A Risk of Moonlighting

by Dennis Crouch

Despite California’s policies limiting non-compete agreements, the law still lays an implicit powerful fiduciary duty on employees. The (proposed) Restatement (Third) of Employment Law indicates that competition by current managerial employees violates the duty of loyalty but that a manager has the right to “prepare to compete.”  One question that arises from the facts of the case below is whether an employee who obtains patents on-the-side in preparation to compete is somehow violating his fiduciary duty.

Robert Kulakowski v. Verimatrix, Inc. (Cal. Appellate Ct. 2014) Decision Text

Back in 2000, Kulakowski helped to found Verimatrix – acting as the company’s chief technology officer (CTO) and directing product development. The company makes video encryption security systems known as Conditional Access Systems or CAS.

In his last year with the company, Kulakowski began working on side projects. As part of that process, he was able to modify his IP and non-compete agreement with Verimatrix to clarify that he did not need to disclose to Verimatrix any inventions “conceived, reduced to practiced or developed by [Kulakowski] in [his] own time; without using the Company’s equipment, facilities, or trade secret information; and which is not the result of work performed by me for the Company.”  Meanwhile, Kulakowski founded a new company (Secure TV) in May 2010 also operating in the CAS market but then expressly denied to his Verimatrix boss that the new company was in the CAS market.  In September 2010 Kulakowski left Verimatrix and then filed a patent application known as Dynamic Obfuscation Processing.

This case arose when Kulakowski filed a declaratory judgment action in California state court asking for a ruling that Verimatrix held no right to title or interest in the new patents.

Following a bench trial, the lower court ruled in favor of Verimatrix — holding (1) that declaratory relief is not called for at this time because the patent applications are pending and may still be amended; and, alternatively, (2) that Kulakowski’s claim for equitable relief should fail because of his unclean hands based upon his breach of fiduciary and contractual duties owed to the company while he was still employed.

Seeing some of the logic of the lower court, Kulakowski accepted that the DJ action was not ripe appeal. However, he appealed the unclean portion of the opinion — arguing particularly that the lower court’s DJ decision was effectively jurisdictional with the consequence that the court lacked jurisdiction to then decide the unclean hands defense.  That conclusion follows from the notion that a court who lacks subject matter jurisdiction has no power to make any findings on the merits of a proceeding.

On appeal, the California appellate court rejected Kulakowski’s arguments and affirmed  the lower court ruling.  Here, the appellate court found that the lower court’s first ruling on the DJ action for practical reasons, not for jurisdictional reasons.

If a court decides for practical reasons it is not necessary or proper to grant declaratory relief, there is no jurisdictional prohibition to the court making alternate findings based on the evidence before it.

The case may be revived once the patents issue or a more concrete dispute arises at that point the court will need to address whether the unclean hands decision here has a preclusive effect.  The appellate court expressly refused to “offer any opinion on the extent to which the court’s alternative findings are binding on either party under res judicata or collateral estoppel doctrines.”

53 thoughts on “A Risk of Moonlighting

  1. This thread has gone off-track on the recent Fed. Cir. decision in K/S HIMPP v. Hear-Wear Techs., L.L.C., __ F.3d __(Fed. Cir. 2014)(Lourie, J.) where allegedly “distinguishing” KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007)], a divided panel affirmed the Board’s confirmation of patentability, 2012 WL 2929630 (PTO Bd. App. & Int. 2012). This was an appeal from a Board inter partes reexamination decision, so it is now of interest for the AIA IPR or CBM replacement.
    The “unproven prior art” for the patent claim element in question was a mere added claim feature of a conventional electrical connector. [To me that is about as “common sense” and obvious to one of ordinary skill in the subject electronics art as you could possible get, and remarkably similar to the facts and legal issue in the KSR S.J.] In the original [application] prosecution the examiners stated position that this feature was obvious to one of ordinary skill in the subject was not even challenged.
    ————————————————–
    The obvious lesson here for all post-grant proceedings is to simply provide an expert declaration for even the most trivial and obvious features of even a dependent claim if it is being challenged, if there is any possible dispute that the feature is not fully disclosed in the cited prior art, in case you may get a Board and CAFC panel like this one! Assuming patent attorneys catch on to the need for completely thorough affidavit support for IPR petitions this kind of decision should disappear.

    1. In the original [application] prosecution the examiners stated position that this feature was obvious to one of ordinary skill in the subject was not even challenged.

      prosecutory estoppel?

    2. Paul, agreed. Petitioners need to recognize they are not examiners and cannot simply rely on the well known to prove their case. Nor can they rely on “notice” to provide a prima facie case. That privilege is reserved to examiner by § 132. Petitioner have to prove their case with evidence and argument.

