Invention assignment provisions are fundamental in employment agreements. On one hand, they are the mechanism by which an employer takes ownership of important types of intellectual property employees create that relates to the job—potentially patentable inventions, which may be trade secrets unless patent protection is sought. In that manner, they safeguard important employer interests, including preventing potential disputes over ownership of key company inventions and ensuring that employers can make necessary representations about ownership of their intellectual property in corporate transactions such as financings and acquisitions. On the other hand, such agreements also provide boundaries under which employees can safely create unrelated intellectual property, such as when planning a new, future start-up company.

In order to clarify these boundaries for the benefit of employers as well as employees, and gradually over the decades, several states have enacted invention assignment statutes, which govern what such contracts can and cannot say regarding employer ownership. Some of them also govern which party has the burden of proof and provide safeguards for employee disclosure of intellectual property the employee may own.

For example, in California and Washington State, under Labor Code § 2870 and Revised Codes of Washington (RCW) § 49.44.140, respectively, an employer generally cannot claim ownership of patentable inventions or trade secrets that an employee developed entirely on their own time and with their own resources as long as the invention is not related to the employer’s actual or anticipated business. Published court decisions providing guidance on what relates to, or does not relate to, a business are relatively rare.

New York has now enacted a new law that follows suit.

The Law

On September 15, 2023, Governor Kathy Hochul signed into law New York State Senate Bill (S) 5640 (codified as New York Labor Law § 203-F) (203-F). 203-F took immediate effect. 203-F renders employee invention assignment provisions unenforceable if the assignment provision requires the assignment of rights to any invention that does not relate to the employer’s actual or anticipated business, so long as such inventions are developed entirely on the employees’ own time and with their own resources.

Specifically, 203-F prohibits assignment of inventions developed by employees entirely on their own time “without using the employer’s equipment, supplies, facilities, or trade secret information.” However, the law includes two important carve-outs. 203-F still permits assignment of inventions to the employer that either: 1) “relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer” or 2) “result from any work performed by the employee for the employer.”

To put this in plain English, there are six ways a New York employer can own a patentable invention: 1) it relates to the business; 2) it relates to provable current or anticipated R&D; 3) it results from work performed for the employer; or, even if 1-3 do not apply; 4) the employer’s equipment or supplies are used to develop the IP; 5) the employer’s facilities are used to develop the IP; or 6) the employer’s trade secrets are used to develop the IP. The language is disjunctive, so any of these six will suffice for employer ownership.

At the same time, 203-F provides that employees who independently innovate, utilizing their own resources and time, and develop an invention that is unrelated to their employer's business, are not bound by any clauses that demand they transfer the intellectual property rights of the invention to their employer. If an employer tries to assert rights over an invention that an employee devised completely on their own time, without the use of the employer’s resources, and the invention is not connected to the employer’s business, the statute provides that the agreement purporting to assign the invention to the employer “shall be unenforceable.”

This regime is similar to, but distinct from the separate test used for employer ownership of copyrightable works, the Work for Hire doctrine under the Copyright Act.

203-F does not expressly specify any penalties for requiring an employee to sign an agreement that is in violation of 203-F. Nonetheless, potential consequences could include a ruling by a court or adjudicating body that the invention assignment provision in an employment agreement is unenforceable. Additionally, the employer could be liable for damages such as compensating the employee for the fair market value of their invention, lost profits, or any unjust enrichment the employer gained or derived from an improper use of the invention, as well as legal fees and costs associated with litigation. Furthermore, invention assignment agreements in violation of 203-F could cause lack of certainty with regard to ownership of intellectual property that is material to the employer.

Although the new law can prevent the assignment of inventions stemming wholly from an employee’s own resources, information, and efforts, 203-F maintains employers’ rights to inventions arising from, or related to, the employees’ work for the employers or the use of the employers’ resources. For example, even under the new law, an employer can require that an employee assigns to the employer all rights to an invention that an employee develops or tests during their working hours or on their employer’s premises, or with the use of any equipment, property, or trade secret information of the employer in the development of the invention, such as a company-issued laptop or mobile device. An employer would likely not be successful in demanding the assignment of an invention if the employer’s equipment or property were only used by employees for communication or other ancillary activities and not for the actual development of the invention. Lastly, even if an employee does not use any employer resources and develops the invention entirely on their non-working hours, under 203-F, the invention may still be deemed assigned to their employer if the invention relates to their employer’s current or future business.

