In the recently decided Whitewater West Industries, Ltd. v. Alleshouse case, the Federal Circuit invalidated a company’s employment agreement that required an employee residing in California to assign his patent rights for a post-employment invention to the company.1 While the district court found the company’s employment agreement to be enforceable, the Federal Circuit disagreed, holding that the assignment provision in the employment agreement had a broad restraining effect that rendered the agreement invalid under the California Business and Professions Code.2
Background of the Case
Wave Loch, Inc. is a company that designed sheet-wave attractions.3 Sheet-wave attractions are large, sophisticated water rides used in amusement parts by wave riding enthusiasts.4 In 2007, Wave Loch hired Richard Alleshouse to work on the sheet-wave attractions.5 Alleshouse’s responsibilities during his employment with Wave Loch included assessing and documenting the physical condition of existing sheet-wave rides, improving the existing sheet-wave rides through research and design, and developing new rides using engineering principles such as 3D parametric modeling and numerical analysis.6
In 2008, Alleshouse signed a Covenant Against Disclosure and Covenant Not to Compete (Agreement) with Wave Loch that included the following assignment provision:
a. 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 here-after 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.7
In July 2012, Alleshouse contacted Yong Yeh, a licensed attorney, to discuss his obligations under the Agreement and the possibility of starting a joint venture (later known as Pacific Surf Designs) with Yeh.8 Alleshouse resigned from Wave Loch late July 2012, and in October 2012, Alleshouse and Yeh filed two provisional patent applications related to sheet-wave water attractions.9 The provisional patent applications resulted in U.S. Patent No. 9,044,685, U.S. Patent No. 9,302,189, and U.S. Patent No. 9,592,433 (collectively, the “Patents”).10 The Patents list Alleshouse and Yeh as the inventors and were assigned to Pacific Surf Designs.11
District Court Finds in Favor of Whitewater
In March 2017, Whitewater West Industries, Ltd. (Whitewater), the successor of Wave Loch, sued Alleshouse, Yeh, and Pacific Surf Designs (Defendants) in the United States District Court for the Southern District of California, alleging that the Agreement required Alleshouse to assign his rights in the Patents to Whitewater.12 The Defendants challenged the validity of the Agreement in part on the ground that it violated the following provision of California Business and Professions Code § 16600:13
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.14
The district court held that “the Agreement does not restrain Alleshouse from engaging in the sheet wave profession. It 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.”15 The district court ultimately ruled in favor of Whitewater, finding that Alleshouse breached the assignment provision of the Agreement by failing to assign the rights in the Patents to Whitewater.16
Whitewater further alleged that Yeh should be removed from inventorship status on the Patents since he did not contribute to the conception of the inventions.17 The district court agreed, finding that Yeh should not have been listed as an inventor since Alleshouse alone conceived the inventions.18
Federal Circuit finds Assignment Provision Invalid
On appeal, the Federal Circuit held that the assignment provision of the Agreement is invalid under § 16600 since the assignment provision’s restraining effect impairs an individual’s right under § 16600 to pursue his profession, trade, or business.19 The assignment provision, which is unlimited in time and geography, applies when Alleshouse’s post-employment invention is “suggested by” his work for Wave Loch and when his post-employment invention is “in any way connected to any subject matter” that was within Wave Loch’s “existing or contemplated” business when Alleshouse worked for Wave Loch.20 Since the inventions of the Patents were conceived without use of any trade secret or other confidential information after Alleshouse left Wave Loch, the Federal Circuit held that the Agreement is invalid under § 16600’s strict standards governing restraints on former employees.21
The Federal Circuit also reversed the judgment of the district court’s correction of inventorship claim.22 In this case, correcting inventorship under 35 U.S.C. § 256 depended on Whitewater’s acquisition of an ownership interest in the Patents based on the assignment provision on which its contract claim rests.23 Since the assignment provision was invalidated, Whitewater lacked standing to contest inventorship, and therefore its claim to correct inventorship failed.24
Invention Assignment Provision Drafting Considerations
While broad assignment provisions extending to post-employment inventions likely violate § 16600, California law allows for assignment provisions that apply to inventions conceived by current employees that relate to the employer’s business.25 Also, assignment provisions directed to inventions developed or derived from an employer’s trade secret or other confidential information, even if conceived post-employment, may still be enforceable.26 Several other states including Delaware, Kansas, Minnesota, Nevada, North Carolina, Utah, and Washington have statutes similar to § 16600 addressing invention assignment agreements.27 Thus, companies should draft the assignment provisions of their employment agreements to include language that complies with the requirements of these state statutes. Companies should also consider clearly outlining the confidentiality provisions in their employment agreements and taking measures within the company to protect that confidential information. Had Wave Loch extended its confidentiality provisions to protect the information used by Alleshouse to arrive at his patented inventions, Whitewater may possess full ownership of the Patents today.
1 Whitewater West Indus., Ltd. v. Alleshouse, Nos. 2019-1852, 2019-2323, 2020 WL 6788760, *12 (Fed. Cir. Nov. 19, 2020).
2 See id. at *6.
3 See id. at *1.
4 See id.
5 See id. at *2.
6 See id.
7 See id.
8 See id. at *3.
9 See id.
10 See id.; see also U.S. Patent Nos. 9,044,685 (issued June 6, 2015), 9,302,189 (issued Apr. 5, 2016); and 9,592,433 (issued Mar. 14, 2017).
11 Whitewater West Indus., Ltd., Nos. 2019-1852, 2019-2323, 2020 WL 6788760 at *3.
12 See id.
13 See id. at *4.
14 Cal. Bus. & Prof. Code § 16600.
15 Whitewater West Indus., Ltd., Nos. 2019-1852, 2019-2323, 2020 WL 6788760 at *4.
16 See id.
17 Whitewater West Indus., Ltd. v. Alleshouse, Case No. 17-cv-00501, 2020 WL 4261884, *13 (S.D. Cal. 2019).
18 See id.
19 Whitewater West Indus., Ltd., Nos. 2019-1852, 2019-2323, 2020 WL 6788760 at *6.
20 See id.
21 See id. at *4.
22 See id. at *12.
23 See id.
24 See id.
25 See Cal. Labor Code § 2870(a).
26 See Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., 630 F. Supp. 2d 1084, 1086 (N.D. Cal. 2009).
27 Del. Code Ann., Title 19, § 805; Illinois Revised Stats., Chapter 140, §§ 301-303; Kansas Stats. Ann., §§ 44-130; Minnesota Stats. Ann., § 181.78; Nevada Stat., § 600.500; North Carolina General Stats., §§ 66-57.1, 66-57.2); Utah Code Ann., §§ 34-39-2, 34-39-3; Washington Revised Code Ann., §§ 49.44.140, 49.44.150.
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