Enforceability of Assignment Provisions Against Former Employees: The Impact of Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment, Inc.

26 May 2009 Publication

Legal News Alert: IP Litigation

Employers who invest in research and development have long been concerned about opportunistic employees. Their fear is that key researchers will invent something valuable. Rather than disclosing the idea to the employer who paid for the research, the researchers look for a bigger payday. They take the idea and either move to a competitor or start their own company. Only then does the former employee seek patent protection for the invention, assigning the rights to the new employer.

While the former employer can sue to recover the invention and to protect trade secrets, proving precisely when the invention was conceived or made can be very difficult. Some employers have attempted to address this problem by contractually assigning the burden of proof of the date of conception to the former employee. These employers include provisions in their employment agreements that create a rebuttable presumption that patent applications filed by former employees shortly after they leave their jobs reflect work done at and should be assigned to the former employer.

A recent District Court decision demonstrates that such provisions are not always enforceable in California. Because the Court’s decision turned on the precise language of the assignment clause, it should prompt California employers to review and amend the assignment provisions in employment agreements to remedy the flaws identified by the Court.

Case Summary
In Applied Materials, Inc. v. Advanced Micro-Fabrication Equipment, Inc., No. 2007-5248 (N.D. Cal. May 20, 2009), the Court held an employer’s assignment clause invalid because it required assignment of all inventions described in patent applications or disclosed to third parties within one year after termination of employment. Applied Materials, Inc. (Applied) is a California-based semiconductor manufacturing company. Applied required its current employees to sign an Employment Agreement that included the following language:

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 as provided by this agreement, provided it relates to my work with APPLIED or any of its subsidiaries.

Applied Materials, slip op. at *2 (emphasis supplied)

The defendant—Advanced Micro-Fabrication Equipment (AMFE)—is a joint venture startup corporation headquartered in China. AMFE is owned by former Applied engineers and has hired a number of former Applied employees.

Applied sued AMFE and the former Applied employees for trade secret misappropriation, conversion, and intentional interference with contract. Applied claimed that AMFE had systematically stolen its trade secrets and used the stolen trade secrets to create semiconductor manufacturing tools in direct competition with Applied’s products. AMFE filed a counterclaim seeking to invalidate the assignment clause quoted above and moved for summary judgment.

The Court granted the AMFE’s motion for summary judgment, finding that the assignment clause is overly broad with respect to subject matter and temporal scope. The Court held that the assignment clause was void under California law as an unlawful restriction on employee mobility because the assignment clause operated as an unlawful non-compete provision.

In its analysis, the Court addressed two questions: (1) did the clause require assignment of inventions conceived within one year after termination of employment, and (2) if so, did the clause violate California’s prohibition on employee non-compete agreements, or did it fall under the trade secret exception to California Business and Professions Code Section 16600?

The Court found that the assignment clause violated § 16600 in both respects. First, the assignment clause was not limited to inventions conceived while employed, but rather included any invention described or disclosed in a patent application within one year following termination of employment. Second, the clause required an employee to assign any invention related to the former employee’s work at Applied and was not narrowly tailored to protect Applied’s trade secrets.

The Court found the assignment clause overly broad because it failed to limit invention assignment to those that were conceived by former Applied employees while employed at Applied. Applied argued that the contract’s “it is to be presumed” language merely created a rebuttable presumption that such inventions were conceived during employment. The Court, however, found that the contract’s plain meaning was that the presumption was irrefutable rather than rebuttable because there was no discussion of how an employee might rebut any such presumption. Giving the contract’s terms their ordinary meaning, the Court held that the contract required former employees to assign all inventions made or disclosed within one year of employment, even if the inventions were created after the employee left Applied. The assignment clause, therefore, constituted an unlawful non-compete provision unless it fell under the trade secret exception.

The requirement that an employee assign any invention related to the former employer’s work at Applied was deemed overly broad because it fell outside the scope of the trade secret exception to Section 16600. The Court distinguished prior case law in which an assignment provision was held to be valid because assignment was limited to inventions based on employer’s confidential information. The Court noted that no similar limiting provision was found in Applied’s agreement. Because the assignment clause “broadly target[ed] any invention related to former employees’ work with Plaintiff” it encompassed both inventions based on confidential information and inventions based on work in the broad field of semiconductor research. Therefore, the Clause did not fall within the trade secret exception to Section 16600.

Although the assignment clause was found void under California law for the foregoing reasons, the Court’s decision only affects Applied’s claim for intentional interference with contract. Applied’s count for trade secret misappropriation is not affected by the decision.

The Court’s holding that the assignment provision was invalid was tied to the specific language used in the agreement. Employers should review existing employment agreements to ensure that any invention assignment provision is crafted to avoid the deficiencies identified in this case. An assignment clause should expressly state that the presumption created by the agreement is rebuttable, establish a procedure by which the employee could rebut the presumption, and clearly state that assignments are limited to the employer’s confidential information. While the Court did not state that inclusion of these provisions would render either the assignment requirement or the contractual allocation of the burden of proof enforceable, it is clear that assignment clauses without such limitations will not be enforceable and are probably invalid on their face.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues.

If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or the following:

George C. Best
Palo Alto, California