IpVenture v. Prostar—Language of Performance or Language of Obligation?

Reader Mike told me about IpVenture, Inc. v. Prostar Computer, Inc. (Fed. Cir. Sept. 28, 2007). I’m delighted that he did, because it’s yet another case that I can point to in making the argument that to control your drafting you need to clearly distinguish one category of contract language from another.

IpVenture owns and licenses patents on inventions relating to management of personal computers. One of its owners is C. Douglass Thomas. In 2003, IpVenture sued Prostar and another computer manufacturer for infringing its patent. The defendants sued for dismissal on the grounds that IpVenture didn’t own the entire interest in the patent, due to Thomas’s obligations under his employment contract with Hewlett-Packard, where he worked from 1992 to 1995. The district court agreed and dismissed the suit, but the Court of Appeals for the Federal Circuit held that the dismissal had been in error, because IpVenture had not assigned HP an interest in the patent and HP had disclaimed any interest in it.

The patent in question was filed in 1994, while Thomas was employement by HP. Thomas’s employment agreement contained the following provision:

This Agreement also concerns inventions and discoveries (whether or not patentable) … (hereinafter called “Proprietary Developments”) that are conceived or made by me alone or with others while I am employed by HP; that relate to the research and development of the business of HP, or result from work performed by me for HP; or that do not qualify under the prevailing provisions of California Labor Code Section 2870. Such Proprietary Developments are the sole property of HP, and I agree:

a. to disclose them promptly to HP;
b. to assign them to HP; and
c. to execute all documents and cooperate with HP in all necessary activities to obtain patent, copyright, mask work, and/or trade secret protection in all countries, HP to pay the expenses.

The district court concluded that “I agree … to assign” constituted an assignment of all Proprietary Developments to HP and was equivalent to “does hereby grant.” The district court declined to consider, on the grounds that it had been entered into after the suit was filed, a 2005 agreement between IpVenture and HP in which HP acknowledged not having any rights in the patent.

The Court of Appeals for the Federal Circuit disagreed with the district court, holding that the agreement to assign “must be implemented by written assignment.” The CAFC also held that the district court should have taken into account HP’s statement in the 2005 agreement, as it served to remove any uncertainty regarding the language of the employment agreement.

The principal lesson I draw from this case is that it’s best not to use agrees to to express an obligation—someone might be inclined to argue that it’s in fact language of performance. The CAFC in effect held that “I agree to assign” constitutes language of obligation, not language of performance. I concur that given the context, that’s clearly the only sensible interpretation. Nevertheless, I can see how, if semantic acuity isn’t your strong point, you might think otherwise. And more to the point, in this case a litigator was willing to go to court to argue that “I agree to assign” constitutes language of performance, and the first court to hear the argument agreed.

As a general matter, it’s commonplace for drafters to use language of obligation (as in Acme shall purchase the Shares as of the date of this agreement) when they’d be better off using language of performance (as in Acme hereby purchases the Shares).

By the way, if I had drafted the HP employment agreement and had wanted to express language of obligation, I would have said “I must assign.” (I think it best to use must instead of shall in agreements that use the first or second person—such agreements are analogous to consumer contracts.)

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

12 thoughts on “IpVenture v. Prostar—Language of Performance or Language of Obligation?”

  1. Just to be clear, you’re not saying that you would have drafted the employment contract with “must,” correct? “Must” isn’t much better at imposing a present assignment than “agrees to.”

    The only proper formulation for the purpose in this case is something like “employee [assigns | hereby assigns]”.

  2. Mike: I suggested that “must assign” would have been preferable if HP had wanted to express language of obligation. (Again, the only reason for using “must” rather than “shall” is that the contract in question refers to the employee as “I.”) If HP had wanted to express language of performance, then they should have used “hereby assign.”

    I leave to guys like you the question of which would have been more appropriate, language of obligation or language of performance, or what, if any, is the standard practice in the industry. But in terms of language of performance, is “hereby assign” enough to transfer patent rights? And is that the best language for assigning now rights that currently don’t exist?


  3. Ken, in asset purchase agreements, I frequently come across the expression “The Purchaser agrees to purchase…” I’ve always felt this was rather weak language and so I’ve begun to use “The Purchaser hereby purchases…”. I think I’m in the minority with this preference though and I’m wondering if there is a generally preferred phrase? Thanks.

  4. Anthony: The Purchase agrees to purchase is just fine if you want to risk following IpVenture into court.

    If the purchase is being made concurrently with the signing of the contract, it’s language of performance, so use The Purchaser hereby purchases. If instead the intention is that the Purchaser effect the purchase at some future time, then use language of obligation, namely The Purchaser shall purchase.

    You comment has helped bring home to me that confusion over agrees to seems to be widespread.