    3. I’m not familiar with this art and haven’t reviewed the prosecution or case file, but was this type of conventional electrical connector used in prior art hearing aids?

      If not, is not such unconventional use of such a conventional connector … non-obvious?

      At least under new use?

      1. unconventional use

        There’s nothing “unconventional” about using a multipronged connection to provide electricity to something that needs electricity.

  2. “Dynamic Obfuscation Processing” sounds like what Kulakowski was doing in his communications with his employer.

    1. Right – In this case Kulakowski looks bad. The court indicated that he lied directly to his CEO about the critical issue of whether the new venture is competing against his current employer. That was likely enough to determine the outcome here.

      1. Except it does not Les – you mentioned not just the bad act of lying, but that that very act serves as public use.

        As noted, that is just not correct.

  3. “Meanwhile, Kulakowski founded a new company (Secure TV) in May 2010 also operating in the CAS market but then expressly denied to his Verimatrix boss that the new company was in the CAS market. In September 2010 Kulakowski left Verimatrix and then filed a patent application known as Dynamic Obfuscation Processing.”

    I think the more interesting question is whether the “express denial” prior to the filing date represents a public use of the Dynamic Obfuscation Processing which would then establish a bar date under 102(b).

    1. ?

      I think you confuse the denial with any basis for the denial – to wit, the basis may have been activity in the market.

      Denial – of its own accord – is just not the same, and itself cannot represent a public use.

            1. Anon,

              Les is making a joke, juxtaposing the implicit untruth behind the “express denial” against an amusing interpretation of “Dynamic Obfuscation Processing”, and placing it within a patent context to make it topical. It’s actually quite amusing. (Les – you’re still a nut job, but this was a pretty good one. :) )

              This is not intended as an attack or slight on you, Anon. Based on your writings, I truly think that social interaction presents difficulties to you that most of us do not experience. Help is available.

            2. Not taken as an attack – my response was meant to play on the truth of the matter (the mere 1ie does not establish public use).

              Why would you think that I took it as an attack? That’s a bit odd.

              Do you know how much public use would be out there if we let 1ies count?

              As to your prognosis – well, you are apparently as off as the other trite meds advocates (so thanks but no thanks). (you seem to want me to be feeling “attacked” when I do not so feel, and then add in some “condition” based on something not there…

              Again, very odd.

            3. Anon,

              Why would you think that I took it as an attack? That’s a bit odd.

              Because most of the time, if someone implies that you are not understanding something correctly (e.g., not getting a joke), you respond with name-calling, condescension, and/or mocking derision. (I ain’t whining about it, just answering the question asked.)

              . . . my response was meant to play on the truth of the matter . . .

              Your going after the “truth of the matter”, with no acknowledgement of the humor in Les’ post, is what led me to believe you were not getting Les’ joke.

              As to your prognosis – well, you are apparently as off as the other trite meds advocates (so thanks but no thanks).

              I advocated no meds. Just pointed out some social behavior that stands out among the posts I read on this (or, really, just about any) blog.

              (you seem to want me to be feeling “attacked” when I do not so feel, . . .

              [humor] Now you’re sounding paranoid. If I wanted you to feel “attacked”, I would have responded with name-calling, condescension, and/or mocking derision. ;) [/humor]

              “. . . and then add in some “condition” based on something not there…”

              Yeah, probably so. It just seems you have trouble seeing things from other people’s perspectives. I don’t know if you even realize how unpleasantly you treat other contributers (not just MM).

              But, I know even less about psychology than I do about about patents, so who am I to judge?

              And, just to keep it topical for this blog: How about those software patents? ;)

            4. But, I know even less about psychology than I do about about patents, so who am I to judge?

              Seeing as you set the patent ‘bar’ so low with your professed reference set including the likes of Slashdot/Techdirt compounded with an obbvious lack of real legal knowledge, your present admission about knowing anything even less simply negates the need for me to respond to you further.

              Thanks for h@nging yourself.

  4. Interesting case. While the patent matter may not be ripe because no patent has issued yet, one would assume that Kulakowski has the invention implemented in software, since he’s starting a newco around this technology. The copyright and the code itself therefore exist. Mr. Kulakowski’s prior employer, Verimatrix, may have an ownership interest in the software and associated copyrights as well. Was this brought to the attention of the court?

