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The United States Court of Appeals for the Federal Circuit is now open and in session.

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God save the United States and this honorable court.

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All right, we'll hear argument first in 19-1852, Whitewater West Industries versus Hales House.

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Mr. De La Serra.

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Good morning.

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Manny De La Serra for Appellants Richard Alshouse, Yang Ye, and Pacific Surf Designs.

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Thank you for your time and consideration.

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Your Honor, this appeal turns on the threshold question of whether California Business and Professions Code 16600 in view of the Labor Code 2870 prohibits employers from acquiring their former employees to assign back inventions conceived of post-employment without use of the employer's trade secret.

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The answer to that question.

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Counsel, this is Judge Moore.

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Is it correct

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that there is no dispute that this invention was conceived and reduced to practice after the employee left the employment?

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That's correct, Your Honor.

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The answer to that question should be a resounding yes.

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Whitewater identified no case to the contrary.

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That is because doing so would directly contradict

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a strict black letter law and public policy of California that prohibits any post-employment restriction on employee mobility.

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Here, the trial court found and Whitewater does not dispute that Mr. Alshouse conceived of the inventions no earlier than two weeks after the termination of his employment.

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Also, Whitewater does not allege that Mr. Alshouse used any trade secret or confidential information.

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Council, I think one of the most difficult questions for you is our Stanford decision has some broad language about 16600.

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Can you please turn to that case and address why the facts here are different from there?

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Yes, Your Honor.

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In the Stanford case, at the district court level,

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Invention was actually, and this is addressed actually in my reply brief, the invention was developed and conceived up during the consulting agreement.

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It was not an employment agreement.

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It was a consulting agreement.

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And it was conceived up during that.

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So there was never this issue of preconception or pre-termination, post-termination.

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That's the first distinction.

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The second distinction is

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that that was a consultant agreement.

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It wasn't an employment agreement as applied, for example, in armor light, applied materials, conversion logic, and highway, all of which were employment agreements.

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And so that's the second distinction.

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So if you look at this in the context of an employment agreement, every single case that has looked at this has divided the world between pre-termination and post-termination.

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If it's pre-termination, then there could be an assignment.

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If it's post-termination and there's no trade secret, then there is no assignment.

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That is the fundamental difference with the Stanford case.

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So I'll continue.

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Each trial court has considered this question including the District of California in armor light and applied materials have consistently held that assignment obligations are void under 16600

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when the extended inventions conceived post-employment without the use of employer trade secret.

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Can I ask this question?

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This is Judge Toronto.

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Am I remembering correctly that we do not actually have any California state court at the appellate or Supreme Court level addressing this particular kind of restraint on a former employee?

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federal court decisions at the district court level.

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Your Honor, the most recent case on 16600 is the California Supreme Court on Ishell Pharma.

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That doesn't involve an assignment, right?

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It does not, Your Honor.

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Right, I'm just trying to clarify.

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Do we owe any kind of deference to

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various district federal court decisions, federal district court decisions about the likely meaning of California law or is it just those are the materials that are available for the particular situation and the much and the more general pronouncements of the California Supreme Court in Edwards and Ixchel and others about the strength of the 16600 prohibition

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on restraints on former employees that those two things together tell us what the likeliest, best interpretation of California law is.

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I think that's right, Your Honor.

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There's no, obviously this court need not abide by the district court cases.

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However, each of those district court cases are completely consistent with the appellate and supreme court cases on 16600 of which this court should take note because it is California law and it is California case, California courts interpreting their own law.

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And with that, that's the only way that 16600 broad per se restriction against any post termination restriction

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and restraint can be reconciled.

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Ishtel was very clear in stating that, quote, an employer cannot by contract restrain a former employee from engaging in his or her profession, trade or business.

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Council.

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Yes.

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So I guess my question is, if there's more again, is Ishtel, those cases go to restraining

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employment, restraining, practicing the profession.

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But this case goes to patent rights.

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There's no question this employee is free to continue working in the field.

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Nothing in the agreement he signed, the employment agreement, restrains his ability to work.

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It only restrains his ability to obtain patent rights under certain limited circumstances.

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So why does this fall within 16600 and those cases that you cite?

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Your Honor, because 16600 is a basically, quote-unquote, take no-holds-barred approach to post-termination restraint.

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Any restraint, even as low as paying $20 back, is found to be a violation of 16600.

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Well, Counsel, it's not any restraint.

