The Story of Ingersoll-Rand V. Ciavatta: Employee Inventors in Corporate Research & Development-Reconciling Innovation with Entrepreneurship

Abstract:     
Most inventors work as employees for the majority of their careers and are often required as a condition of employment to sign a contract drafted by the firm's lawyers giving the firm exclusive control over as broad a range of economically valuable information and innovation that the lawyers think is legally feasible. Such contracts typically claim as firm property - both during and after an employee's term of employment - the nebulous category of "proprietary information," along with the slightly more clearly (though still poorly) defined category of "trade secrets." These contracts, variously known as "invention assignment agreements" or "holdover clauses" or "trailer clauses," also claim as firm property any invention the employee might make that has any relationship to the firm's business or, less frequently, to the business of the firm's subsidiaries and affiliated companies. In Ingersoll-Rand v. Ciavatta, the New Jersey Supreme Court adopted a new and influential approach to the enforceability of such contracts.

The enforcement of patent assignment agreements presents vexing policy problems. On the one hand, many inventors believe that their former employers have unfairly claimed their ideas and refused to share the profit or the credit for the invention. Some tell a story of a bureaucratic research and development culture that fails to stimulate, support, or reward innovation and regard contractual provisions that would enable the employer to claim any invention of former employees as unconscionable.

Employers, on the other hand, point out that innovation is notoriously expensive and difficult, particularly in those fields where complex modern technology requires the sustained inventive efforts of many people to develop new products. When one employee claims as his own all the profit and all the credit for an invention to which many of his co-workers and predecessors at the firm contributed, the firm is entitled to resist that opportunism by insisting that the patent and the profits should belong to the firm that fostered the culture and financed the work.

As these disputes filter through litigation, employment contracts become increasingly important. In addition to their significance to the legal issues, interpretation and enforcement of these contracts shapes the ethical, economic, and political debates about reconciling individual creativity with collaborative work, about how credit and profit for creativity should be allocated, and about desirable incentives for individual entrepreneurship and corporate investment in research and development. One of the principal jurisprudential accomplishments of the Ciavatta decision was its melding of the law of holdover clauses with the law of restrictive covenants and trade secrets. The court's multi-factor reasonableness analysis, which explicitly relied on decisions in the restrictive covenant area, attempted to create a unified reasonableness rule to govern a wide range of disputes between employees and firms over the control of economically valuable workplace knowledge. That approach has meant that Ciavatta has been as significant for its contribution to the law of restrictive covenants (an area that produces more published decisions) as it has been to the law of holdover agreements (an area of law that produces fewer published decisions). To the extent that the opinion's analytic approach has caught on in other jurisdictions, it has brought greater coherence and pragmatism to the effort to identify the employer, employee, and public interests in the enforcement of these contracts. That is a worthy accomplishment in a field of law that was previously characterized, at least in some states, by uncertain standards and archaic formalism.

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