Overbroad Assignment Agreement: Invalid under California Law

Whitewater West Indus. v. Richard Alleshouse and Yong Yeh (Fed. Cir. 2020)

This is an important case invalidating provisions of an employment agreement based upon California Law. Alleshouse left his former employer Wave Loch (predecessor to Whitewater) and started working on inventions for his new venture the very next day. Within two months he (along with his partner Yeh) had filed a set of provisional patent applications at issue in this case.  Whitewater then sued, arguing that the employment contract included rights over post-employment inventions.

The agreement:

a. Assignment: Employee agrees that all right, title and interest in all inventions … that Employee conceives or hereafter may make or conceive …

(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.

Prong (c) from the contract is at issue that requires Alleshouse to assign any invention connected with the business of Wave-Loch — apparently reaching indefinitely into the future.  It just so happens that Wave-Loch makes wave-riding attractions, and that is also the subject of Alleshouse inventions here. So the patents fall squarely within the express and literal terms of the contract.

On appeal, the court looked to § 16600 of the California Business and Professions Code.

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.

The provision voids any contract that restrains anyone from engaging in a lawful profession or trade. Here, the Federal Circuit found that the assignment provision reaching indefinitely into the future would have “a broad restraining effect” because it would prevent Alleshouse from working effectively in the field for any other company.

The Federal Circuit cited to a number of prior district court decisions confirming “that invention-assignment provisions that go beyond protection of proprietary information and ensnare post-employment inventions are to be judged under the strict § 16600 standards that protect former employees.”  The court also cited older cases that discuss these same issues. See, e.g., Standard Plunger Elevator Co. v. Stokes, 212 F. 893, 896 (2d Cir. 1914); and Guth v. Minnesota Min. & Mfg. Co., 72 F.2d 385 (7th Cir. 1934) (improper to force someone to “turn over the children of his inventive genius” conceived after employment).

The weak point: The baseline here is that the court found that this assignment agreement to be void. The weak point of the Federal Circuit’s decision is that it is seemingly contrary to its own prior express statement that “section 16600 [applies] to employment restrictions on departing employees, not to patent assignments.” Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832, 837 (Fed. Cir. 2009), aff’d on other grounds, 563 U.S. 776 (2011).  On appeal here, the court attempted to skirt that statement by interpret interpret as only applying to assignment agreements that were not themselves driven by employment agreements, even though that caveat is not found in the decision.

= = =

U.S. Patent Nos. 9,044,685; 9,302,189; and 9,592,433.

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Alleshouse was Represented by Manuel de la Cerra with Rick Taché on the other side.

20 thoughts on “Overbroad Assignment Agreement: Invalid under California Law

  1. 6

    I don’t really think it’s fair to say the panel attempted to “skirt” the Stanford case. The panel provided an extensive analysis of Stanford and several grounds to distinguish it. You may disagree with the panel’s rationale, but it wasn’t dismissive or in any way resembling an attempt to “skirt” the Stanford case.

    The best argument the panel gave to distinguish Stanford relies on intervening authority, namely the 2020 California Supreme Court decision in Ixchel Pharma, which clarified that Section 16600 is applied much more strictly when you’re dealing with agreements between parties in an employee-employment relationship.

    That provided the key distinction here. The invention assignment agreement in the earlier Stanford case was between an inventor and a third party company (later acquired by Roche) with which Stanford was collaborating. Critically, the inventor who signed the invention assignment agreement was NOT employed by that third party company (he was a Stanford employee). Because there was no employee-employer relationship between the actual parties to the assignment agreement, as confirmed by the recent Ixchel case, the agreement is subject to more lax scrutiny under Section 16600.

    But in this new case, obviously, there was an employee-employer relationship between the parties to the invention assignment agreement, so the court properly applied stricter scrutiny to it, and came to the correct (and predictable) outcome.

    Dennis rather unconvincingly attempts to dismiss the panel’s rationale by reducing it into formalism as to whether the “assignment agreements… themselves [are] driven by employment agreements,” but it makes no difference whether the assignment agreement was drafted as part of an employment agreement, part of some other document, or a separate oral agreement. The key factor here was the existence of an employee-employer relationship between the parties to the assignment restriction.

    1. 6.1

      interesting – nice post, LR.

  2. 5

    “the court attempted to skirt that statement”

    Now; anywhere else the court so skirts?

    (Hint: 101)

  3. 4

    Hmmm . . . so could / would the result be different with a different (more tightly focused?) employment agreement . . . and / or had this case originated in some other state?