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It's any restraint from engaging in a lawful profession trade or business.

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So what does that language mean, engaging in a lawful trade profession or business?

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Basically, it is employee mobility.

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The purpose of the statute 16600 is to promote competition and to allow employees to move from job to job.

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Now, if we are left with a situation where Whitewater, under its current assignment provision,

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can indenture effectively Mr. All's house for his entire career because there is no end point in the assignment provision.

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It's forever from having to- I think what Judge Moore is asking, this is Judge Dyke, what Judge Moore is asking you is why does this assignment provision prevent this individual from practicing his trade or business?

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That's the question.

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Well, Your Honor, he cannot get hired by, if this restraint maintains, employers will not hire him because they will have to assign any work that they do in a particular field back to his previous employment.

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That restrains his ability to be mobile, and that's the fundamental purpose of 16600.

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If employer, if employees cannot move and take with them their

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their training but not trade secret and either start a competing company or do or work with a competing company, then that's a restraint on their trade.

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That's a restraint on their ability to be able to work in the field they chose.

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And the courts are very clear here.

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Any restraint, no matter how minimal, triggers 16600.

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And there needs to be an exception.

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And those exceptions are listed specifically in the statute.

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None of those exceptions apply here.

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Can I ask this question?

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This is Judge Toronto.

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You have, sort of following the approach of your reply brief in this morning's argument, you have rested your presentation, I guess, this morning entirely in the gray brief primarily

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on 16600, not on 2870.

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And I just want to ask a question about that.

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When I read 2870 and think about the argument that was featured in your blue brief about its applying only to current employees' inventions, the problem that I see with that, and this may be a good reason

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for your reliance on 16600 is that it would, by its literal language, mean that 2870 simply does not address or therefore restrict agreements about former employees' inventions.

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There might be an implication that a fortiori former employees are free from such assignments,

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If you're right, as I understood your original 2870 argument, that employee where it's used means current employee, the provision simply would not address former employees' inventions.

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I think that's right, Your Honor.

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The current reading of 2870

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is that there has to be an employee-employer relationship.

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Otherwise, the statute would have said former employee and former employer.

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It does not say that.

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If you look, for example, at Division 3, which is what 2870 is a part of,

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and Labor Code Section 2750, it states that the contract of employment is a contract by which one who is called an employer engages another who is called an employee to do something for the benefit of the employer or the third party.

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Once the employment relationship is done, Mr. Alshouse is no longer an employee and therefore... Well, Counsel, I'd like to follow up.

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This is more on Judge Toronto's question because if

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If your position is correct that 2870 simply doesn't apply to circumstances where the employment relationship has terminated, so it never applies in a backward-looking fashion, then how in the world do we construe A1, which focuses on whether or not the invention was conceived or reduced to practice at the time you were employed, right?

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How do we understand that in the context of this section doesn't imply at all to anyone once the employment rights are terminated?

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I'm not understanding your argument, Your Honor.

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It's not an argument, Counsel, it's a question.

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But the question was, how do we look at A1

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In light of the argument you're making about timing, you're making a timing argument.

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You're saying 2870 as a whole doesn't apply any longer and employees can't be restricted because once you're no longer an employee, you can't be restricted.

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Is that right?

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That's correct, Your Honor.

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Well then, why would it have this portion within it?

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that talks about whether or not you invented during the course of your employment, you conceived and reduced to practice.

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Why would that timing provision need to be in there at all if this section simply never applied once employee deployment agreement no longer existed?

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Well, Your Honor, A1 states relate at the time of conception or reduction of practice of the invention to the employer's business.

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There's no statement in there that it has to be within the confines of employment like I believe you're stating.

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What I'm, what I, this section basically has two hooks.

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One of which is if you conceive of this during your employment and it's part of the business of the employee, of the employer, then you must assign.

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Or if you conceive.

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And that restriction would continue after the employment is terminated, right?

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I don't believe so, your honor.

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And I think this court in Appalara, uh, um, basically stated that 2870 does not confer any rights, any additional rights to the employer.

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It's a protection to the employee.

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But if an employee can conceive of an invention while employed, then leave and the assignment hasn't taken place, there's still an obligation to assign.

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after the termination of the employment, right?

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That's correct.

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But that's not the situation here, Your Honor.

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No, no, I understand that.

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But your broad statement about this not applying to former employees is not correct.

