Meaning
Common law doctrines in intellectual property grant an employer a non-exclusive, royalty-free, non-transferable license to use an employee’s invention if it was developed using the employer’s resources, time, or facilities. This doctrine applies even if the employee holds the patent to the invention and there is no written agreement to assign the intellectual property to the employer. The shop right allows the employer to continue using the invention within its own business operations without being sued for patent infringement by the employee.
It is an equitable doctrine designed to prevent an employee from exploiting their employer’s resources to create a technology and then using their patent rights to block the employer from using it. However, because a shop right is non-exclusive and non-transferable, it does not give the employer the right to sell or license the technology to third parties, nor does it prevent the employee from licensing it to competitors.
Corporate Context
While shop rights provide some level of protection for an employer’s internal operations, they are a highly insufficient substitute for a formal, written invention assignment agreement. In the technology startup sector, companies must have full, exclusive ownership of their intellectual property to attract venture capital investment and secure a successful exit. A company that relies on a shop right to use its core technology does not own the intellectual property, meaning that it cannot prevent competitors from using the same technology or secure a strong competitive advantage.
Furthermore, because a shop right is non-transferable, it cannot be easily transferred to an acquiring entity in a merger or acquisition, which can severely impact the startup’s valuation and derail the exit. Startups must therefore ensure that all employees and contractors execute formal invention assignment agreements that supersede the default rules of the shop right doctrine.
Resource Tracking
Disputes over the existence of a shop right typically hinge on the specific extent to which the employee utilized the employer’s resources to develop the invention. To establish a shop right, the employer must demonstrate that the employee used company time, equipment, materials, or facilities, or that other employees assisted in the development of the technology. This requires the employer to maintain detailed records of resource allocation, computer usage logs, and project development timelines to support its claim.
If the employee can demonstrate that the technology was developed entirely on their own time, with their own resources, and without any assistance from the employer, the shop right claim will be denied, and the employee will retain full, unrestricted ownership of the invention.
Financing Risks
Venture capital investors during due diligence will scrutinize any situations where a startup’s technology was developed by individuals who have not signed formal assignment agreements. Relying on shop rights to secure the company’s intellectual property assets is considered a major risk that can lead to a significant reduction in the company’s valuation or the complete cancellation of the investment round. Investors will require the startup to obtain executed invention assignment agreements from all key contributors to ensure that the company holds full, exclusive, and unencumbered title to its core technology.
This eliminates the uncertainty associated with shop rights and ensures that the company’s intellectual property portfolio is structured to support its long-term growth and success.
