Megha Manjunath and Doug Portnow, Schwegman, Lundberg & Woessner03.07.19
It is often more cost effective for a medical device company to outsource product development , component manufacturing, or assembly work to a contract manufacturer (CM) since the CM often has the proper equipment, technical expertise, and experience. Many medical device companies and CMs work together in mutually rewarding business relationships that can last for many years. In some situations, however, the relationship can quickly sour and may end up in a legal dispute that can consume time, money, and emotional energy from both sides.
One such battle can involve the ownership of intellectual property (IP) developed during a business relationship between the device company and the CM. The problem may occur when one of the companies invents something related to the project the two companies are working on together, and that company files a patent application on the invention. If certain considerations are not addressed upfront in contractual agreements, disputes can result that involve complex legal issues, including ownership of the patent. Further, the ill will generated when one company feels the other company misappropriated an invention can be fatal to the relationship.
This article’s focus is on patent ownership principles. Although not exhaustive, there are some suggested practices companies can take to preserve their intellectual property rights. It is always advised, however, to communicate with your IP counsel to ensure adequate protection of your company’s inventions.
A Brief Introduction to Patent Law
The United States patent laws were founded in the U.S. Constitution. A patent provides its owners the right to exclude others from making, using, selling, or offering to sell the patented invention in the United States. This right is provided in exchange for full disclosure of the invention. The grant of a patent incentivizes creation and rewards disclosure of the invention. Disclosure of the invention can be instrumental in furthering innovation by others. Thus, the patent system strives to promote innovation rather than encouraging inventors to keep their scientific discoveries a secret for a competitive advantage.
Inventorship vs. Ownership
In the United States, a patent, by default, is granted to the inventor. Therefore, in the default case, the inventor is also the owner of the patent. The inventor, however, may assign his or her interest in the patent to another entity, such as another person or company. In that case, the patent owner may be different from the inventor. Inventorship and ownership of patents are distinct, yet often intertwined, issues.
An inventor is an individual who conceived of the invention claimed in the patent. The inventor, however, is not necessarily the same person who reduced the invention to practice. Thus, if a person implements an invention (e.g., codes or builds) under the direction of someone else who conceived the actual invention, then that person does not qualify as an inventor.
An owner of a patent enjoys all the rights granted by the patent without requiring approval from a co-owner. For example, an owner can license patent rights to third parties, sell the patent, or sue anyone who infringes the patent.
To ensure your company is the sole owner of its patents, it is important to have thorough agreements that address assignment of IP. Without an agreement, the line between ownership and inventorship may become blurred and cause complications in patent enforcement.
Potential IP Problems
Following are three hypothetical scenarios in which a medical device company enters into a business relationship with a CM for the manufacture of a medical device.
In the first example, a company provides the CM with design specifications of the device and the contract manufacturer builds the device as directed. The device company files a patent application on the device. The contract manufacturer demands a share of patent rights. Here, the CM has not contributed to the conception of the invention. Instead, the CM has simply implemented the invention under the direction of the device company. The contract manufacturer is not an inventor and has no ownership rights to the patent absent any agreement stating otherwise.
In the second example, the CM builds the part as directed. An employee of the CM discloses details of the device to a large company that builds the device and adds functionality to the original device. The large company files a patent on the modified device. The first medical device company subsequently files a patent on the original device. Here, the first medical device company will suffer from a loss of patent rights because it did not file a patent in a timely manner. The United States patent system follows a “first to file” rule that grants the patent to an inventor who is first in time to file, and thus the large company will prevail.
Finally, for the third example, assume the CM builds the device but adds functionality the medical device company did not originally conceive in its initial design specifications. The device company files a patent application directed to the device as disclosed by the design specifications and the added functionality. The contract manufacturer demands a share of patent rights. In this scenario, an employee of the CM has now contributed to the conception of the invention, and thus is an inventor. If this employee is obligated to assign the invention to the CM, the CM is now a joint owner of the patent absent any agreement stating otherwise.
Jointly owned IP refers to IP developed by two or more parties. Here, the CM and the company may have joint ownership of the patent. It is generally advised against owning jointly owned IP for several reasons. Both the CM and the device company may now have full rights to the invention without the consent of the other. Filing and drafting the patent may become more complex and expensive. Both owners may license the patent, thus diluting the overall value of the patent. Differences in intellectual property law in various jurisdictions may also add complexity to patent enforcement if either the company or the contract manufacturer are based in a foreign country.
Standard Solutions
As has been demonstrated from the examples, it is important to include basic conditions in any agreement between a company and a contract manufacturer regarding intellectual property. On the other hand, filing a patent application on an invention before outsourcing development work or manufacturing can be an initial safeguard. Experienced legal counsel can work with a company to draft a patent application directed to the invention and foreseeable variations of the invention, thereby securing IP rights and preventing any future confusion. If filing a patent ahead of time is not possible, consider including terms in the agreement about breach of confidential information in a non-disclosure agreement.