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It does apply to former employees who conceived of inventions while they were employed, right?

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That's correct.

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And that's consistent with the district court case law in armor light and conversion logic.

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That's correct, Your Honor.

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But again, I must stress that that's not the issue here.

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Your Honors, I see that I'm at 14 and a half minutes, actually 15 minutes at this point.

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Would you like to continue?

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Unless my colleagues have further questions, we'll hear from Mr. Scott.

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Hearing none, we'll restore your rebuttal time, Mr. De La Sara.

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Thank you, Your Honor, I appreciate it.

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Okay, we'll hear from Mr. Scott next, please.

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Mr. Scott, are you there?

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Yes.

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Good morning.

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The typical thing we have now where people forget to unmute.

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I apologize.

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May it please the court?

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My name is Roger Scott of the law firm Buckhalter.

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I, along with my colleague Rick Cache, represent Appellee Whitewater West Industries Limited.

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I will be speaking to the issues related to the assignment provision and Mr. Aileshouse's employment contract.

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And Mr. Cachet will address any issues the court may have relating to Mr. Ye's alleged co-inventorship of patents at issue.

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Let me ask you a question about 16600 as construed by the California Supreme Court in the recent XCELL decision.

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That case seems to suggest that there is a rule of reason under 16600.

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And I guess my question is,

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How can it be that the provision of this agreement, which requires the future assignment of any newly created inventions in the future, the indefinite future, just because they relate to the former employer's business, can possibly be a valid provision of the agreement?

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Well, Your Honor, I think that the language of the contract, especially when it's tied with the language of Labor Code 2870, dictate that the legislature has said that relating to the employer's business is an appropriate subject matter restriction.

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But that's not the question.

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The contract, the assignment provision says that it applies to inventions here and after made or conceived by the employee

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quote, in any way connected to any subject matter within the existing or contemplated business of the company.

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So that provision would seem to require the assignment of an invention conceived after employment, 10 years after employment, that relates to the former employer's business.

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Am I wrong in reading it on its face that way?

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I don't think that you're incorrect in reading it on its face that way.

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However, I think that there's a natural connection here that has to be proven by fact that it actually relates to the employer's business and that over a period of time that relationship simply goes away.

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I think that that's even more true with respect to the other provision of the contract that says that an invention that results from the employee's work

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at the employer must be assigned back, which is similar to the language that's in 2870A2.

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Counsel, I'd like to follow up on Judge Steck's question because I'm going to be honest, your answer made absolutely no sense to me.

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What do you mean over time the relationship goes away?

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I apologize if I wasn't clear.

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Relating to the employer's business,

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is what the business was at the time that the employee worked there.

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Obviously, if the employer's business changes or the employee does something afterwards that's different, then it's not going to tie back and it's not going to be factually related to the employer's business and the employer is not going to be able to claw that back.

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Yes, but I think Judge Dyke's question is 10 years down the road, if this business is still in the same business,

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and 10 years down the road while working at a completely different but competitive company, this inventor comes up with an idea that relates to that same business that the other employer is still in that other employer can claim ownership over any intellectual property rights related to that newly conceived concept 10 years down the road.

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Is that correct?

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Your Honor has hit on obviously the most difficult portion of our position.

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And I understand that that's the interpretation that could be taken.

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I don't think that that is correct.

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I think that there must be some tie to what the employer was doing, excuse me, what the employee was doing at the time he was employed there.

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And that going and working for another competitor and conceiving of something that is related to the competitor's business, even if it's in the same line,

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is not really going to tie back to what the employee was doing there.

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Let's assume for the moment that the broad construction that Judge Moore and I have suggested to you is correct and that this does apply for the indefinite future to any newly invented inventions that relate to the former employer's business.

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Would that provision be valid under 16600?

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I don't think that that provision would be valid

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in that construed context under either 16600 or 2870.

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However, what I will point out is that 2870 allows for the voiding of a specific provision if it exceeds 2870.

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So here you could line out the, you know, if that was the interpretation to be taken, then that specific subsection of the contract, I believe that's subsection 2AC in this contract,

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would be lined out, but it would not invalidate the entire contract nor would it invalidate the entire assignment provision.

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So what about the Kaleidi decision that says that the entire contract does fall if it violates 16600?

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Well, the entire time, I believe that what Tony says is that you can't blue pencil the contract.

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You can't narrow it.

