IP Alert: New Decision May Undermine Claims To IP Created By Former Employees

CONTRACT REQUIRING ASSIGNMENT OF INVENTIONS DEVELOPED BY FORMER EMPLOYEE AFTER EMPLOYMENT RULED UNENFORCEABLE AND UNFAIR COMPETITION UNDER CALIFORNIA LAW

By Stephen M. Fronk and Thomas A. Magnani

In late May, a federal court in California published a decision that may undermine some companies' claims to intellectual property created by their former employees. The court's order, in Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment (Shanghai) Co., 2009 WL 1481147 (N.D.Cal.), voids certain provisions in employee contracts that purport to assign to employers rights in inventions created by employees after their period of employment, even if those inventions relate to work performed for the former employer.

Background

The case concerned a dispute between Applied Materials, Inc. ("Applied"), a California-based semiconductor company, and Advanced Micro-Fabrication Equipment (Shanghai) Co. ("AMFE"), a Chinese competitor. After a number of Applied employees left the company to work for AMFE, Applied filed a lawsuit alleging, among other things, that the inventions described in several AMFE patent applications rightfully belonged to Applied. Those inventions, Applied argued, were produced by its former employees whose contracts contained clauses stating that Applied presumptively owned work-related inventions disclosed in any patent applications the employees filed within one year after their departure. In response, AMFE contended that California law precludes enforcement of the clauses Applied sought to invoke.

The precise clauses at issue (the "Assignment Clause") typically read as follows:

In case any invention is described in a patent application or is disclosed to third parties by me within one (1) year after terminating my employment with APPLIED, it is to be presumed that the invention was conceived or made during the period of my employment for APPLIED, and the invention will be assigned to APPLIED as provided by this Agreement, provided it relates to my work with APPLIED or any of its subsidiaries.

Findings

The court found that the Assignment Clause violated California law. The state's prohibition on employee non-compete agreements, California Business and Professions Code § 16600, invalidates provisions of "every contract by which anyone is restrained from engaging in a lawful profession, trade or business." It has long been established that certain agreements assigning away inventions conceived after the termination of employment run afoul of this statutory command. However, contractual provisions that assign to employers inventions conceived by an employee post termination, but based on the former employer's confidential information, have been enforced. Winston Research Corp. v. Minnesota Mining & Mfg. Co., 350 F.2d 134, 145 (9th Cir.1965). The significant legal development from this case is the court's conclusion that the Assignment Clause fell in the former, rather than the latter, category and that the Assignment Clause should not be enforced to the extent permissible under existing law.

First, the court determined, the Assignment Clause effectively applied to all work-related inventions within the year following an employee's departure. Applied had argued that the clause merely created a rebuttable presumption that inventions disclosed during that time were conceived during the employee's tenure at the company. In this view, former employees could keep rights in any inventions they genuinely developed independently following the termination of their employment, simply by overcoming the presumption. The court did not agree. Rather, it concluded, the plain meaning of the Assignment Clause was that it required assignment of all work-related inventions developed within a year of termination. The presumption that such inventions were conceived during employment served merely to justify the assignment. In light of that interpretation, the court found the Assignment Clause to be so overbroad as to amount to a "post-employment penalty that violates California public policy." The provision, the court wrote, "conceivably encompasses both inventions based on confidential employer information and inventions relating to former Applied employees' work in the broad field of semiconductor research and manufacturing." Were it limited to the first type of invention, it might have been lawful; because it included the second type as well, it was not.

Second, the court determined, the Assignment Clause purported to govern inventions produced over an impermissible range of time. Provisions in an employment contract assigning rights in an employee's invention produced during his or her tenure at the company are, of course, perfectly enforceable. When similar clauses cover later periods as well, however, they may "encompass[] not only the dishonest employee but also the honest employee who legitimately conceives an idea or improvement following termination" (ellipses omitted). The applicable provisions in Applied's contracts, the court asserted, were "overly broad with respect to . . . temporal scope."

Refusal to Narrow

The implication of the Assignment Clause's violating California's strict policy against employee non-compete agreements, in the court's view, was that the provision as a whole must be deemed void. The proper remedy, in other words, was not to adopt a narrow interpretation under which only permissibly assignable inventions would be covered. That more lenient approach, the court cautioned, would undermine that strict California policy because (1) "employers could insert broad, facially illegal covenants not to compete in their employment contracts;" (2) "[m]any, perhaps most, employees would honor these clauses without consulting counsel or challenging the clause in court, thus directly undermining the statutory policy favoring competition;" and (3) "[e]mployers would have no disincentive to use the broad, illegal clauses if permitted to retreat to a narrow, lawful construction in the event of litigation." Moreover, the court determined, Applied's use of the Assignment Clause in its employment agreements constituted unfair competition under California Business & Professions Code § 17200.

Practical Implications

In light of the court's decision in Applied Materials, companies may wish to review their existing employment agreements or proprietary invention assignment agreements to ensure that key provisions do not contain language that would render them altogether void under the reasoning the court articulated. Moreover, companies that rely on "form" agreements should ensure that their assignment clauses would be enforceable, if challenged.

If you have questions about any of the issues raised in this article, contact Thomas A. Magnani at 415.399.3032 or your usual Howard Rice attorney.