Property, intangible

a blog about ownership of intellectual property rights and its licensing

Don’t Be Too Agreeable

Plaintiff Tegu is a toy company. It hired defendant Vestal Design Atelier LLC to develop its first toy line.

Vestal created prototypes for Tegu for blocks with embedded magnets.

These are the relevant provisions on ownership of the intellectual property rights in the agreement:

2.0 Ownership of Intellectual Property.

1. Ownership. Intellectual property rights of each party will be governed by the following: For the purpose of this contract, any work product or new invention related to or arising from the Services provided hereunder, including all intellectual property rights created, invented or authored by Contractor [Vestal] in connection with the Services, will be the exclusive property of the Client [Tegu]. The Client will own all right, title and interest in such work product or new invention, except as stipulated in in item 4 below. Contractor hereby assigns all such right, title and ownership to Client.

4. For any work product, invention and/or intellectual property generated under this Agreement that Contractor and Client mutually agree may be patented under a utility (non-aesthetic) patent, Contractor shall own at least 50% of any utility patent generated from the Contractor’s research and design. In addition, Contractor will be granted by Client a fair and agreeable share in revenue generated by commercialization. A separate agreement shall be established in writing, which specifies the precise nature of Contractor’s and Client’s ownership of Intellectual Property rights and share in revenue generated from the commercialization of the invention or Intellectual Property at a time no later than the filing date of the patent application (provisional or full application).

The contract said that Tegu would pay Vestal $7,200 for 90 hours of work and there is no dispute that it was paid.

Tegu wrote to Vestal and informed Vestal that that any patentable invention was on the manufacturing method, which Vestal hadn’t contributed to. Tegu was granted three patents and a lawsuit ensues.

Vestal claimed that Tegu breached the agreement by not giving it partial ownership of the patents and sharing royalties, and also sued for correction of inventorship. Tegu claimed that the language in “item 4” was uneforceable because it was only an agreement to agree.

The court sided with Tegu:

The first sentence of Section 2.4 states that “[f]or any … intellectual property generated under this Agreement that [Vestal] and [Tegu] mutually agree may be patented … [Vestal] shall own at least 50% of any utility patent generated from [Vestal’s] research and design.” It is clear from this language that agreement is required. This language does not predicate Vestal’s ownership simply on the generation of intellectual property. For example, the sentence does not say that, “for any intellectual property generated, Vestal shall own at least fifty percent generated by Vestal’s research and development.” Rather, the parties emphasized that they needed to “mutually agree.” The parties could have adopted a different approach and decided to forego mutual agreement on the patentability of intellectual property. They could have, for instance, used a retrospective approach whereby Vestal had a right to at least fifty percent of any patent that Tegu actually obtained based on Vestal’s research and development. However, the parties instead opted for a prospective approach, wherein the parties were required to determine Vestal’s ownership and revenue share “at a time no later than the filing date of the patent application.” Such obligations were triggered by mutual agreement that certain intellectual property was patentable. Thus, the cooperation between Vestal and Tegu before the patent was filed was necessarily preceded by the parties’ agreement as to patentability.

Moreover, even if the Court could infer from the mandatory language used in Section 2.4 (“shall own,” “will be granted,” and “shall be established”) an enforceable duty on Tegu’s part to grant Vestal a share ownership and revenue, neither Section 2.4 nor any other part of the agreement provides a discernable standard for doing so. Notably, the agreement does not contain a section on remedies in the event Section 2.4 is breached. Although Section 2.4 states that Tegu will grant Vestal a “fair and agreeable share” of revenue, such language provides no guidance as to what would be a “fair” share of revenue under various ownership percentages or how a court would determine whether this fair revenue share would also be “agreeable” to the parties. Even if a court could determine a fair revenue share, the court would still be faced with the lack of any standard for determining the ownership percentage. The Court concludes that Section 2.4 does not indicate that the parties have settled all the essential elements of the agreement or agreed upon a method of settlement. For the Court to enforce Section 2.4 as Vestal requests, the Court would effectively need to write a new section of the contract spelling out the rights of each party and the available remedies in the event that the parties fail to “mutually agree” on patentability. The Court cannot do this, as “the court cannot force parties to come to an agreement.”

With section 2.4 inoperative, all of Vestal’s contract-based claims and its fraud claim failed. There was no quantum meruit claim because Vestal was paid for its work, including for the transfer of ownership of the intellectual property rights created. Finally, its correction of inventorship claim failed because Vestal had not suffered any injury in fact so it did not have standing for the claim.

The agreement is on Vestal’s paper. I wonder if all their agreements have this language or if Tegu had a sharp lawyer. And don’t miss Section 6.6.

Tegu v. Vestal Design Atelier LLC, No. 18-cv-01377-PAB-NRN (D. Colo. Aug. 12, 2019)

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One response to “Don’t Be Too Agreeable”

  1. On a slightly different point, anyone who uses the phrase “mutually agree” has no business drafting contracts.

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