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And there's also a distinction in the language between 16600 which says that any contract is to that extent void versus 2870 which allows for any provision to be voided.

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So I think that if you're applying 16600 there may be a broad strokes deletion but if you're applying 2870 then you narrow the provision itself which in this case is the subsection that might go beyond 2870 without affecting the other subsections.

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For example, subsection, I think it's 2AB in the contract that says results from, which is the portion of the contract that district court actually applied.

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OK, so under the broad construction of this agreement, we're left with the question as to whether, as you put it, blue pencil a contract or whether it becomes invalid as a whole because of this invalid provision, right?

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If you're applying 16600, and I think one of the larger questions here is the intersection between 2870 and 16600.

[00:23:05] Speaker 05:
And, you know, looking at the California Supreme Court's recent opinion in Ixchel, one of the statements that struck me is it says, it is axiomatic that the language in a judicial opinion is to be understood in accordance with the facts and issues before the court.

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And that's in Ixchel at 9 Cal 5th, 1158.

[00:23:25] Speaker 05:
And they're citing Chevron, which is an older California Supreme Court case.

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And here, all of these decisions that discuss 16600 and the broad strokes, none of them discuss 2870.

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None of them have looked at 2870.

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And as far as I can tell, none of them have ever been presented with the question of how 2870 interacts with 16600.

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So I think it's very difficult to say as a blanket statement that because the other provisions that have been invalidated under 16600 are invalid, that a provision that complies with 2870 would be invalid.

[00:24:05] Speaker 02:
I think Judge Moore asked a question about restraining employment, and I think that... Well, how is this provision consistent with 2870?

[00:24:16] Speaker 02:
Are you reading 2870 as...

[00:24:19] Speaker 02:
saying that you can have a future restraint on new inventions that's valid?

[00:24:28] Speaker 05:
Yes.

[00:24:29] Speaker 05:
I think that 2870, as it's written, does not have any time constraints.

[00:24:35] Speaker 05:
The use of the words employer and employee are basically identifiers of the people who enter the contract at the time.

[00:24:42] Speaker 05:
I don't think that there's any restriction to say that just because somebody becomes a former employee later that the legislature needed to write down every single potential thing that might happen, future employer, former employer, et cetera.

[00:24:57] Speaker 05:
They're just contract identifiers and nowhere does it say this cuts off at the time the employment ends.

[00:25:04] Speaker 05:
And I think that that's actually bolstered by the next section 2871

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which the legislature did specifically write in the words during employment.

[00:25:14] Speaker 05:
So the legislature knew how to restrict something to the scope and time of employment if it wanted to, but did not apply that in 2870.

[00:25:24] Speaker 01:
Council, I totally understand your distinction, the differentiation argument between 2870 and 71, and it's a very good point, but I'd like to turn to the language of 2870.

[00:25:36] Speaker 01:
Why do you think, if it wasn't to focus on timing, why do you think the California legislature added the A1 restriction that it has to relate at the time of conception or reduction of practice to the employer's business?

[00:25:50] Speaker 01:
Why wouldn't he just say an invention that relates to the employer's business?

[00:25:56] Speaker 01:
Why would they put that timing portion into A1?

[00:26:05] Speaker 05:
I see that I have time.

[00:26:06] Speaker 05:
May I still respond to your question, Your Honor?

[00:26:08] Speaker 00:
Go ahead.

[00:26:10] Speaker 05:
I think that that timing provision is actually very important.

[00:26:13] Speaker 05:
And I think it also sets up the distinction between 2870A1 and A2.

[00:26:17] Speaker 05:
I think the restriction on timing in A1 is trying to tie it to what the employee was doing at the time he worked there.

[00:26:28] Speaker 05:
And 27A2 does not make any timing restriction at all.

[00:26:33] Speaker 05:
It just says results from.

[00:26:36] Speaker 05:
which is really the situation we have here where an employee was doing something while he was employed, decided he wanted to compete, left, and then immediately finalized the invention afterwards.

[00:26:48] Speaker 05:
So you can look to what the invention resulted from without restriction on timing, whereas A1 is specifically restricted in time.

[00:27:01] Speaker 02:
Okay, unless my colleagues have further questions,

[00:27:04] Speaker 02:
We'll hear from Mr. Tashay.

[00:27:10] Speaker 04:
Good morning, Your Honors.

[00:27:11] Speaker 04:
May it please the court, Rick Tashay on behalf of Whitewater West Industries.

