Federal Circuit Court of Appeals Makes Waves For Post-Employment Invention Assignment Provisions

Arent Fox
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Arent Fox

The Federal Circuit Court has issued an opinion invalidating a post-employment invention assignment provision in an employment agreement because the assignment provision violated California law disfavoring restrictive covenants.
 

The case, Whitewater West Industries v. Alleshouse, Nos. 2019-1852, 2019-2323 (Fed. Cir. Nov. 19, 2020) arose out of a dispute regarding patent ownership but resulted in a decision with wide-ranging implications for California employers.

Defendant, Alleshouse, was a former employee of Wave Loch, Inc., a manufacturer of surfing wave rides for water parks. Alleshouse left his employment with Wave Loch and began a new venture with his partner, Yeh, to develop new wave-related technologies. When Alleshouse and Yeh sought patents on their new inventions, Wave Loch’s successor, Whitewater West Industries, sued the two, claiming breach of contract and correction of ownership. In particular, Whitewater sought, inter alia, to enforce the post-employment invention assignment provision that Alleshouse had signed in connection with his prior employment.

In analyzing the claims, the Federal Circuit relied on two separate statutes: California Business and Professions Code § 16600, which has regularly been used to invalidate non-competition agreements and other restrictive covenants in California, and California Labor Code § 2870(a), which applies specifically to invention assignment provisions. The Court’s analysis was further guided by two critical facts: (1) the inventions at issue were not developed until after Alleshouse left his employment with Wave Loch, and (2) Alleshouse did not use any trade secret or confidential information in developing the new inventions.

The Wave Loch invention assignment clause was broadly drafted to require Alleshouse to assign all of his rights and interests in any invention he “may make or conceive,” “whether solely or jointly with others,” if the invention is either “resulting from or suggested by” his “work for” Wave Loch or “in any way connected to any subject matter within the existing or contemplated business of” Wave Loch. The assignment clause was not limited to those inventions that relied on Wave Loch’s confidential or trade secret information. Given this breadth, the Court found that the restraining effects of these requirements meant that a wide range of inventions made by the former employee would be assignable forever, meaning that the individual would be impaired from pursuing his profession, trade, or business in any meaningful way.

The Federal Circuit analyzed California law regarding the breadth of § 16600 and the duty to harmonize related laws, like § 2870(a), with that breadth. The court found that “invention-assignment provisions that go beyond the protection of proprietary information and ensnare post-employment inventions are to be judged under the strict § 16600 standards that protect former employees,” and held that Wave Loch’s invention assignment provision could not be enforced against Alleshouse.

Takeaway

Employers in California should revisit their post-employment restrictions and assignment clauses to ensure that they include reasonable time limits and apply only to those ideas conceived while employed by the employer or based upon confidential information learned during the course of employment.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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