vary substantially from state to state.
Section 203-f uses the term “invention” but does not define it. Although “inventions” are typically considered within the realm of patent law, there are both patentable inventions and non-patentable inventions. Courts might interpret this term broadly to include any employee creations (e.g., designs, software code, ideas, etc.), whether patentable or not. It may require some case law development to assist in understanding what “invention” means.
It is in the realm of possibility that courts may apply Section 203-f to contracts with non-W2 employees if, under traditional totality-of-the-circumstances analysis, the degree of an employer’s control of these employees demonstrates that they are not merely independent contractors.
Section 203-f does not create a private right of action and thus is likely to arise in the case where an employer sues the employee (or former employee) to enforce its right of assignment. Nor does Section 203-f specify any other remedies, except with respect to the enforceability of the IP assignment. Section 203-f is likely to be implicated in patent infringement, trade secret, and idea misappropriation actions involving employees’ inventions.
Before enacting Section 203-f, in case of disputes involving employees’ inventions, employers might rely on several defenses, including the “shop right” doctrine, which allows employers to use employees’ inventions that are created with the use of employer’s time, equipment and resources, although it does not grant any exclusive rights on such inventions. However, in light of the Section 203-f requirements, courts might interpret the “shop right” requirements more restrictively and preclude employers from using employees’ inventions that are not related or anticipated, although created with the use of certain employers’ resources. This concern might be especially worrying in case an employer uses overly broad language in the assignment agreement and courts might interpret this language under Section 203-f as preempting the “shop right” doctrine.

Employee Invention Assignment Agreements Face Stricter Scrutiny Under New York Employee Protection Laws

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Robert Isackson

Vera Glonina