• Who Owns the Shop Right?

    by  • October 27, 2012 • patent

    The decision in Ultimax Cement Manufacturing Corp. v. CTS Cement Manufacturing Corp. begins “After a four-week trial in this decade-old patent infringement case, the jury was unable to reach a verdict.” Imagine how deflated the parties and their lawyers were. But the court was able to sort things out on the parties’ renewed motions for judgment as a matter of law, including one on shop right.

    The patent-in-suit was for rapid-hardening, high-strength cement. The owner of defendant CTS Cement, Edward Rice, had been the mentor of the owner of plaintiff Ultimax Cement, Hassan Kunbargi, when Kunbargi was a graduate student at UCLA. Kunbargi then worked for Rice starting in 1985, and by 1987 was working for CTS Cement. He worked on rapid-hardening, high-strength cement. While working for Rice and CTS, Kunbargi participated in a burn experiment known as “Burn One,” or the “Heartland Burn,” which resulted in the production of, in the court’s words, “a novel form of rapid-hardening, high-strength cement.” Kunbargi later was granted U.S. Patent No. 4,957,556 titled “Very Early Setting High Strength Early Cement.” The patent was assigned to plaintiff Ultimax Cement, who sued CTS Cement for patent infringement.

    First, to define a shop right:

    A “shop right” is generally accepted as being a right that is created at common law, when the circumstances demand it, under principles of equity and fairness, entitling an employer to use without charge an invention patented by one or more of its employees without liability for infringement. Guided by these equitable principles, the Federal Circuit has held that “an employer may obtain a shop right in employee inventions where it has contributed to the development of the invention.”

    The plaintiff argued that “shop right requires acquiescence by the employee in the employer’s use of the invention.” If that were true, though, it “would enable employees to prevent employers from acquiring shop rights simply by refusing to consent to the employers’ use of inventions created with the employers’ resources” — an employee’s acquiescence is therefore not required.

    Kunbargi had admitted all the elements needed to prove a shop right. When asked by defense counsel whether “develop[ing] new hydraulic cements … was one of your jobs with Mr. Rice,” Kunbargi responded, “Yes.”  As to whether all the elements of the the patented invention was created while he worked for the defendant, Kunbargi testified:

    Q. [Defense Counsel] All the elements in Claim 9 were at hand at Burn 1, weren’t they?
    A. [Kunbargi] Yes.

    Q: [Defense Counsel] … when was the first time that you observed ultra high-strength early setting cement having a compressive strength on the order of 3000 PSI within one hour?
    A: [Kunbargi] I think when I apply my formula to the production in the Heartland 1988, when I make that demonstration to Ed Rice.
    Q: That was the first time you’d observed that; okay?
    A: If I remember correct, yes. Yes.

    Kunbargi also testified that Rice provided the financing and resources necessary to conduct Burn One  in 1988.

    The only question seemed to be who could claim the shop right. Shop rights are personal and cannot be assigned or transferred. It wasn’t clear whether Kunbargi worked for Rice, CTS Cement, or other companies owned by Rice. However, the Ninth Circuit has held (as has the Supreme Court) that a shop right will pass to a successor business that acquires an entire business of the shop right holder:

    The Court specifically held that attempts to invalidate shop rights based on the “formalities of modern business organization” were “unsuitable to the equitable origins of the shop right concept.” [California Eastern Laboratories v. Gould, 896 F.2d 400, 402 (9th Cir.1990).] Plaintiffs’ argument that CTS could not have held a shop right in the ’556 patent because the shop right was held by Rice himself or entities owned or controlled by Rice elevates the “formalities of modern business organization” over the “equitable origins of the shop right concept.”

    Thus:

    The innovations in cement technology that Plaintiffs claim to have pioneered would not have been possible without the capital and resources that Defendants provided. When all the evidence is viewed in the light most favorable to Plaintiffs, and all inferences and credibility determinations are drawn in Plaintiffs’ favor, the only reasonable conclusion the evidence permits is that Rice and CTS held a shop right in the ’556 patent.

    Ultimax Cement Mfg. Corp. v. CTS Cement Mfg. Corp., No. SACV 02-578 AG (ANx) (C.D. Cal. April 20, 2012).

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