  5. K/S HIMPP 2 v. HEAR-WEAR TECHNOLOGIES, LLC
    link to cafc.uscourts.gov

    The only difference between the prior art and the claimed hearing aid was a detachable electrical connector having a plurality of prongs. During the original prosecution, the examiner had rejected the claims as obvious stating that it was well known that electrical connectors might have a plurality of prongs. During inter partes re-examination, the third-party urged the examiner to make a similar finding, but he declined. The refusal by the examiner to make such a finding was affirmed by the board, and then affirmed again by the Federal Circuit over a dissent by Judge Dyk. The reason both the Board and the Federal Circuit affirmed was that the third-party could not simply urge that a multi-pronged electrical connector was well-known, they needed to provide evidence, which they did not. This points out a distinction between an examiner, and a third-party. The examiner can rely on his own knowledge. But the third-party must rely on Proof .

    Aside: what do John Wilkes Booth, Lee Harvey Oswald, and Robert Greene Sterne have in common?

    1. This points out a distinction between an examiner, and a third-party. The examiner can rely on his own knowledge. But the third-party must rely on Proof .

      That is most definitely not a correct understanding.

      1. The examiner can rely on his own knowledge.
        … pursuant to 37 CFR 1.104(d)(2).

        However, in reality, the Examiner will take official notice of the alleged facts … applicant will traverse … the Examiner will not produce evidence … applicant will appeal … the Board will (incorrectly) affirm because applicant didn’t prove the Examiner was wrong — forgetting that the Examiner’s findings of fact are not given deference.

        1. what 104(d)(2) provides – in the way of adding that something else – is:

          When a rejection in an application is based on facts within the personal knowledge of an employee of the Office, the data shall be as specific as possible, and the reference must be supported, when called for by the applicant, by the affidavit of such employee, and such affidavit shall be subject to contradiction or explanation by the affidavits of the applicant and other persons.

          Clearly, additional support, even if that support is just an affidavit, is more than merely knowledge with nothing more.

          1. anon, I think the examiner can rely on his personal knowledge because of the procedures in play to protect the applicant by requiring the examiner to justify his position with evidence when called to do so.

            The 3rd party, however, must provide proof ab initio. I think that explains the difference between the majority and dissent in this case.

            1. Thanks Ned – as noted, the clarification accords with my added comment.

              However, we still have the interesting give and take between Examiner 1 (who made a rejection – but did not follow through with a complete process) and Examiner 2 (who basically rescinded Examiner 1’s rejection). It appears that there was no personal knowledge left on the record from the Office side of the equation.

    2. During the original prosecution, the examiner had rejected the claims as obvious stating that it was well known that electrical connectors might have a plurality of prongs. During inter partes re-examination, the third-party urged the examiner to make a similar finding, but he declined.

      Is not an examiner supposed to give full weight and effect to another examiner’s earlier work on a case?

      Is not this rejection (by the first examiner) evidence on the record?

      1. I think the court did cover this. The applicant never agreed with the examiner in the first case, just avoided the issue altogether.

        Now, had the applicant challenged the examiner and the examiner had supported his position, the issue would have been litigated and decided — presumably adversely to the patent applicant.

        But this is a close case, and explains why there is a dissent.

        1. Thank Ned – I suspected that the non-traversed rejection is one that the applicant cannot be said to have either disagreed or acquiesced to (I have not read the actual words in the file, so this is just a guess).

          However, that is not to say that the initial finding of the claim as obvious is not on the record as evidence. It is.

          That’s why I asked the first question. The second examiner – in effect – removed the rejection by not persisting in applying the first examiner’s rejection.

          That too is on the record as evidence.

          At the appeal level, is Dyk now also wanting to play examiner and reverse the second examiner’s reversal of non-obviousness and reinstate the first examiners’s obvious rejection? Or should he be compelled to treat the evidence on the record – with the second examiner in effect trumping the first examiner – as the controlling evidence?

          I think the better reason for a dissent is that there is some confusion of the role of judge – as an appeal judge or as an activist judge.

          And you know who I will lay the blame for that trend on….

  6. The first thing one must ask when an individual inventor who has a patent approaches you to license or sell his patent is whether that inventor truly owns the patent rights when that individual inventor was employed by a company and the patent is in the field of the company’s business.

    If the patent application was filed during or shortly after, I would think the presumption is against.

    I have been in these situations on a number of occasions; and I have asked the inventors to go get a signed waiver from the former employer before I would even consider further discussions.

    1. Ned,

      Your advice here is merely being prudent. Being prudent is distinguishable from what the law actually is.

      This also provides a cross-over point to a discussion with IPMan on another thread.