[00:27:15] Speaker 04:
Rather than ask this court to review the district court's factual determinations for clear error and review its legal conclusions de novo consistent with established law, instead, appellants ask this court to undertake its own credibility determinations and reweigh the evidence by conducting a de novo review, not just of their

[00:27:33] Speaker 04:
the district court's legal conclusions regarding the date, conception, and inventorship, but also its underlying facts.

[00:27:41] Speaker 04:
The district court based on the totality of the evidence, including but not limited to the images contained in Mr. Aileshouse's notebook that are dated between August 4th, the day that the company opened, and August 16th, 12 days later, the testimony of the witnesses, emails between the principals at Pacific Cirque Designs, Mr. Aileshouse and Mr. Yeh,

[00:28:02] Speaker 04:
videos of Mr. Ailes' house and Mr. Yeh, the patents at issue and their filed histories, the court determined that Whitewater West established by clear and convincing evidence the date of conception is August 16, 2012, and that each and every claim limitation in the patents at issue was conceived by Mr. Ailes' house.

[00:28:22] Speaker 04:
The district court also made secondary factual findings based upon evidence presented regarding the wave lock technology

[00:28:29] Speaker 04:
and the lock of health patents that were cited by the patent office to further support its legal conclusion that Mr. Ye did not contribute to the conception of the patents at issue because all of Mr. Ye's alleged contributions that were set forth in their verified responses to the interrogatory requests were merely recitations of well-known concepts or current state of the art that were known by Mr. Aileshouse as one of ordinary skill in the arts and because of his employment

[00:28:58] Speaker 04:
working with Mr. Lochtefeld at Wavelock at the time of conception.

[00:29:03] Speaker 04:
And where the findings are based on determinations regarding credibility of witnesses, as was the case here, the Supreme Court in Anderson v. the city of Bessemer City in North Carolina said that Rule 52A demands even greater deference to their trial court's findings, or only the trial judge can be aware of the variations in demeanor and tone of voice

[00:29:26] Speaker 04:
that bears so heavily on the listener's understanding of and belief in what is said.

[00:29:30] Speaker 04:
And the court went on to further state that when a trial judge's finding is based on his decision to credit testimony of one of two or more witnesses, each of whom has told a coherent and factually plausible story that is not contradicted by the intrinsic evidence, pardon me, that a finding, if not internally inconsistent, can virtually never be clear error.

[00:29:54] Speaker 04:
And as such, the appellant here has failed to identify any clear error by the district court in its factual determination so as to warrant a de novo review of the district court's legal conclusions on the issues of the date of conception and inventorship.

[00:30:10] Speaker 04:
And unless the court has questions for me, I'm happy to yield my time.

[00:30:15] Speaker 02:
Okay.

[00:30:16] Speaker 02:
Hearing no further questions, let's hear from Mr. De La Sera.

[00:30:19] Speaker 02:
You have three minutes.

[00:30:22] Speaker 03:
Thank you, Your Honors.

[00:30:23] Speaker 03:
I'd like to direct your attention to the Epplerra case, which basically states that when the 2870 contract is written solely by the employer, it must be construed strictly against that employer, which is the case here.

[00:30:44] Speaker 03:
I don't think under California law, and it's pretty clear that under Dow and its progeny, that a

[00:30:54] Speaker 03:
district court can red line or blue line any sort of violation of 16600.

[00:31:00] Speaker 03:
In Dell, for example, the court said, any attempt to construe the non-compete and non-solicitation clauses in such a manner to make them lawful would not be reforming the contract to correct the mistake of the parties, but rather to save the statutorily prescribed and void provision.

[00:31:17] Speaker 03:
One other thing that should be mentioned here is that when this contract was drafted between All's House and

[00:31:24] Speaker 03:
Whitewater.

[00:31:26] Speaker 03:
Whitewater did not, as the employer, advise Alshouse as the employee of 2870 and the bounds of 2870 as required by Section 2872.

[00:31:40] Speaker 03:
Further, the Council for Appellees continues to use the language derived directly from Labor Code 2870 in particular

[00:31:53] Speaker 03:
Section A1 relate at the time of conception and Section A2 results from any work performed by the employee or for the employer.

[00:32:03] Speaker 03:
But the actual language of the assignment provision here is much broader.

[00:32:09] Speaker 03:
It states resulting from or suggested by employee's work, that's broader than 2870.

