In Whitewater West Industries, Ltd. v. Alleshouse,1 the Federal Circuit held, under California state law, an employment agreement that required a surf-simulation designer to assign his patents on any related inventions that did not use the employer’s confidential information after terminating employment was void under California law. The court reasoned that the assignment provision was unlimited in time and geography and applied to any post-employment invention that was merely suggested by the prior employment, and therefore was impermissibly broad in scope.
Richard Alleshouse and Yong Yeh were the named inventors on U.S. Patent Nos. 9,044,685 and 9,302,189, relating to water park attractions that simulated surfing, and on U.S. Patent No. 9,592,433, which related to nozzle designs for controlling water flow for the simulated surfing. Pacific Surf Designs Inc., the company Messrs. Alleshouse and Yeh created to design and promote such water rides, owned the three patents. Whitewater West Industries, Ltd., is the successor of Wave Loch, Inc., which employed Mr. Alleshouse until he began working with Mr. Yeh and prior to the patented inventions being conceived.2
Whitewater sued Mr. Alleshouse, Mr. Yeh and Pacific Surf Designs in the U.S. District Court for the Southern District of California for contract breach. The district court determined that Mr. Alleshouse breached the employment agreement with Whitewater, the employment agreement was binding under California law and Whitewater was entitled to ownership of the patents.3
On appeal, the Federal Circuit reversed the breach of contract ruling because the assignment was invalid under California law.4 The court explained that two sections of California law were relevant. First, California Business and Professions Code § 16600 provides: “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.”5 Second, California Labor Code § 2870(a) states:
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.6
Mr. Alleshouse executed a “Covenant Against Disclosure and Covenant Not to Compete” with Wave Loch (Agreement). The Agreement included the following assignment language:
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
The Agreement was interpreted under California law. Whitewater sued Messrs. Alleshouse and Yeh and Pacific Surf Designs, asserting that the Agreement obligated Mr. Alleshouse to transfer his interests in the three patents to Whitewater and that Mr. Yeh should not be considered an inventor.8
The district court sided with Whitewater and rejected the argument that the assignment language was invalid under California law. The district court also determined that Mr. Alleshouse violated the Agreement by not transferring the patents to Whitewater and explained that the Agreement only required Mr. Alleshouse to transfer the inventions relating to his work at Wave Loch or relating to business conducted by Wave Loch at the time he was employed.
After determining the assignment provision was valid, the district court found that Mr. Alleshouse’s inventions were related to Wave Loch’s business.9
On appeal, the defendants asserted the Agreement’s assignment requirement was invalid. The parties agreed that the inventions were not conceived until after Mr. Alleshouse was no longer an employee at Wave Loch and that he did not use any trade-secret material of Wave Loch’s in creating the inventions. The Federal Circuit determined that the assignment provision was invalid under § 16600 and rejected Whitewater’s assertion that § 2870(a) prevented the assignment provision from being invalid.10
According to the Federal Circuit, “we 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.”11 The Federal Circuit reasoned that the “Agreement’s assignment provision has a broad restraining effect that renders it invalid under § 16600 as that statute has been applied to employment contracts in a manner highly protective of former employees.”12
The court explained that the Agreement’s assignment provision was too broad:
No trade-secret or other confidential information need have been used to conceive the invention or reduce it to practice for the assignment provision to apply. The obligation is unlimited in time and geography. … The restraining effect of these requirements is evident. … The impairment of the individual’s ability to pursue his profession, trade, or business would be significant.13
According to the court: “The question for us is how California has resolved the issue—where there is no use of confidential information and the conceptions of the inventions post-date employment.”14
The Federal Circuit noted that its review of California law was that California prohibited the restraint on former employees required by the assignment provision. After analyzing various California decisions, the Federal Circuit explained:
Those decisions, all from federal district courts in California, confirm 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. As far as we have been shown, there is no contrary decision of a California federal court except for the district court’s decision in this case. As explained, the agreement in this case is invalid under § 16600’s strict standards governing restraints on former employees.15
Therefore, the Federal Circuit held the assignment provision was invalid under California law § 16600. The court thereupon reversed the district court’s holding that Mr. Alleshouse violated the Agreement by not transferring the ’685, ’189 and ’433 patents to Whitewater.16 In addition, since the assignment provision was not valid, the court also reversed the inventorship claim.17
Important Points
Assignment provisions in employment agreements that are overreaching will likely be struck under California law. An assignment provision that is unlimited in time and geography and applied to any post-employment invention that was just generally related to prior employment will be considered impermissibly broad in scope, particularly where no confidential information of the employer is being used.
Perpetual post-employment assignments will likely be considered invalid under California law unless narrowly tailored. Thus, assignment provisions in employment agreements for inventions conceived post-employment should be limited to where the employee uses the employer’s confidential information. The assignment provision should also have a reasonable duration for post-employment, akin to the duration of noncompetes under California law.
If an employer is unsure how restrictive the assignment should be, perhaps the question to ask is whether another employer would hire this employee with the restrictive assignment provision. If the employer is unsure, the assignment provision is likely too restrictive under California law.
Irah Donner is a partner in Manatt’s intellectual property practice and is the author of Patent Prosecution: Law, Practice, and Procedure, Eleventh Edition, and Constructing and Deconstructing Patents, Second Edition, both published by Bloomberg Law.
1 Whitewater West Industries, Ltd. v. Alleshouse, 981 F.3d 1045, 2020 USPQ2d 11381, 2020 WL 6788760 (Fed. Cir. 2020).
2 Id., 981 F.3d at 1046.
3 Id., 981 F.3d at 1046–47 (citing Whitewater West Industries, Ltd. v. Alleshouse, No. 17-cv-00501, 2019 WL 4261884 (S.D. Cal., Mar. 27. 2019); Whitewater West Industries, Ltd. v. Alleshouse, No. 17-cv-00501, 2019 WL 4261883 (S.D. Cal., Aug. 1, 2019)).
4 Id., 981 F.3d at 1047.
5 Id., 981 F.3d at 1047 (quoting Cal. Bus. & Prof. Code § 16600).
6 Id., 981 F.3d at 1047 (quoting Cal. Labor Code § 2870(a)).
7 Id., 981 F.3d at 1048 (quoting J.A. at 1022).
8 Id., 981 F.3d at 1048–49.
9 Id., 981 F.3d at 1049–50.
10 Id., 981 F.3d at 1050.
11 Id., 981 F.3d at 1050–51.
12 Id., 981 F.3d at 1051.
13 Id., 981 F.3d at 1052.
14 Id., 981 F.3d at 1052–53.
15 Id., 981 F.3d at 1055.
16 Id., 981 F.3d at 1059.
17 Id., 981 F.3d at 1059.