Making Waves: Post-Employment Contract Assignment Provision Invalid Under California Law

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The US Court of Appeals for the Federal Circuit invoked “precedents that are relevant but not directly on point” to examine when employment contract provisions may require assignment of inventions conceived post-employment and without use of the former employer’s confidential information, finding that an intellectual property assignment provision in the employer’s predecessor’s employment agreement was void under California law. Whitewater West Industries, Ltd. v. Richard Alleshouse, et al., Case No. 19-1852 (Fed. Cir. Nov. 19, 2020) (Taranto, J.)

Richard Alleshouse began working for Wave Loch in 2007 as an engineer in the field of large-scale sheet-wave water attractions, which are surf and wave simulators sometimes seen on cruise ships and in water parks. Alleshouse’s many duties for the company included the inspection, assessment and improvement of the company’s wave rides; the development of new rides; and product management of the company’s branded FlowRider sheet wave attraction.

After almost five years with the company, Alleshouse consulted with a lawyer, Yong Yeh, regarding the scope of his employment agreement with Wave Loch, which included intellectual property assignment terms that survived termination of the employment agreement. Following that consultation, Alleshouse and Yeh discussed the idea of starting their own company to design sheet-wave attractions. In August 2012, Alleshouse resigned from Wave Loch, and in October 2012, Alleshouse and Yeh filed provisional patent applications that resulted in three different US patents describing and claiming certain “water attractions involving a flowing body of water on a surface” and “nozzle shapes and configurations which create a flowing body of water over a surface.”

In 2017, Whitewater West Industries, the successor to Wave Loch, sued Alleshouse, Yeh and their new company, Pacific Surf Design, in federal district court in California, asserting claims for breach of contract and correction of inventorship. In particular, Whitewater sought an assignment of the three patents under the terms of Alleshouse’s employment contract with Wave Loch, and claimed that Yeh was improperly listed as an inventor on each of the three patents. The district court ruled for Whitewater and found that the intellectual property assignment provision in Alleshouse’s employment agreement was valid and thus breached due to the failure to assign the patent rights at issue. Alleshouse appealed.

Alleshouse challenged the employment agreement’s intellectual property assignment provision as invalid under California Labor Code § 16600, which prohibits any contract provision that restrains a person from a lawful profession, trade or business, and under § 2870(a), which prohibits requiring an employee to assign over any invention that an employee developed entirely on her own time without using the employer’s equipment, supplies, facilities or trade secret information (with certain enumerated exceptions for employee inventions related to the employer’s business or the employee’s work for the business). The parties agreed on two factual points that were important to the Federal Circuit’s analysis on appeal: that the inventions at issue were not conceived until after Alleshouse left his job at Wave Loch, and that Alleshouse did not use any trade secret or confidential information belonging to Wave Loch in arriving at the patented inventions.

The Federal Circuit cited an arsenal of decisions from federal courts in California and the California Supreme Court that stand for the proposition that invention assignment provisions that go beyond the protection of a company’s proprietary or trade secret information and “ensnare post-employment inventions” are to be assessed under the strict § 16600 standards that protect the rights of former employees. The Court found the Wave Loch employment agreement intellectual property assignment provision to have a restraining effect of “substantial character,” rendering it invalid under § 16600. The Court noted that the assignment obligation was unlimited in time and geography, that no company trade secret or confidential information needed to be included in an invention for the assignment to apply, and that the assignment provision applied even to post-employment inventions merely “suggested by” Alleshouse’s work for Wave Loch or that were “in any way connected to” any subject matter of Wave Loch’s existing or contemplated business.

The Federal Circuit also rejected Whitewater’s premise that the exceptions language under § 2870(a) of the California Labor Code allows for an agreement requiring assignment of post-employment inventions. Instead, given the duty to harmonize § 2870(a) with § 16600 and other neighboring provisions, and under a plain reading of the statute, the Court confirmed that § 2870(a) does not apply to former employees or to a post-employment period. Accordingly, the Court found the Wave Loch assignment provision invalid under § 16600 of the California Labor Code and reversed the district court’s judgment of breach of contract. Based on that finding, the Court confirmed that Whitewater lacked standing to contest inventorship in the patents at issue, including the listing of Yeh as an inventor.

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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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