California Prohibits Post-Employment Assignments; Has Pandora's Box Opened for Michigan and Other States?

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By William Honaker

A recent federal court decision found a post-employment patent assignment invalid under California law.  The agreement required a former employee to assign patents obtained after leaving the company back to his former employer.

The decision will likely extend beyond patents to other intellectual property, like copyrights. Its holding is also likely to extend beyond California, which is why the case is being watched nationally.

The decision is interesting because the court considered the agreement to be a restriction on future employment. Agreements that restrict future employment, i.e., non-compete agreements, are strictly construed by the courts and must be reasonable in scope in most states.

California law prohibits contracts that restrain anyone from engaging in a lawful profession, trade, or business – and prohibits non-compete agreements outright. Although a California court had not addressed post-employment assignments, this appeals court (The Court of Appeals for the Federal Circuit) noted that California law has been applied to employment contracts in a manner highly protective of former employees.

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Background

Whitewater Industries makes water attractions that simulate surfing. Richard Alleshouse started working for Whitewater in 2007 as an engineer (at the time known as Wavelock, which became Whitewater).  He was a field engineer and worked closely with the engineering staff to do research and design work to improve and create new rides.

In 2008 he signed an agreement that required him to assign any inventions to Whitewater if they were in any way connected to any subject matter within the existing or contemplated business of Whitewater. This requirement continued even if the agreement was terminated for any reason. Basically, the agreement lasted forever.

Alleshouse left Whitewater on August 3, 2012. The next day he started keeping a notebook of ideas for products. Around this same time, he started Pacific Surf Design with a partner, Yong Yeh, to make and sell products that would compete with Whitewater. In October 2012, Alleshouse and Yong filed patent applications that resulted in three patents on wave attractions.

Whitewater sued Alleshouse for breaching his employment agreement because he refused to assign the patents. In effect, Whitewater, if successful, would own the three patents and could sue Pacific Surf Design for infringement of their own patents.

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The Appeals Court’s Analysis

The parties agreed on two important factual premises: the inventions were not conceived until after Alleshouse left his job; and he did not use any trade secrets or other confidential information belonging to Whitewater.

The appeals court was troubled by the breadth of the agreement. The court noted that whether an invention was made solely by the employee or with others and connected to any subject matter within the existing or contemplated business of Whitewater, the invention had to be assigned. This obligation had no time limit. The court stated any inventions created by the employee in the field for which “he was particularly fitted” would have to be assigned for all time. This exposed the employee and the employer to the loss of IP rights and potential infringement of their own patents.

The court concluded that the assignment of post-employment inventions is a restriction on future employment, observing that Alleshouse, “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 likely prospects for such an individual to pursue when leaving an employer.”

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Effect on Post Employment IP Agreements in general

The court equates post-employment patent assignments to non-compete agreements and held that the agreement was invalid under California law, but it also gave a clear warning to its effect on agreements in other states.
What would be acceptable? The court suggests that post-employment assignments may be enforceable if they are limited to trade secrets or proprietary information, even in California. The court states several times that the requirement to assign isn’t limited to trade secrets or proprietary information. This seems appropriate since this information is owned by the employer and should not be taken by a former employee. But beyond California, equating these agreements to non-competes suggests they must be reasonable. They should be limited in time, geographical area, and/or subject matter in the same manner as non-compete agreements.

This court handles all patent appeals. Although not controlling on other courts, it will likely be given deference since it is the patent appeals court. The decision is also likely to be extended to copyrights. Requiring an author, artist, or photographer to assign later created work would appear to be just as restrictive on them as it is on an inventor. The same analysis of their restriction on future employment applies.

The concern over non-competes is growing, and President Biden weighed in on them during his campaign, stating, “[he] will work with Congress to eliminate all non-compete agreements, except the very few that are absolutely necessary to protect a narrowly defined category of trade secrets.”  (Misappropriation of trade secrets is illegal under state law as well as Federal law under the Defend Trade Secrets Act.)

Most states, including Michigan, allow non-compete agreements as long as they are reasonable, considering the period of time, geographic reach, and the subject matter restricted. They also look at the employee's access to sensitive information, and involvement in research and development; something this court repeatedly pointed to as lacking in the Whitewater agreement.

The trend will likely be a further narrowing of non-compete agreements. Since this court considers post-employment assignments to be a restriction on future employment, the same will likely happen to these agreements as well.

In the meantime, revising agreements to tie them to trade secrets would be wise, in the event President Biden gets his Federal ban. Businesses need to protect themselves from former employees who just happen to conceive of an invention or content capable of copyright protection after leaving that was under consideration or in development before leaving.

To be able to show these were trade secrets of the employer may be the only way to recover these valuable assets after an employee leaves, and having invention disclosure records and records of ongoing developments may be the evidence that is needed.

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William Honaker is a member partner in the Troy office of Dickinson Wright. With more than 35 years of experience as an intellectual property attorney, he helps businesses protect their brands, inventions, and copyrights. 



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