[00:32:15] Speaker 03:
And in Section C, in any way connected to any subject matter within the existing or contemplated business of the company, it's hard to imagine that anything would be outside of the scope of that.

[00:32:28] Speaker 03:
And so when Etholese Council states that if this,

[00:32:34] Speaker 03:
assignment provision were to be interpreted to last forever, which indeed it does say conceives of or here and after may conceive of, that lasts forever, it would violate 2870 and 16600.

[00:32:49] Speaker 03:
Imagine if this court were to uphold Whitewater's reading of this provision.

[00:33:02] Speaker 03:
then employers would hire every available engineer in their industry and have them sign an assignment provision and then immediately fire those employees.

[00:33:10] Speaker 03:
Any invention from those engineers would require assignment provided it is quoted in any way connected to anything.

[00:33:17] Speaker 01:
But, Council, Council, I think that your opponent suggested when we were talking about this blue pencil versus invalidating the contract as a whole, what he said could blue pencil out just provision C if you were worried about timing.

[00:33:32] Speaker 01:
And you could leave B, which is, he said, what the district court actually applied.

[00:33:37] Speaker 01:
Why couldn't we leave B intact?

[00:33:42] Speaker 03:
Well, because the language of B is actually broader than the statute.

[00:33:46] Speaker 03:
It states resulting from or suggested by.

[00:33:48] Speaker 01:
If the trial court were to simply line out... You haven't explained to me how those two words are different from each other.

[00:33:56] Speaker 01:
And I'm not sure that isn't really just a redundant concept.

[00:34:00] Speaker 01:
What do you mean?

[00:34:02] Speaker 01:
You didn't argue in your brief to me that resulting from or suggested by are two different standards which have different breadth or scope.

[00:34:12] Speaker 03:
Oh, I think they are.

[00:34:13] Speaker 03:
And I think we did argue that in our brief.

[00:34:17] Speaker 03:
But to answer your question directly, Your Honor, if, for example, I was working at a tire manufacturer and typing up a report,

[00:34:28] Speaker 03:
an idea came to my mind regarding a new keyboard that might help me type this up faster.

[00:34:34] Speaker 03:
Is that suggested by my work for the employee, for the employer?

[00:34:38] Speaker 03:
I would argue that it is.

[00:34:40] Speaker 03:
I would also argue that it's not related to.

[00:34:43] Speaker 01:
No, no, no, no.

[00:34:44] Speaker 01:
The word isn't related to.

[00:34:46] Speaker 01:
It's resulting from work you did.

[00:34:48] Speaker 01:
Certainly that new idea does result directly from the work you were doing.

[00:34:54] Speaker 03:
If that is the bounds, Your Honor, of 2870, that anything you do during the time frame, any concept you have from the time frame that I believe 2870, then the assignment provision here has absolutely no bounds, none.

[00:35:13] Speaker 03:
And it would be impossible for me or Mr. Alshouse to ever, ever work as

[00:35:22] Speaker 03:
an inventor in any other capacity in the water works field or really any other field if resulting means that rod.

[00:35:32] Speaker 03:
And more importantly, if that resulting from has no tail end, if it exists forever.

[00:35:39] Speaker 03:
If Mr. Alshouse were to have called me this morning and said, I have another idea for a wave ride,

[00:35:44] Speaker 03:
Do I then need to call Whitewater's counsel and say, hey, look, we've got something to assign to you?

[00:35:49] Speaker 03:
And if that's the case, when does it stop?

[00:35:52] Speaker 03:
If that's the case, 16600 means nothing.

[00:35:57] Speaker 03:
And clearly, the H. Shell recent promulgation from the State Supreme Court states that any restriction is invalid unless it's specifically cited.

[00:36:10] Speaker 03:
And the one thing is that 2870 is not cited,

[00:36:14] Speaker 03:
And yet, the applied materials, the conversion logic case, the highway case, the armor light lens case, were all known to the legislature.

[00:36:25] Speaker 03:
They amended several times since the inception of 2870, and at least four respects they amended and included exceptions to 16600, but 2870 is not among them.

[00:36:40] Speaker 02:
And the reason is, I think unless there are further questions, we're out of time here.

[00:36:45] Speaker 02:
Hearing none.

[00:36:49] Speaker 02:
Thank you.

[00:36:50] Speaker 02:
Thank both counsel.

[00:36:51] Speaker 02:
The case is submitted.