Saturday, August 4, 2012

Supreme Court of South Carolina Addresses Validity of Invention Assignment Clause

Cases addressing invention assignment clauses are few and far between. But 2012 has produced two state supreme court decisions in this area of intellectual property law. Earlier this year, Wyoming addressed the matter, and now South Carolina has.

I have discussed this subject infrequently, but assignment clauses often intersect non-compete law. In essence, they provide that any inventions (patentable or not) that an employee develops in association with her employer are the property of the employer. The only real controversial element of these clauses is the holdover or trailer aspect of them - which are found, I'd say, in about half the contracts I've seen. Those holdover clauses bear some passing resemblance to a post-termination non-compete, as they require an employee to assign inventions if they are developed within a period of time - usually 6 months or a year - after termination.

The purpose of holdover clauses is fairly obvious. Assume an employee in product development is working on a rollout of new smart phone technology, whose planned launch is several months away. If she leaves and starts development of a product based on that same technology, an assignment clause without a trailer may not capture this invention. The holdover clause creates a disincentive for an employee to delay or hide work on a technological development, because presumably the employee knows the trailer clause won't allow her to lie in the weeds and exploit it after termination. One can also look at a holdover clause as an extension of an employee's duty of loyalty, in effect providing a remedy in contract for improperly exploiting valuable commercial information after departure.

The Supreme Court of South Carolina in Milliken & Co. v. Morin held that holdover clauses were not restraints of trade subject to the traditional three-part rule of reason. More importantly, they are not strictly construed against the employer. Still, because there is potential for overreaching and for holdover clauses to restrict some competition, courts will assess whether they're reasonable. It's difficult to distinguish between a more lax test of reasonableness (applicable to clauses like an invention assignment holdovers and even non-disclosure covenants) and a three-part rule of reason (applicable to non-competes). In fact, the test that the Court in Morin established sounds almost identical to the non-compete test.

Practically speaking, courts will simply check to see what the economic impact of the holdover clause is on the marketplace. If it looks and acts like a more expansive non-compete, such as a term that is too long (say 5 years) or a clause that is too vague so as to not put someone on notice of its scope, then a court more likely will apply a strict scrutiny test. If the clause looks commercially reasonable and designed to protect an employer's inventions, then a simple reasonableness check almost certainly will uphold the covenant.


Court: Supreme Court of South Carolina
Opinion Date: 8/1/12
Cite: Milliken & Co v. Morin, No. 27154
Favors: Employer
Law: South Carolina

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