Property, intangible

a blog about ownership of intellectual property rights and its licensing

Dodged a Bullet

Awhile back I titled a blog “Pay Attention to This One.” People did.

You can read in more detail about the facts in the appeals court opinion blogged here, but the crux is that an inventor had an oral agreement with his employer that he would be paid a bonus for his inventions in exchange for his assignment of the patents to his employer. After several years the employer said that it was restructuring the bonus program so stopped paying, but the inventor in good faith continued to assign the patents while waiting for the company to put a new program in place. The company never did, the inventor sued, and convinced the appeals court that he could elect rescission of the patent assignments. The Supreme Court of North Carolina then heard the case on discretionary review.

I commented that “the result is pretty eye-opening” and apparently others agreed. The North Carolina Chamber of Commerce, North Carolina Association of Defense Attorneys, North Carolina State University, Qualcomm, Cisco Systems, Microsoft, and Cree filed amici briefs in the case and the Supreme Court of North Carolina has reversed.

There are other issues in the case that take up most of the opinion (North Carolina Wage and Hour Act and North Carolina Retaliatory Employment Discrimination Act). This is the rescission part (citations and quotation marks removed):

Finally, we address defendants’ argument that plaintiff is not entitled to rescission. Defendants argue that plaintiff is not entitled to rescission because monetary damages provide plaintiff with an adequate remedy, and because rescission would return plaintiff to a status quo that never existed. We agree.

Rescission is an equitable contract remedy that differs from its legal counterparts. While legal remedies generally compensate the non-breaching party as if there were no breach, rescission treats both parties as if there were no contract. As with all equitable remedies, rescission will not lend its aid in any case where the party seeking it has a full and complete remedy at law. A party may pursue rescission only if there is a material breach of the contract going to the very heart of the instrument.

The Court of Appeals incorrectly applied the test for rescission. The court held that Scenera’s failure to pay plaintiff his patent bonuses was prima facie evidence of a material breach, and, because defendants breached the contract materially, plaintiff could pursue rescission. But, rescission cannot be the remedy for every material breach. A party may pursue rescission only when a material breach occurs and all legal remedies falls short of compensating the injured party for its loss.

Here, although defendants materially breached their contract with plaintiff, monetary damages sufficiently compensate plaintiff for his loss. Plaintiff’s entire claim is that defendants owe him $5,000 to $10,000 for each patent he created while employed at Scenera. Defendants owed plaintiff no other obligation under the contract, and monetary damages provide plaintiff with a full and complete remedy.

To hold otherwise would seriously undermine the rationale of the hired-to-invent doctrine. As this Court explained in Speck, an employer takes a risk when hiring an employee to invent, because the employer has no guarantee of a return on its investment. If an employee is hired to invent but could later rescind that agreement and claim ownership of inventions made during his or her employment, the employee would end up in a far better position, and the employer in a far worse position, than when the parties reached their original bargain. The employer’s risk would increase exponentially, thereby discouraging businesses and universities from undertaking valuable research efforts that could benefit our State and Nation.

For these reasons, the Court of Appeals’ holding that plaintiff may pursue rescission is reversed.

Morris v. Scenera Research, LLC, No. 429PA13 (N.C. S. Ct. June 10, 2016).

Creative Commons License
This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.

Share Button

Leave a Reply

Your email address will not be published. Required fields are marked *