Notably, New York’s statute does not contain language regarding a burden of proof, or reporting requirements, as seen in other enactments such as California and Washington.

Justification and Implications

In its justification for enacting 203-F, the New York State Senate indicated that economists have linked better intellectual property protection for employees to “more efficient firms and increased economic growth,” as previous assignment clauses effectively prevented employees from trying or investigating new ideas that could transform into new businesses. See S.B. 5640, New York State Senate, 2023 Session. Further, the New York Senate noted that employees tend to relocate to work in jurisdictions with these types of invention assignment protections.

The New York State Senate also highlighted the fact that California’s implementation of a similar protection has not impeded growth of its technology sector—an understatement, to say the least. See CA Labor Code § 2870 (through 2012 Leg. Sess.). Since Washington’s enactment in 1979, numerous additional states have passed similar laws, including California (CA Labor Code § 2870), Delaware (Del. Code tit. 19 § 805), Illinois (765 ILCS 1060/2), Kansas (2006 Kansas Code - 44-130), Minnesota (Minn. Stat. § 181.78), New Jersey (NJ Rev. Stat. § 34:1B-265 (2022)), North Carolina (NC Gen Stat § 66-57.1 (2022)), and Utah (Utah Code Section 34-39-3), while Nevada has a substantially different enactment (NV Rev. Stat. § 600.500 (2022)). Although the actual text of each state’s law varies somewhat, the above referenced laws generally prohibit provisions in employment agreements that require the assignment of rights in an invention for which no equipment, supplies, facilities, intellectual property, or trade secret information of the employer were used and where the invention was developed on the employee’s own time. More states may follow suit.

Considerations and Next Steps

• Review Employment Agreements: Employers with employees in New York should diligently work with their employment and intellectual property counsel to review their employment agreements, policies, and procedures, including any offer letters, handbooks, or other policies that include intellectual property language, to ensure they do not require employees to assign inventions that are outside the scope of what is permitted by the new law. A good practice is to include the text of the statute as an exhibit to an employment agreement, as companies typically do in California.
• Retroactivity: While 203-F does not expressly state retroactive application, the law indicates that any prohibited provisions cannot be enforced as of September 15, 2023. This unenforceability applies even if the provision is contained in an agreement entered into prior to September 15, 2023. As a result, employers with New York employees should consider whether their agreements with current employees must be updated in light of 203-F. Wilson Sonsini can provide an updated agreement.
• Documentation of Invention Ownership: Although the law does not expressly discuss which party bears the burden of proving ownership rights to an invention, and thus probably puts the burden on the party filing suit, it is in an employer’s best interest to have clear and comprehensive documentation showing an invention was developed within the scope of the employee’s work for the employer, given the importance of clear intellectual property ownership for both the employer’s day-to-day operations as well as future commercial deals, corporate transactions, and exit opportunities.
• Scope of the Employer’s Business: Since 203-F allows inventions by employees to be assigned to the employer that are related to “the employer’s business, or actual or demonstrably anticipated research or development of the employer” even if conducted during non-working hours away from the employer’s premises, employers should evaluate whether they have sufficient documentation detailing the scope of their business. Such documentation will permit the employer to fully capture any inventions by employees within such line of business and be best prepared to defend against a claim of ownership over a given invention by the employee.

Conclusion

It is essential that employers take appropriate steps to ensure their ownership of intellectual property to which they are entitled. Clear language in employment agreements and thoughtful company policies can avoid unnecessary conflict and confusion for both employer and employee, as well as potential company investors and acquirers down the line. Given the constant evolution of the legal landscape around employer-employee intellectual property rights, the current effectiveness of 203-F, and the frequency of employee movement due to hybrid and remote work, companies should work regularly with their employment and intellectual property counsel to ensure employment contracts, policies, and other agreements comply with all laws related to assignment of inventions where their employees may be located.

Wilson Sonsini Goodrich & Rosati is available to assist employers in navigating this evolving area of law. For more information, please contact any member of the firm’s employment litigation, technology transactions, and patents and innovations practices.