Assigning a patent application to a corporate entity (C-corp, S-corp, or LLC) is almost always a best practice. Many inventors don’t understand the value of this procedure, so lets break it down and explain why it should be done.
What is a Patent Assignment?
A patent assignment is a transfer of ownership of the patent. It is analogous to selling a house (also a form of property). When a house is sold, ownership of the house is transferred from the seller to the buyer (new owner). In the patent world, the transaction of selling a patent, i.e., “all right, title, and interest” (37 CFR 3.1) is called an assignment.
By default (at least in the US), patents are owned by the inventors. Many inventors ask why they would transfer ownership of their “baby” to someone else. Actually, there are very good reasons to do so.
- Licensees want to work with an legal entity. When it comes time to license a patent, licensees would much rather deal with a corporate entity rather than an individual. A license to a group of individuals (as inventors) is more difficult. Not having a corporate entity actually own the patent makes a license much more complicated, and can become another obstacle in the licensing process.
- Patents as an asset. A related issue is that a patent is an asset. This asset can be the basis of a loan, license, security interest, or other financial instruments. These instruments typically require that a corporate entity own the patent.
- Allocation of ownership. An assignment is a better way to allocate ownership of the patent than naming inventors. Say two people in a business venture have a patent, with one being the inventor and the other providing money or business advice but is not an inventor. A temptation is to name the second person as an inventor to give that person ownership in the project. This is a dangerous trap. The inventor of a patent is a question of fact and has to do with who conceives of the invention. Inventorship is not determined based on commercial considerations. Misnaming inventors is a serious problem that can theoretically invalidate a patent. If the patent is ever contested, when the other side discovers this issue (and they will look for it), this problem will prolong any validity dispute and patent owner could theoretically lose the patent for misnaming the inventors. By assigning the patent to a corporation or LLC jointly owned by the inventor and investor in this hypothetical, this problem is solved.
- Resolving disputes among co-owners. While co-inventors and partners may be best friends when the project is started, disputes can arise down the road. In a situation where there are multiple parties, either multiple inventors or inventors and investors, a dispute among the parties is much better resolved in the context of a corporate entity than as co-inventors of a patent. With co-inventors or co-owners of a patent, any party can license or work the patent as they wish. Hypothetically, a disgruntled joint inventor (with no assignment) could license their interest to a party that other inventors don’t like. If a single corporate entity owns the patent, any dispute between individuals becomes a contract problem that is much more efficiently dealt with in a corporate context.
- All owners must participate in a legal action involving the patent. If the patent goes into dispute, for example, if an infringer is discovered and a patent infringement action becomes necessary, all owners of the patent have to agree. With multiple owners, that can be a problem. With a single owner, its much easier to bring an action – or defend an action challenging the validity of the patent.
- Succession issues. It may be unpleasant to think about, but an inventor can die or become incapacitated at any time. Without an assignment, the patent may fall into probate or under the control of an administrator. If a corporate entity owns the patent, the patent can continue to operate without any delays.
So the bottom line is that patents should generally be assigned to a corporate entity where the relevant parties (inventors, financial backers, business advisors, other stakeholders) can participate as owners of the entity that controls the patent. It is even a best practice to assign a patent if there is a single inventor.
We help with drafting and filing patent assignments and creation of corporate entities to hold a patent. Also, drafting and negotiating patent licenses is one of our specialties.
If you’re an inventor that’s ready to transfer ownership of your patent to a corporate entity and then continue with the licensing process, we’re here to help!
Andrew Berks (updated 10/20/2023)