Property, intangible

a blog about ownership of intellectual property rights and its licensing

Pay Attention to This One

Ok, here’s one every in-house patent attorney should pay attention to. It’s a case from North Carolina state court, but has much wider-reaching ramifications. Maybe it’s a fact pattern that doesn’t arise too often, but the result is pretty eye-opening.

Plaintiff Robert Morris was the first employee at the defendant company Scenera Research, LLC. There was no written employment agreement and Morris testified that inventing was not part of his regular employment duties. He was, though, a prolific inventor for the company and was compensated for inventions by way of a bonus, $5,000 when the application was submitted and $5,000 when the patent issued.

In 2007 Morris voluntarily stopped the bonuses with the understanding that the company was coming up with an alternate bonus structure, but he continued to assign his patents to Scenera. They couldn’t come to terms on a new bonus agreement and Morris ended up leaving the company (whether he was fired or quit was disputed). Morris brought a claim under the North Carolina Wage and Hour Act for the unpaid bonuses.

A jury awarded Morris $210,000 for the bonuses for patent applications filed or issued between January 1, 2008 and June 17, 2009 (the date he left the company) and $675,000 for patent applications pending as of June 17, 2009 (at $10K a pop, “prolific” is an understatement). Morris had prayed that he be allowed to elect between rescission of the patent assignments and damages, but the trial court held that Scenera was the owner of the patents. An appeal followed.

There was no dispute there was a stand-alone oral “patent-bonus agreement” (PBA) to compensate Morris for his patents. The remedy of recission—”an abrogation or undoing of the contract from its beginning”—is available:

[W]here there is a material breach of the contract going to the very heart of the instrument, [i.e., a dependent covenant,]…. A covenant is dependent where it goes to the whole consideration of the contract; where it is such an essential part of the bargain that the failure of it must be considered as destroying the entire contract; or where it is such an indispensable part of what both parties intended that the contract would not have been made with the covenant omitted. A breach of such a covenant amounts to a breach of the entire contract; it gives to the injured party the right to sue at law for damages, or courts of equity may grant rescission in such instances if the remedy at law will not be full and adequate.

Rescission … is allowed to promote justice. The right to rescind does not exist where the breach is not substantial and material and does not go to the heart of the agreement.

The Court of Appeals found that

Scenera’s obligation to pay Morris for the patents submitted to and issuing from the patent office was a covenant on which the oral contract between the two parties depended. Failure to fulfill that covenant constitutes a material breach. The fact that Scenera failed to pay bonuses to Morris for eighteen months is relevant only to the extent that it provides a cap on the number of times Defendants breached; it does not affect the materiality of those breaches. Similarly, the adequacy of money damages is not relevant to the materiality of the breach. Our Supreme Court made it clear in Wilson that a party may “elect” to rescind an agreement when there is a material breach of this nature.

Whether Morris had been “hired to invent” didn’t matter; Scenera failed to pay, which was a material breach of the PBA. The Court of Appeals therefore remanded the case to the district court for reconsideration of Morris’ claim for rescission.

There’s a lot more going on in this case worth reading, particularly if you administer a bonus program for patents. Whether Morris was entitled to the bonuses after he left the company, whether the damages were “calculable” as defined by the Wage and Hour Act, and whether “calculability” is a question of fact or law were all covered in the opinion.

Morris v. Scenera Research, LLC, 747 S.E.2d 362 (N.C. 2013).

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