Careful documentation of inventive activity during the early stages of a spinout are important to avoid legal complications.
Patents can form an essential part of the commercial success of a spinout. Patents can give the company an exclusive right to its point of differentiation, creating barriers to entry that may block later competitors from selling the same goods or services. Those barriers to entry may free the spinout from price competition and increase market share, potentially increasing its value by multiples far in excess of values driven by other assets.
However, in order for them to be effective it is critical to ensure that the spinout can demonstrate the right to own or use the rights. It is common for title to the patents for the initial inventions made to be retained by the parent university so they have to be licensed to the spinout, but it is also common for later patents to be filed by the spinout, in the name of the spinout, for inventions originating wholly from company resources.
Regardless of whether a patent originated in the name of the university and is licensed to the spinout, or originated within the spinout, that patent may contribute to the commercial success of the spinout. In either case, in-licensed or company-owned patents play a role in protecting the university’s investment and driving future returns, although in the former case, the licences need to be robust enough to satisfy later investors and in the latter case it is important for the spinout to ensure that the patents are employee-made or are the subject of clear assignments.
It is common for a spinout to have a mix of both in-licensed and company-sourced patents. Not surprisingly, when an academic researcher becomes a spinout founder, those patents may – broadly speaking – have overlapping subject matter. In fact, a researcher will often continue their principal research in the academic lab while also serving part-time as a consultant to the spinout. It may also occur that other personnel from the same academic lab may work with the spinout at early stages. It may also be the case that personnel from a number of different institutions are involved in the research work which leads to the invention especially when consortia are created for the purpose, often funded by government grants.
In whatever way a new invention with potential commercial value is made, the best use of that invention can be made by avoiding uncertainty as to ownership and putting any resultant patents into the hands of the spinout through the correct legal mechanisms.
For university employees, invention ownership is often governed by an employment agreement or handbook. Depending on local laws, those documents either supplement laws pursuant to which inventions made by employee-researchers belong to the employer-university or create obligations to assign any inventions made within the scope of employment or using university resources to the university. It is recommended for all spinouts to use employment agreements containing obligations and clauses that assign inventions made in the course of employment or using the employer’s resources to the spinout. It is also important that consortium agreements which govern the roles and responsibilities of the participants are clear about who owns what and what the owners are entitled to do with the rights they end up with.
For any new invention made during periods when personnel may be working both with the university and with the spinout, the spinout can avoid having a cloud of uncertainty over commercially-important legal rights by carefully adopting best practices for documenting and assigning inventorship and by communicating candidly with the university’s technology licensing office.
Scientists at the spinout may discuss the benefits of an invention within the walls of a newly-rented business space. But they should be mindful of whether the legal definition of invention was met at the university or in the new business. For a patent in the United States, invention is defined as “the formation in the mind of the inventor, of a definite and permanent idea of the complete and operative invention, as it is thereafter to be applied in practice.” (see: Burroughs Wellcome Co. v. Bar Labs., Inc., 40 F.3d 1223, 1227-1228 (Fed. Cir. 1994)).
The way in which an invention is made, and where it is made, may also affect entitlement to it under English law and that of other European countries. In consequence, the spinout, like the university, should make it the practice for inventors to document inventive activities with records that show where and in what capacity the invention is made.
A familiar form of such record-keeping is the laboratory notebook of the research lab, made and witnessed contemporaneously with scientific inquiry. Such practices for documentation of invention have been discussed. See, for example, Crowell, 2007, Documentation of Inventions, In Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices, Krattiger, al. Eds., Oxford, UK (the abstract of that book is available here).
By the careful documentation of inventive activity to such standards, both in the university lab and in the spinout’s facilities, and by the careful application of the invention assignment provisions of employment agreements and consortium agreements and a good understanding of the legal process, the stakeholders can ensure that patents are filed in the name of the entity that has legal and equitable rights in the invention.
Those practices will avoid disputes about patent ownership. Both the university and the spinout benefit from having the patent name the correct applicant. Each party should avoid future disputes about invention ownership or patent entitlement by carefully documenting the inventorship and the application of assignment and licensing obligations. Such best practices will create a clear chain-of-title for both spinout-owned and in-licensed patents, ensuring that the patents can be used to the commercial benefit of the spinout. Because correct documentation of inventorship and patent ownership will give security to future investors, assist in the enforcement of the patent rights against competitors and promote the commercial success of the spinout, those practices are good for the returns of university ventures.