Shop Rights: What are they and can they be assigned?

“Shop rights” arise when an employee uses an employer’s resources to create an invention, but the employer does not own the invention. A shop right permits the employer to use a patented invention for its own business as a quid pro quo when the inventor used the employer’s resources to develop the invention.

The concept of a shop right is not found in any law.  Instead, it is a judicial creation that grew out of equitable principles. Because of this, shop rights are fact-specific. When determining whether a shop right exists in a particular situation, a court will consider several factors to determine whether equity and fairness should entitle the employer to use the invention without paying a royalty.  These factors include “the contractual nature of the relationship between employer and employee, whether the employee consented to the employer’s use of the invention, and whether the employee induced, acquiesced in, or assisted the employer in the use of the invention.”  U.S. v. Dubilier Condenser Corp., 289 U.S. 178 (1933).

Shop rights can be valuable in situations where an inventor has not executed an assignment document for a patent and the inventor is either unavailable or refuses to assign the patent. However, a shop right is not a substitute for an assignment. Instead, shop rights are essentially nothing more than a defense to patent infringement for the employer. Some courts refer to it an implied license, while others call it a form of equitable estoppel.  In either situation, a shop right is non-exclusive, royalty-free, and personal to the employer.

The last element listed above — personal to the employer — can significantly diminish the value of a shop right.  A personal right typically cannot be assigned or sublicensed. The Federal Circuit recently discussed this limitation in a nonprecedential opinion in Beriont v. GTE Laboratories, Inc. (No. 2013-1109, 8/9/13).  In the case, GTE received an assignment of the patent from the inventor in 2005, but the inventor asserted that GTE’s rights prior to the assignment infringed the patent.  The Court noted that GTE’s activity prior to 2005 was covered by the shop rights doctrine, but that it was unclear whether all that activity was within the scope of GTE’s personal shop rights.

Specifically, the court noted that “use of the patent invention by GTE outside the scope of its own business” would not be within GTE’s shop rights .  The Court also noted that:

the doctrine does not extend to an employer’s sale of the patented invention to an unrelated third-party for the latter’s unfettered use, since the “shop right” belongs only to the employer.

This nonprecedential decision highlights a sometimes difficult due diligence issue for companies and potential buyers in investment and M&A transactions. If a company merely has shop rights to an invention, an asset sale or other transaction in which the company does not remain intact could extinguish shop rights. While the right may remain intact in a merger scenario, or a transaction that involves a transfer of substantially all assets, the lack of a bright-line rule means that all relevant facts should be considered in each situation.

For example, in cases dating back nearly 100 years, courts allowed shop rights to pass from a corporation to the successor of its entire business and good will. (See McKinnon Chain Co. vs. American Chain Co., Inc., M.D. Pa 1919; see also Neon Signal Devices Inc. v. Alpha Claude Neon Corp., W.D. Pa 1932.)  In contrast, an opinion issued earlier this year, a court in Massachusetts declined to extend shop rights to an entity that purchased the original shop right holder’s assets in a bankruptcy proceeding.  (See U.S. Solartech v. J-Fiber GmbH, D. Mass 2013.)

Parties to a transaction involving shop rights should carefully review the applicable state law and court precedent before assuming that the rights will flow to the successor.  Failure to understand the rights could expose the successor to liability for patent infringement.

Because of this, companies engaged in M&A transactions who rely on shop rights should obtain patent assignments wherever possible.  If an assignment is not possible, the parties should consider structuring the transaction in a way that leaves the company intact, such as a stock purchase or merger.  Any asset transfers should be carefully analyzed with an eye toward their potential effect on shop rights.

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