  5. Ok, I opened up my “Drafting Patent License Agreements” Fifth Edition by Brian G. Brunsvold and Dennis P. O’Reilley. Their example clause for the “Assignment of Future Inventions” (which follows a discussion of the cases cited in IpVenture case) begins: “The Employee hereby assigns and agrees to assign to the Company…”

    Whether that formulation or “hereby assigns” or merely “assigns” is the “best language,” I’m not sure. I’d say the fact that since the “x hereby assigns” formulation has been held up a couple of times now, I’m going to stick with it in my template language.

    There are reasons to have other obligations (like to execute a more formal assignment or other similar documents) since the assignee may want to take more unambiguous precautions: e.g. the assignee may want to record an actual assignment with the patent and trademark office.

  6. Mike: Thanks. Regarding why hereby assigns is better than simply assigns, I point you to MSCD 3.7. And as a vehicle for assigning everything now, the usage hereby assigns and agrees to assign is extremely dubious. Ken

  7. “Hereby assigns and agrees to assign” isn’t all that bad in the context of the employment agreement. It’s a statement of a present action (I assign every invention I have right now) and an agreement to take a future action (and I’ll assign to you everything I come up with later).

    Query whether it is appropriate for someone to assign now something he doesn’t yet have or, alternatively, to have this seemingly perpetual, renewing action in an ‘ancient’ agreement (~by some agreement I signed 10 years ago I hereby assign to you today…)

    I think the conveyance of future IP probably should be done in the future. So I might say “I assign and shall assign” and then backstop that with a further-assurances clause with a specific performance remedy. That way the employee conveys what he has now and I have an enforceable obligation to cause the conveyance of those things that arise in the future.

  8. 10803: My reaction to assigns and agrees to assign was largely driven by my understanding that Mike was advocating assigning now both current and future rights. Using assigns and agrees to assign to accomplish that would be misguided.

    Assigns and agrees to assign expresses that I’m transferring rights I have now and that I’m under an obligation to transfer any rights I acquire in the future. If that’s the approach you adopt, I wouldn’t lump the two verbs together, given that one would be used with respect to current rights and the second with respect to future rights. I’d say Acme hereby assigns X and shall assign Y.

    I’m profoundly ill-informed when it comes to patents, so I wouldn’t dare offer an opinion as to which of the two approaches is preferable.


  9. Well, just to clarify.

    I think that “hereby assigns” could mean both current and future inventions, depending on the remainder of the clause (both shortened for simplicity):
    Employee hereby assigns all interest in:
    1. the Making Widgets invention. (current invention, but this isn’t usually the employment agreement context)
    2. any Inventions first conceived of or reduced to practice during his or her employment. (future invention, typical in the employment context)

    We know that we can presently assign future inventions. In Filmtec v. Allied-Signal, 939 F.2d 1568, 1572, the Federal Circuit stated:
    “If an assignment of rights in an invention is made prior to the existence of the invention, this may be viewed as an assignment of an expectant interest. An assignment of an expectant interest can be a valid assignment.”

    I think that you can dispose of the “and agrees to assign” and rely solely on “hereby assigns” for the purpose of a present assignment of expectant interest, at least if you can get the Federal Circuit to take your case (remember, assignments are governed by state law even though they involve patents).

    If the “agrees to assign” is meant to do something more like require that the assignor file the appropriate document, I would instead include a clause that actually requires the assignor to execute any documents upon request. This might be important, for example, if the assignee wants to record an actual assignment document that clearly lays out the assigned invention with the PTO. This can also be a safety valve if some court decides that you can’t actually presently assign a future expectant interest.

  10. Anthony’s comment regarding asset purchase agreements requires some context. If he means the type of agreement by which one company buys the assets of another, then the language of obligation is exactly right. That style of agreement (see, for example, the Model Asset Purchase Agreement by the ABA Business Law Section Committee on Negotiated Acquisitions) contemplates a closing of the transaction on a subsequent date at which an instrument of assignment effecting the purchase would be delivered. Indeed the entire structure of the obligations in that agreement depend on the transfer NOT taking place at the time of signing. (For example, there is a period of “due diligence” and express conditions to the closing taking place that would be nonsensical if the purchaser had purchased when it signed.)

    Perhaps that is not the sort of agreement Anthony had in mind.

  11. Steve: In the comment I added after Anthony’s, I alluded to the distinction you refer to. I assumed that the agreements Anthony was referring to involved a simultaneous signing and closing. If not, The Purchaser hereby purchases would be an unfortunate choice. Ken

  12. Nobody seems to address ‘Such Proprietary Developments are the sole property of HP’. Arguably those words grant HP full title to present inventions and expectancies and constitute language of performance. One can reasonably interpret the subsequent ‘agreement’ to report, assign, and execute as the assumption of a duty to document, at HP’s request, any present or future transfer that takes place by virtue of the ‘sole property’ language. The text needs cleanup, but that scenario might have been the drafter’s imperfectly expressed intent.


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