    1. 4.1

      Nobody gives real legal opinions here, but I would not have wanted to try to enforce this particular agreement anywhere. Especially with the lack of time limits. Of course the best way to write one of these is to first do the research to see what employee contract provisions that you want have been judicially upheld in recent years in the state who’s law will be applicable [if findable]. [And to not confuse invention and/or patent assignment agreements with non-compete agreements.]

      1. 4.1.1

        I would also add that this legal area, in which certain contractual agreements or clauses are rendered void or unenforceable for “public policy” reasons or actual antitrust law, is typically variable between states, messy, and changing over time.

        1. 4.1.1.1

          Appreciate your thoughts Paul.

        2. 4.1.1.2

          That same thought – messiness (expressed by me – in conversation with the late Ned Heller) occurred in the aftermath of the Stanford v. Roche case.

  4. 3

    Did the Wave Loch employment agreement extend to Alleshouse’s children? If they had wanted to go into their father’s field they could have benefited from his experience in the field.

    Did the Wave Loch employment agreement include the rights to Alleshouse’s wet dreams?

    If Atariman really did work for Atari his employment agreement did.

    Mine did.

  5. 2

    If you believe he conceived of his new invention the day *after* he left his employer, I have a bridge to sell you.

    1. 2.1

      Because coming up with a variation of the company’s product couldn’t possibly be done in a month?

  6. 1

    This CA employment contract was clearly unenforceable. The important difference between this Fed. Cir. decision and Board of Trustees of the Leland Stanford Junior University v. Roche Molecular Systems, Inc., 583 F.3d 832, 837 (Fed. Cir. 2009) is that This Fed. Cir. panel properly applied CA state law to a contract dispute as as been consistently required by the U.S. Supreme Court decision of Erie Railroad Co. v. Tompkins, 304 U.S. 64, since 1938, but ignored in some Fed. Cir. decisions.

    1. 1.1

      [Of course this decision does not admit that, and only tries to fact-distinguish the Stanford decision.]

    2. 1.2

      P.S. re the Stanford case: Erie v Tompkins and its progeny does not just require the Fed. Cir. to follow state contract statutes like this one, but also state judicial decisions on contract law issues like executory contracts, equitable relief, etc., – anything not specifically controlled to the contrary by the patent statute.

      1. 1.2.1

        For more on this subject see The Jan./Feb. 2011 ABA IPL “LANDSLIDE” magazine. Starting on p.24 is an extensive legal research article on inconsistencies and conflicts in Fed. Cir. cases with basic Sup. Ct. principles on the [normal, unless Federally essential] utilization of state law versus “federal common law”. The Stanford case is cited.

        Also note the Judges O’Malley and Newman dissent From denial of an En Banc Rehearing in another case involving a patent Assignment Agreement — Abraxis Bioscience, Inc. v. Navinta LLC 2009-1539. The Federal Circuit denied Abraxis’s petition for a rehearing en banc by vote of 8 to 2. They filed a 19-page dissenting opinion, arguing that the 3-judge panel improperly created federal common law to govern assignments of existing patents in conflict with Supreme Court precedent restricting judicial preemption of state law in interpreting the contract. New York state law in this case. [The panel decision of November 9, 2010 had ruled that a contract to assign existing patents was insufficient to give standing to sue.]

    3. 1.3

      …that This Fed. Cir. panel properly applied CA state law to a contract dispute as as been consistently required by the U.S. Supreme Court decision…

      Paul,

      Are you stating (or suggesting) that the (Federal) patent law holding of the U.S. Supreme Court decision in Stanford v. Roche is not correct? would have been decided differently under State law?

      1. 1.3.1

        Well. the ABA IPL article I cited above certainly did as I recall.

        1. 1.3.1.1

          But that issue was not raised at the Sup. Ct.* and presumably not adequately raised at the Fed. Cir. below.
          *but did get a question from one Justice at the oral argument.

        2. 1.3.1.2

          Yeah but no.

          Since I don’t have the article (and a paywall is present), I searched the interbutz and the ONLY thing that I came up with on the topic is YOU actually repeating this same assertion.

          at this blog:
          link to patentlyo.com

          and echoed four years later:
          link to patentlyo.com

          at IPWatchdog:
          link to ipwatchdog.com

          Echoes of unsubstantiated assertions are even weaker than the first assertions.

          Can you provide any assistance to help yourself out?

        3. 1.3.1.3

          Well my post rebutting this appears to be caught in the ‘too many links’ filter.

          Need more than your mere assertion, Paul, as the paywall issues exists, and a googling only brings up a number of YOUR assertions (two on this blog, one on IPWatchdog). Kind of interesting that no other hits (other than your statements) spanning over 9 years were in those results.

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