Background

S5640 would amend the New York Labor Law to introduce a new section, § 203-F, in relation to inventions made by employees. Under this new section, employment agreements may not include any provision that requires the employee to assign to their employer any rights in inventions that the employee developed on their own time and without the use of employer equipment, supplies, facilities, or trade secret information. The restriction on assignment would not apply to employee inventions that relate to: (1) the employer's business; (2) the employer's anticipated research; or (3) those inventions that result from the employee's work for the employer. Any provision that violates this restriction will be unenforceable.

Employment contracts, especially those in innovation-driven industries that rely on the ideas of their workforce, customarily include terms requiring employees to transfer rights in their intellectual creations made in the course of their work to the employer. Such provisions are especially important in respect of inventions. While the work-for-hire doctrine automatically vests authorship and copyright with an employer in many common employment scenarios, patents will belong to their inventor absent an assignment, except in very limited circumstances. Accordingly, many template employment agreements contain a provision assigning employee inventions — or creating an obligation for employees to assign them — to the employer.

New York would not be the first state to address the assignment of employee inventions in its labor code. In fact, many states — including California (Cal. Lab. Code § 2870), Illinois (765 ILCS 1060/2(1)), and New Jersey (N.J.S.A. 34:1B-265(a)(1)) — already have laws on their books that are substantially identical to S5640 and prohibit employers from requiring the assignment of inventions made by workers on their own time and with their own resources. For this reason, many businesses, especially those that operate nationally, will limit assignment obligations to reflect these laws. Under some state laws, though not under the New York bill, the employer is also required to provide notice to the employee at the time the agreement is made that the assignment doesn't apply to inventions that the employee invents on their own time. In sharp contrast to this trend, Nevada creates the opposite presumption; in the absence of a contract provision to the contrary, employee inventions automatically vest with the employer under Nevada law (NRS 600.500).

Key takeaways

Although many businesses already use invention assignment provisions that comply with the proposed law, the passage of S5640 provides an important opportunity for employers to review how they capture and safeguard intellectual property rights in their employees' creations that relate to the business:

• Employers should ensure all employees execute contracts containing invention assignment provisions that comply with relevant state law. Failure to use compliant assignment provisions could render such terms unenforceable, undermining the value of employers' intellectual property. Employers should also ensure they provide any required notice to employees.
• Employers may also seek to strengthen their intellectual property capture capabilities by implementing invention disclosure processes and requiring employees to disclose relevant intellectual property they create prior to and during  the course of their employment.
• Employee-created intellectual property is often a key value driver in corporate transactions. Failure to understand state law requirements can compromise deal value. For businesses engaged in acquisitions, especially where the intellectual property of the target is a core component of the transaction, be sure to account for the state law invention assignment requirements in your diligence process.

The state labor law landscape as it relates to employee-created intellectual property is complex and constantly changing. Staying on top of these developments is increasingly business-critical. If you have any questions regarding S5640 or any issues regarding employee-created intellectual property, please reach out to any of the Baker McKenzie attorneys listed in this alert.