Why Form an Entity to Hold Your Patent Rights?

December 2009

Many of our clients are individual inventors, and almost without exception, we recommend that they form an entity and assign their patent rights to the entity. The purpose of this article is to summarize the reasons for holding your patent rights in an entity. Scott Heard, a corporate attorney in Billings, Montana, should be given credit for the ideas expressed in this article as he recently provided us with an excellent summary.

1. Relative Ownership Interests.

Entity formation is particularly desirable when there are co-inventors (in other words, when more than one individual is named as an inventor). In the absence of an assignment of patent rights to an entity, each inventor is also an owner of the patent rights, and each patent owner has an undivided interest in the patent. This means that any one inventor may make and sell or even license the patent rights without the consent of the other inventors and without accounting to them for profits.

One way to address the latter situation is to have the individual inventors enter into a contract that addresses issues like commercialization, prosecution and maintenance of patents and patent applications, and enforcement of patent rights, but these types of agreements are often difficult to negotiate and challenging to enforce. When an entity owns the patent rights, the parties’ respective contributions toward developing the invention and/or applying for a patent can be recognized in how the ownership interests are allocated. This approach usually results in a much more fair allocation of ownership rights than the situation described above.

2. Limitation of Liability.

A major consideration for assigning patent rights to an entity is that it protects the individual inventors’ personal assets from any lawsuit that might arise as a result of ownership of the patent rights. I have yet to see a case in which an individual inventor was sued merely for owning the patent rights (as opposed to producing or licensing the invention), but by placing the patent rights in an entity, the inventors’ personal assets are shielded as long as corporate formalities are observed.

3. Management Structure.

When co-inventors elect to own a patent or patent application jointly, there is rarely a formal structure for managing the ownership and exploitation of the patents. An entity, on the other hand – whether it is a corporation or a limited liability company – imposes an organizational and operational framework for these decisions. In the situation where co-inventors own a patent jointly and there is no written agreement that addresses the inventors’ respective rights and responsibilities, the invention will either be dead on arrival because no one will have the authority to do anything with it, or else one party may take advantage of the situation by making decisions without consulting with the other inventor(s).

4. Continuity of Patent Ownership.

Holding the patent rights in an entity makes it easier to deal with transition issues like the death or incapacity of an inventor. When patent rights are held by an entity, if an owner passes away or becomes incapacitated, that person’s ownership interest passes to his heirs in accordance with his estate documents (and taking into consideration any agreements between the owners that might restrict the transfer of ownership interests), but ownership of the patent rights remains the same. In other words, the formation of an entity and the assignment of the inventors’ patent rights to that entity allows a single party to own the patent regardless of changes in ownership of the entity itself.

5. Funding Defense of Patent.

When individual inventors elect to hold the patent rights in their individual capacities, there is often no formal mechanism for developing a fund to be used for future patent enforcement efforts (i.e., the pursuit of infringers). When the patent rights are held by an entity, that entity may license the patent and hold a certain portion of the licensing proceeds in reserve as a patent enforcement fund. Alternately, the entity may periodically or as necessary assess the owners a fee for this purpose.

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An important part of being an effective patent attorney is having colleagues like Scott Heard who can handle our clients’ corporate legal needs. We are proud to have developed a network of attorneys in Montana and throughout the world who can attend to our clients’ every legal need.


Amicable photo of Toni

Antoinette M. Tease, P.L.L.C.