Regardless, ownership of any inventions conceived during the business relationship is a critical aspect that must be addressed. The contract manufacturer may feel the inventions were conceived of using their resources or their employees, and therefore, feel they should own the invention. On the other hand, the medical device company may feel that without having engaged the CM and paying for the work, no inventions would have even been developed by the contract manufacturer, and hence, they should own the invention. Therefore, ownership should be negotiated early in any relationship.
One potential compromise is the granting of a license to the other party to allow them to have access to the technology. The scope of the license may be restricted in terms of field of use, a time limit, geographical constraints, or any other limitation that can be negotiated. These licenses are often royalty-free and exclusive, but in some situations, the license may not be exclusive and may require payment of royalties.
Other broad terms can be addressed upfront, including the ability to assign the intellectual property or sublicense it with or without consent by the other party. These are only the very basic licensing terms that should be addressed, and it may be appropriate to address other licensing terms. Thus, it would be prudent to have seasoned legal counsel to guide you through this process.
Other Considerations
One other issue both parties should keep in mind is most governments have complex rules about exporting technology out of the host country. This is most relevant to the medical device company or the CM in terms of where the invention was conceived and the citizenship and residency of the inventors. Some countries will require patent applications to be filed in the country where the invention was conceived or where the inventor is a citizen, rather than just simply filing in the United States first without obtaining the required government approvals. Thus, one party may file a patent application in a foreign country while the other party is completely unaware of the action.
Working with universities can also have a unique set of complex issues related to ownership of the IP. Therefore, it is recommended to work with experienced patent counsel to develop agreements that remove the risk of IP ownership issues when working in this type of relationship.
Conclusion
Although outsourcing to contract manufacturers may pose a risk to your company’s intellectual property rights, it is important to realize there are several safeguards in place that, if properly instituted, can greatly minimize any potential harm. An agreement between the two parties that outlines basic agreed upon terms, such as ownership and access to intellectual property developed during the business relationship, will go a long way in resolving potential future legal conflicts.
Megha Manjunath is a registered patent agent and associate at Schwegman, Lundberg & Woessner. Her practice focuses on prosecuting patents relating to the software arts. Manjunath received her J.D. degree from Santa Clara University and her B.S. degree in computer science from the University of California, Los Angeles.
Doug Portnow is a registered patent attorney and principal at Schwegman, Lundberg & Woessner. His practice focuses primarily on medical device patent preparation, prosecution, and intellectual property due diligence. Prior to entering the legal profession, Portnow was a medical device engineer designing various medical products.
One such battle can involve the ownership of intellectual property (IP) developed during a business relationship between the device company and the CM. The problem may occur when one of the companies invents something related to the project the two companies are working on together, and that company files a patent application on the invention. If certain considerations are not addressed upfront in contractual agreements, disputes can result that involve complex legal issues, including ownership of the patent. Further, the ill will generated when one company feels the other company misappropriated an invention can be fatal to the relationship.
This article’s focus is on patent ownership principles. Although not exhaustive, there are some suggested practices companies can take to preserve their intellectual property rights. It is always advised, however, to communicate with your IP counsel to ensure adequate protection of your company’s inventions.
A Brief Introduction to Patent Law
The United States patent laws were founded in the U.S. Constitution. A patent provides its owners the right to exclude others from making, using, selling, or offering to sell the patented invention in the United States. This right is provided in exchange for full disclosure of the invention. The grant of a patent incentivizes creation and rewards disclosure of the invention. Disclosure of the invention can be instrumental in furthering innovation by others. Thus, the patent system strives to promote innovation rather than encouraging inventors to keep their scientific discoveries a secret for a competitive advantage.
Inventorship vs. Ownership
In the United States, a patent, by default, is granted to the inventor. Therefore, in the default case, the inventor is also the owner of the patent. The inventor, however, may assign his or her interest in the patent to another entity, such as another person or company. In that case, the patent owner may be different from the inventor. Inventorship and ownership of patents are distinct, yet often intertwined, issues.
An inventor is an individual who conceived of the invention claimed in the patent. The inventor, however, is not necessarily the same person who reduced the invention to practice. Thus, if a person implements an invention (e.g., codes or builds) under the direction of someone else who conceived the actual invention, then that person does not qualify as an inventor.
An owner of a patent enjoys all the rights granted by the patent without requiring approval from a co-owner. For example, an owner can license patent rights to third parties, sell the patent, or sue anyone who infringes the patent.
To ensure your company is the sole owner of its patents, it is important to have thorough agreements that address assignment of IP. Without an agreement, the line between ownership and inventorship may become blurred and cause complications in patent enforcement.
Potential IP Problems
Following are three hypothetical scenarios in which a medical device company enters into a business relationship with a CM for the manufacture of a medical device.
