Fed Cir holds that transfer of “Intellectual Property” applies to Patents but not underlying technology

The United States Court of Appeals issued an important ruling on March 20, 2014 that may affect employment cases involving trade secrets, intellectual properties that are protected by patents and non-compete.  Energy Recovery, Inc. v. Hauge (Fed. Cir. 2014) 13-1515.Opinion.3-18-2014.1 is an appeal from a Federal District Court’s Contempt order and injunction against a former employee (Leif J. Hauge) of Energy Recovery.  The District court found Hauge in violation of  a 2001 settlement order, found him in contempt, and further enjoined him and his new company, Isobarix “from manufacturing and selling pressure exchangers and replacement parts for ERI’s pressure exchangers.” J.A. 9. The court also awarded ERI attorneys’ fees and ordered it to file a request for damages and reasonable attorneys’ fees within thirty days.

At issue  was  a 2001 settlement that included the following terms:

(1) the Agreement only required transfer of his ownership rights to the intellectual property pre-dating
the Agreement;

(2) the non-compete clause had a limited two-year duration; and

(3) the Agreement explicitly provided that the transfer of ownership rights did not extend to inventions after the date of the Agreement.

In the contempt hearing, ERI argued that while Mr. Hauge is free to develop and commercialize new technology relating to the energy recovery field; he is not, however, able “to appropriate the very pressure exchanger technology” that he explicitly transferred to ERI in 2001.

The Federal Circuit made it clear that there is a distinction between “intellectual property” and the technology itself.

In his blog about the ERI case, Jason Rantanen writes

“The Federal Circuit, on the other hand, agreed with Mr. Hauge’s view: that he had complied with the settlement agreement by “transfer[ring] ownership of the pre-Agreement pressure exchanger intellectual property.”  Slip Op. at 8.  He was “not claiming ownership of ERI’s intellectual property,” id. at 9, and “[n]othing in the 2001 Order expressly precludes Mr. Hauge from using any manufacturing process.”  Id. at 8.  Under the Federal Circuit’s approach, “intellectual property” is not treated as the technology itself, but the rights over that technology, rights that Mr. Hauge properly assigned to ERI.  (To spark yet another debate: This is, in my view, the only correct way to view the term.  Using “intellectual property” to refer to the underlying technology, as opposed to the legal regimes surrounding that technology, leads to chaos, confusion, and erroneous views about the law).”

Many companies have agreements with their employees that transfers ownership  of all intellectual properties developed by the employee during during their tenure from the employee to the company.   The intellectual property (IP) transfer clause are often incorporated into non-compete and non-disclosure agreements that the companies have with the employees.

It is interesting to note that if the Federal Circuit makes a distinction between transfer to intellectual properties and trade secrets, then the issue of who owns and can practice the trade secrets remains a grayer area in intellectual property law.  The question remains if a company agreement to transfer all intellectual property developed by an employee to the company if that adequately restricts the transfer and use of the underlying technology and trade secrets.

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