Copyright 1982 Neal Orkin Published in the May 1982 issue of The EUROPEAN INTELLECTUAL PROPERTY REVIEW: Fn's Most technically oriented American employees must contractually assign their patent rights to their employer as a condition of employment. Since no legislation exists on this subject, American employers are free to draft "free" extensive provisions covering both the so-called "service" and inventions of the European and Japanese statutes, On rare occasions, in the absence of a contract, the employer and employee find themselves as ga Litigants, exercising their rights under the common law of employee patent rights.2 This doctrine divides the rights into three distinct solutions: (1) employer ownership3; (2) employee ownership, and (3) employee See generally, Phillips, Employees Inventions: a Comparative Study, Fernsway Publications, 1981. 2id. pp. 153-155. This occurs when an employee was specifically hired to invent or his assigned duty was to devote his or her efforts to a particular problem in the course of employment. 4This occurs when the employee was not hired to invent, or where an invention was conceived independently of one's job or deals with subject matter unrelated to employment.wnership subject to a shop right in favor of the employer a non-exclusive, non-assignable_royalty-free license to use the invention for the duration of the patent grant). Roberts Sears, Roebuck and Co. is one such recent case decided by using elements of the common law. It's main points of interest are derived from the excessive duration of the litigation and the huge sums of money at stake. As the case pr series of cases-involves highly complex legal issues not related to patent law, the author will attempt to resolve these issues for his European colleagues as painless a manner as possible. This results when the employee has a non-job related invention, but has untilized the employer's time and/or facilities. 6The case citations will ne noted thronologically as the article progresses. FACTS: In 1963, Peter M. Roberts, as an 18 year old Sales Clerk in the employ of a Sears, Roebuck and Co. (Sears) store in Massachusetts constructed a prototype socket wrench with a quick release feature that allowed the user to change sockets with one hand. As Roberts had only a high school education and no practical business experience, he showed his invention to the store manager who persuaded him to submit formally the idea as a suggestion to Sears. In May 1964, the protype and suggestion form were sent to Sears' main office in Chicago, Illinois. Roberts left the employ of Sears when his parents moved to Tennessee. Sears Afterward, then ascertained both the utility and profitability of the invention, and the A by June 1965, determined that manufacturing cost of the quick-release was a mere 20 cents per unit. Roberts, meanwhile, had retained a patent attorney who contacted Sears about the item's patentability even before he informed his client that a patent 7 had been issued. iations between the parties began in January 1965. In April 1965, Sears' Attorney, in a letter seeking merely a license, told Roberts that the invention was not new and that the claims in any patent issued would be "quite limited". Other assertions made by Sears' Attorney were that the quick-release feature would cost 40-50 cents, the feature was only worth $10,000, and that once Sears had paid off the royalty expense they would probably take the amount previously allocated and use it for promotional expenses if Sears desired to maintain sales on the item. 7. It was also shown at the trial that the attorney performed some routine legal matters for Sears, raising some doubt as to the independence of his advice to Roberts. On July 29, 1965, the parties entered into a contract providing Roberts a two cent per unit royalty up to a maximum of $10,000 in return for complete assignment of all Roberts' rights.8 Also included in this agreement was a provision of what would happen if Sears failed to sell 50,000 wrenches in a given year, thus reinforcing the impression that the wrenches might prove a commercial failure. The contract contained a clause that dealt with the possibility that a patent might not be granted even though Sears, and not Roberts, knew that a patent had already been issued. When it signed the agreement, Sears knew of the tremendous commercial potential, yet it did not disclose this vital information to Roberts. Just days after the parties had signed the agreement, Sears was manufacturing 44,000 wrenches per week, with the patent number neatly stamped on them. Nine months later, Sears had sold 500,000 items, paid Roberts' his maximum royalty, and had acquired all his rights. In the ten years between 1965 and 1975 they sold more than 19 million wrenches, many at a premium of one to two dollars profit. Roberts' attorney even gave Sears all his foreign patent rights at no extra charge. In December 1969, Roberts (then a Tennessee resident) filed suit in a federal district court against Sears, an Illinois Corporation. The suit was able to be heard in a federal court as it was based on diversity of citizenship.? Roberts' sought a return of the patent and restitution of damages for the fraud, breach of a confidential relationship and negligent misrepresentation. During the month long trial that ended on January 18, 1977, Roberts proved facts as listed above. Sears claimed that it did not misrepresent any facts and unforeseeable that the success of the invention was due to the scamb boom in do-it- Citizens or corporations of one state may sue citizens or corporations of another state so long as the amount in contention at the time of this suit had exceeded 10,000. The basis for suit is found in the U.S. Constitution in Article III, Section (2), and is codified in 28 U.S.C. 1332. Had the suit alleged patent invalidity or infringement, it would have been instituted under 28 U.S.C. 1338, which grants jurisdiction to the federal district court for civil actions concerning patents and arises under an act of Congress. See Lockett v. Delpark, 270 US. 496, 510(1926). At this point in the article, the author feels a need to digress somewhat from the case in order to explain the nuances created by a case brought under the federal court's diversity jurisdiction. A federal court is to apply whatever substantive law would be applied by the courts of the state in which the federal 10 district court is sitting. One point of contention that arises in such cases is whether the law to be applied is "substance" or" procedure" and hence, whether the federal court is free to appl its own procedural rules. This issue will be noted during the discussion of the appeals of the case. apply Stentor 10Klaxon Co. v. Mfg. Co., Inc., 313 U.S. 487 (1941). 1IV. THE APPEALS A. ROUND ONE Both parties appealed the judgment to the U.S. Court of Appeals for the Seventh Circuit." district Sears argued that the distinct court should have determined, validity of the patent, for if it were found to be invalid, then Roberts could not have been injured by fraud, as Sears would have paid $10,000 for a "worthless" invention. 12 Sears cited Lear, Inc. v. Adkins in which the U.S. Supreme Court held that a patent licensee was not topped to contest the validity of licensor's patent, and was not required to pay the contractually-provided royalties for the license on the invalid patent during the pendency of the litigation. The appeals court rejected this argument for two reasons: (1) As there was a complete assignment of the patent rights, Roberts had no legal basis for exacting any "tribute" until the patent rights were returned to him. Hence, when that occurs, the validity of the patent could be tested in an infringement suit or after Roberts entered into a licensing agreement. (2) the Lear required parties, as in any contract to have acted in good faith. Sears' actions were a blatant violation of this requirement. |