Federal Circuit Sides with Inventors on Analysis of California Employment Contract Law

The U.S. Court of Appeals for the Federal Circuit yesterday reversed a district court finding that an inventor of water park surfing attractions breached his employment agreement and that his co-inventor was improperly listed as an inventor. The CAFC based the decision on its best prediction of how the California Supreme Court would interpret state law as applied to the case.

Underlying Law and Assignment

Relevant here are the following two provisions of California law:

California Business and Professions Code §16600:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

California Labor Code § 2870(a):

Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either: (1) Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or (2) Result from any work performed by the employee for the employer.

Also relevant is the assignment provision of the Employment Agreement signed by Richard Alleshouse with his former employer, Wave Loch, Inc., which was succeeded by Whitewater West Industries:

1. 1. Assignment: In consideration of compensation paid by Company, Employee agrees that all right, title and interest in all inventions, improvements, developments, trade-secret, copyrightable or patentable material that Employee conceives or hereafter may make or conceive, whether solely or jointly with others:

(a) with the use of Company’s time, materials, or facilities; or

(b) resulting from or suggested by Employee’s work for Company; or

(c) in any way connected to any subject matter within the existing or contemplated business of Company shall automatically be deemed to become the property of Company as soon as made or conceived, and Employee agrees to assign to Company, its successors, assigns, or nominees, all of Employee’s rights and interests in said inventions, improvements, and developments in all countries worldwide. Employee’s obligation to assign the rights to such inventions shall survive the discontinuance or termination of this Agreement for any reason.

Whitewater Lawsuit

Alleshouse had been employed by Wave Loch since 2007, before leaving in August 2012 to form a new venture with Yong Yeh, Pacific Surf Designs, Inc. The two men filed a provisional patent application in October 2012 that resulted in their U.S. Patent Nos. 9,044,685 and 9,302,189, “which claim water park attractions that individuals may ride as if surfing,” and later that month filed another provisional application that led to U.S. Patent No. 9,592,433, for “nozzle configurations for regulating water flow in such surfing attractions.” Whitewater, as successor to Wave Loch, sued Alleshouse and Yeh in 2017 alleging that Alleshouse was in breach of contract and Yeh was improperly named as an inventor and should be removed from all three patents.

The inventor defendants argued in district court that the Agreement’s assignment provision was invalid under California Labor Code §§ 2870, 2872, and under California Business and Professions Code § 16600.

The district court disagreed with the inventors and found Alleshouse to be in breach of the assignment provision by failing to assign his rights to Whitewater and that Yeh was not properly listed as an inventor. The court rejected the argument that the contract was invalid under the Business and Professions Code because “the Agreement does not restrain Mr. Alleshouse from engaging in the sheet wave profession” and “only requires him to assign inventions resulting from his work at Wave Loch or relating to Wave Loch’s business at the time he was there.”

‘Restraining Effect’ Requires Reversal

On appeal to the CAFC, the defendants again challenged the Agreement’s assignment provision as invalid under the Business and Professions Code as well as the Labor Code. Whitewater accepted the premise that the inventions were conceived after Alleshouse had left Wave Loch and that he did not use any trade secrets or other confidential information in conceiving the inventions. Alleshouse and Yeh accepted that the assignment provision applies to post-employment inventions. However, the Federal Circuit held the assignment provision to be invalid under Section 16600 and rejected Whitewater’s argument that “§ 2870 saves the provision from invalidity under § 16600.”

In the absence of any California Supreme Court decision directly addressing how broadly employment contract provisions require assignment of inventions conceived post-employment, the CAFC said it must “try to predict, based on precedents that are relevant but not directly on point, how the State’s highest court would rule on the issue before us.” Since Section 16600 “has been applied to employment contracts in a manner highly protective of former employees,” the court said the assignment provision has “a broad restraining effect that renders it invalid under §16600.” The court explained:

The restraining effect of these requirements is evident. For a number of years, Mr. Alleshouse worked for Wave Loch in a wide variety of capacities involving design and implementation of water attractions. Anyone in his position would have developed useful, specialized knowledge of the business of water attractions, wholly apart from any confidential information. Work in the same line of business was necessarily among the best and likeliest prospects for such an individual to pursue when leaving the employer.

The court cited several recent California Supreme Court and U.S. Court of Appeals for the Ninth Circuit rulings that erred on the side forbidding the type of restraint on former employees imposed by the agreement at issue. The court also cited three other district court decisions specifically addressing contracts requiring assignment of rights in inventions conceived after employment that were decided in line with the higher courts’ precedents. The CAFC also distinguished this analysis from its decision in Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., in which a Section 16600 challenge to an assignment provision was rejected, because that case involved a visitor, and not an employment, relationship.

The court further ruled that Section 2870(a) of the state’s Labor Code is “nowhere close to clear in applying to post-employment inventions,” and that to read it as such “would produce a conflict with what we think is otherwise the clear prohibition of §16600 on agreements like the one at issue here.” Finding the assignment provision of the employment agreement invalid, the court necessarily rejected Whitewater’s claim that Yeh was not properly listed as an inventor and reversed the judgment of the district court in full.

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Author: almoond
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