In the first example, a company provides the CM with design specifications of the device and the contract manufacturer builds the device as directed. The device company files a patent application on the device. The contract manufacturer demands a share of patent rights. Here, the CM has not contributed to the conception of the invention. Instead, the CM has simply implemented the invention under the direction of the device company. The contract manufacturer is not an inventor and has no ownership rights to the patent absent any agreement stating otherwise.
In the second example, the CM builds the part as directed. An employee of the CM discloses details of the device to a large company that builds the device and adds functionality to the original device. The large company files a patent on the modified device. The first medical device company subsequently files a patent on the original device. Here, the first medical device company will suffer from a loss of patent rights because it did not file a patent in a timely manner. The United States patent system follows a “first to file” rule that grants the patent to an inventor who is first in time to file, and thus the large company will prevail.
Finally, for the third example, assume the CM builds the device but adds functionality the medical device company did not originally conceive in its initial design specifications. The device company files a patent application directed to the device as disclosed by the design specifications and the added functionality. The contract manufacturer demands a share of patent rights. In this scenario, an employee of the CM has now contributed to the conception of the invention, and thus is an inventor. If this employee is obligated to assign the invention to the CM, the CM is now a joint owner of the patent absent any agreement stating otherwise.
Jointly owned IP refers to IP developed by two or more parties. Here, the CM and the company may have joint ownership of the patent. It is generally advised against owning jointly owned IP for several reasons. Both the CM and the device company may now have full rights to the invention without the consent of the other. Filing and drafting the patent may become more complex and expensive. Both owners may license the patent, thus diluting the overall value of the patent. Differences in intellectual property law in various jurisdictions may also add complexity to patent enforcement if either the company or the contract manufacturer are based in a foreign country.
Standard Solutions
As has been demonstrated from the examples, it is important to include basic conditions in any agreement between a company and a contract manufacturer regarding intellectual property. On the other hand, filing a patent application on an invention before outsourcing development work or manufacturing can be an initial safeguard. Experienced legal counsel can work with a company to draft a patent application directed to the invention and foreseeable variations of the invention, thereby securing IP rights and preventing any future confusion. If filing a patent ahead of time is not possible, consider including terms in the agreement about breach of confidential information in a non-disclosure agreement.
Regardless, ownership of any inventions conceived during the business relationship is a critical aspect that must be addressed. The contract manufacturer may feel the inventions were conceived of using their resources or their employees, and therefore, feel they should own the invention. On the other hand, the medical device company may feel that without having engaged the CM and paying for the work, no inventions would have even been developed by the contract manufacturer, and hence, they should own the invention. Therefore, ownership should be negotiated early in any relationship.
One potential compromise is the granting of a license to the other party to allow them to have access to the technology. The scope of the license may be restricted in terms of field of use, a time limit, geographical constraints, or any other limitation that can be negotiated. These licenses are often royalty-free and exclusive, but in some situations, the license may not be exclusive and may require payment of royalties.
Other broad terms can be addressed upfront, including the ability to assign the intellectual property or sublicense it with or without consent by the other party. These are only the very basic licensing terms that should be addressed, and it may be appropriate to address other licensing terms. Thus, it would be prudent to have seasoned legal counsel to guide you through this process.
Other Considerations
One other issue both parties should keep in mind is most governments have complex rules about exporting technology out of the host country. This is most relevant to the medical device company or the CM in terms of where the invention was conceived and the citizenship and residency of the inventors. Some countries will require patent applications to be filed in the country where the invention was conceived or where the inventor is a citizen, rather than just simply filing in the United States first without obtaining the required government approvals. Thus, one party may file a patent application in a foreign country while the other party is completely unaware of the action.
Working with universities can also have a unique set of complex issues related to ownership of the IP. Therefore, it is recommended to work with experienced patent counsel to develop agreements that remove the risk of IP ownership issues when working in this type of relationship.
Conclusion
Although outsourcing to contract manufacturers may pose a risk to your company’s intellectual property rights, it is important to realize there are several safeguards in place that, if properly instituted, can greatly minimize any potential harm. An agreement between the two parties that outlines basic agreed upon terms, such as ownership and access to intellectual property developed during the business relationship, will go a long way in resolving potential future legal conflicts.
Megha Manjunath is a registered patent agent and associate at Schwegman, Lundberg & Woessner. Her practice focuses on prosecuting patents relating to the software arts. Manjunath received her J.D. degree from Santa Clara University and her B.S. degree in computer science from the University of California, Los Angeles.
Doug Portnow is a registered patent attorney and principal at Schwegman, Lundberg & Woessner. His practice focuses primarily on medical device patent preparation, prosecution, and intellectual property due diligence. Prior to entering the legal profession, Portnow was a medical device engineer designing various medical products.
