January 25, 2021

Volume XI, Number 25

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January 22, 2021

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Section 16600 Wipes Out Invention Assignment

"Wipin' out wipe out
Hey watch out
Wah wah wah
Wipin' out wipe out"

While employed by Wave Loch, Inc., Richard Alleshouse signed a "Covenant Against Disclosure and Covenant Not to Compete" that declared any inventions conceived then or in the future by Mr. Alleshouse to be Wave Loch's property if, among other things, the inventions are "in any way connected to any subject matter within the existing or contemplated business of [Wave Loch]".  The Agreement specified that California law governed.   After leaving Wave Loch, Mr. Alleshouse and his attorney filed applications that ultimately resulted in the issuance of three patents.  Whitewater West Industries, Ltd. then sued Messrs. Alleshouse, his attorney and the company that they formed to exploit the patents.  U.S. District Court Judge Dana M. Sabraw ruled in favor of Whitewater, finding that Mr. Alleshouse breached his covenant and that the covenant was valid under California law.

The Court of Appeals for the Federal Circuit reversed, finding that the covenant's "assignment provision has a broad restraining effect that renders it invalid under [Business & Professions Code] § 16600 as that statute has been applied to employment contracts in a manner highly protective of former employees".   Whitewater West Indus., Ltd. v. Alleshouse, 2020 U.S. App. LEXIS 36394.  Readers will recall that Section 16600 provides that with limited statutory exceptions "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void".  

Whitewater argued that Section 2870(a)  of the Labor Code overrides Section 16600 because Section 2870(a) approves of certain assignment provisions:

"(a) 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."

The Court of Appeals disagreed, however, holding that Section 2870 applies to inventions conceived during employment:

"No case law supports such an interpretation. Moreover, to read it as applying to such inventions, and authorizing temporally unlimited assignment requirements through its exceptions, would produce a conflict with what we think is otherwise the clear prohibition of§ 16600 on agreements like the one at issue here."

This case is another example of a court finding that an agreement does not have to expressly forbid competition to violate Section 16600.  See Broad Confidentiality Restriction Void As Illegal Non-Compete Provision.

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© 2010-2020 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume X, Number 330
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Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
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Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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