      The point to be made – both for this thread, and the other thread – is that STILL in this day and age there are many small start up firms that hire people to invent that do not have rigorous employment agreements in place. Many small entities have NO employment agreements in place whatsoever. Others have employment agreements that may contain terms that are not enforceable. Still others have been diligently made, that conform with all pertinent state laws and that are heavily one-sided to the corporation, and that will STIL not amount to adhesion, because many states follow a right to work policy that dictates that an employee has a right NOT to sign an employment agreement and this right nullifies the adhesion argument (you still do not have to work for ‘the man’).

      When this happens, the great and typical lawyer answer of “it depends” is the only possible answer to discussion points. We necessarily open ourselves up to a wide morass and quagmire of multiple state laws and intricate fact patterns. There is NO universal default or “proper assumption” that a corporation has ANY rights to an invention. This is the point I made to IPMan in the distinction between the UK law that – by default – vests the invention with the corporation and US law that does the opposite (as shown in Stanford v. Roche).

      1. “UK law that – by default – vests the invention with the corporation”

        No. Rather than setting a default position, UK law distinguishes when the invention will vest with the employer and when it will vest with the inventor. Which of those applies depends on the circumstances.

        1. I see the distinction you are making IPMan – my statement was perhaps a bit overbroad in that UK law by default does allow certain situations that do not vest the invention with the corporation.

          But you find the right tree in the wrong forest by missing the difference between what the UK law does do and what US law mandates.

          Have you read Stanford v Roche yet? The discussion here does rest in the distinction between UK and US law, so my minor error is of no accord in our discussion. It is a given in our discussion that the application of UK law is in the part that does vest the invention first with the corporation (as Stanford has attempted – unsuccessfully – to argue was the US law).

          1. Stanford v. Roche says that the US has a default position, which UK law does not. The US default position is that the inventor owns the invention. Stanford hoped that Bayh-Dole might affect that, but it doesn’t. The biggest surprise was that the Supreme Court bothered to take the time to tell us what everyone believed anyway.

            Set against that default position in the US are all sorts of ifs and buts, which may or may not mean that an employed inventor is obliged to assign the invention to the employer. Or failing that, the employer may or may not have a shop right. It’s a complex mix of employment law, common law and contract law, which varies state by state. A wide morass and quagmire, as you have said.

            You’ve highlighted that small companies can lose out in this mess, through not having rigorous employment agreements in place.

            The other side of that coin is that inventors can lose out, particularly employees of large well-advised corporations, because in many states the law does nothing to prevent the imposition of employment contracts which in the UK would be seen as unfair, and which would be unenforceable.

            For example, in the other thread Ned highlighted the common requirement in a US employment contract that the employee assign all inventions related to the company business – irrespective of whether he was paid to invent it. I explained why that would be unenforceable in the UK, under the Patents Act section 42. It diminishes the rights which the inventor has under section 39.

            Thus, a UK inventor is better protected than a US inventor in this situation, as a result of the automatic operation of the UK law.

            The automatic operation of the UK law also prevents small companies losing out by accident (but it is not good for an inventor who wants to just walk away from a small company, taking with him the invention that they paid him to invent).

            Is the UK law perfect? No, I wouldn’t claim that. But then, you’ve pointed out that the US law is not perfect either. Notwithstanding Stanford v. Roche, it’s a wide morass and quagmire.

    2. Good advice Ned.

      Given your experience in this regard, do you have a general feel for what percentage of such inventors brought you back signed wavers from their former employers?

      Did some of those who didn’t/couldn’t get such waivers come back and ask you to reconsider the waiver request? What kind of reasons/excuses did they give for not getting one?

      1. All of them came back with signed waivers.

        But there was one famous case here in Silicon Valley where one Dr. Z got a waiver, from IBM while he was still employed. IBM later sued Dr. Z, claiming that the representations made to IBM were fraudulent.

        Thus, if the patent has issued, the likes of IBM cannot claim they did not know what was in the patent. But if the patent application is only pending…. Well IBM did have a case.

    1. This is me laughing at you, because you’re probably using it and too clueless to know what it even is.

  7. he was able to modify his IP and non-compete agreement with Verimatrix to clarify that he did not need to disclose to Verimatrix any inventions “conceived, reduced to practiced or developed by [Kulakowski] in [his] own time

    Wouldn’t “conceived” be enough here?

  8. “…the lower court ruled in favor of Verimatrix.”

    Does that merely mean that the motion for DJ was denied (and therefore may be adjudicated later), or does it mean that the judge ruled that Verimatrix is the owner of the patent applications?

  9. What percentage of the US population has the time and resources to “invent on the side” and then spend additional time filing and selling their patent applications? And where is all this “innovation” taking place?

    The company makes video encryption security systems

    Ah, yes: “systems”. As set forth so “plainly” in 101.

    Keep the laughs coming.

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