Hauge wins reversal at CAFC of civil contempt ruling in "former employee" case

The former employee Hauge prevailed against his former employer in a contempt/injunction case Energy Recovery v. Hauge.

Of the background for this inventor/former employer disagreement:

The dispute between Mr. Hauge and his former employer, ERI, began more than thirteen years ago over ownership of intellectual property rights related to “pressure exchangers,” a type of energy recovery device used in reverse osmosis. On March 16, 2001, the parties entered into the Agreement resolving the litigation. Three days later, the district court adopted the Agreement and issued the 2001 Order, stating that ERI was to be the sole owner of three U.S. patents and one pending U.S. patent application: U.S. Patent Nos. 4,887,942, 5,338,158, and 5,988,993, and U.S. Patent Application No. 09/508,694, which later issued as U.S. Patent No. 6,659,731.1

The Agreement and subsequent Order obligated Mr. Hauge to transfer ownership not only of the patents, but also “all other intellectual property and other rights relating to pressure exchanger technology” pre-dating the Agreement and 2001 Order. J.A. 10, 16. The Agreement states: “[t]his assignment and transfer of rights is not intended to extend to inventions by Hauge . . . made after the date of this Agreement.” J.A. 16. The Agreement also contains a non-compete clause, prohibiting Mr. Hauge from making or selling energy recovery devices for use in reverse osmosis salt water desalination for two years from the date of the Agreement.

An issue

After the expiration of the non-compete clause, on August 10, 2004, Mr. Hauge filed a provisional patent application, titled “Pressure Exchanger,” and filed a utility application one year later. U.S. Patent No. 7,306,437 (the “’437 patent”) issued on December 11, 2007. Its abstract describes “[a] pressure exchanger for transferring pressure energy from a high-pressure fluid stream to low-pressure fluid stream.” ’437 patent, at [57]. (...)

At the hearing, Mr. Hauge’s counsel argued that ERI had failed to show that the allegedly proprietary technology was protectable as a trade secret, and argued that Mr. Hauge was not prohibited from using the technology because the Agreement related only to transfer of ownership of the patents and proprietary technology pre-dating the Agreement.

A point on appeal procedure:

Even though no final disposition has been made regarding the amount of contempt damages and attorneys’ fees, the district court’s Contempt Order is appealable under §1292(c)(1) because it modified the scope of the 2001 Order.  In relevant part, the 2001 Order declared ERI the sole owner of all “intellectual property and other rights relating to pressure exchanger technology predating this Order.” 

As to contempt

To establish civil contempt, clear and convincing evidence must support each of the following elements:

(1) the existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) that the decree was in the movant’s favor; (3) that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) that the movant suffered harm as a result.

The CAFC observed:

None of Mr. Hauge’s challenged conduct violates any provision of the 2001 Order. Paragraph One of the Agreement begins with the heading “ABSOLUTE TRANSFER OF ALL RIGHTS IN PATENTS, PATENT APPLICATIONS AND ALL RELATED INTELLECTUAL PROPERTY, TO ENERGY RECOVERY.” J.A. 16. The remainder of the paragraph details that Mr. Hauge “irrevocably and absolutely assign[s]” to ERI “all right, title and interest along with any and all patent rights,” J.A. 16, which Mr. Hauge had in “(i) the patents and patent applications . . . ; (ii) any and all patent rights . . . , intellectual property rights, property rights . . . ; and (iv) all other intellectual property and other rights relating to pressure exchanger technology predating this Order.” J.A. 10. Only clause (iv) is at issue. See J.A. 57 (ERI’s counsel explained to the district court that “[t]he [issue] that is in question . . . for this hearing, it’s not patents, it’s not the applications for patents, but it is No. 4 in the [O]rder, ‘[a]ll other intellectual property and other rights relating to pressure exchanger technology predating this [O]rder.’”).

The Agreement only required Mr. Hauge to transfer ownership of the pre-Agreement pressure exchanger intellectual property; “cooperate fully in executing any and all documents necessary” to do so; refrain from competing for two years; and announce in a press release that ERI was the “sole source for Pressure Exchangers built pursuant to such patents, patent applications, and technology.” 

Of hiring other employees:

The district court was also concerned by Mr. Hauge’s conduct in hiring two (then current) employees of ERI. Mr. Hauge admitted hiring the ERI employees, explaining they were “skilled trade persons . . . and of course no one would hire at this cost and expect no benefit from past work experience.” J.A. 7. Mr. Hauge’s professed motivation for the hires was that when he was the president of ERI, “we basically went through the complete setup of commercial production. And what we were about to do was pretty much all over again doing what I did in [19]98.”  (...)

While it may constitute trade secret misappropriation, that would not justify a finding of contempt in this case. Notably, ERI’s trade secret claim in California state court based on the same conduct resulted in a unanimous jury verdict in favor of Mr. Hauge.

Of consent decrees

the Supreme Court has explained that a consent decree must be discerned within its four corners:

Consent decrees are entered into by parties to a case after careful negotiation has produced agreement on their precise terms. The parties waive their right to litigate the issues involved in the case and thus save themselves the time, expense, and inevitable risk of litigation. Naturally, the agreement reached normally embodies a compromise; in exchange for the saving of cost and elimination of risk, the parties each give up something they might have won had they proceeded with the litigation. Thus the decree itself cannot be said to have a purpose; rather the parties have purposes, generally opposed to each other, and the resultant decree embodies as much of those opposing purposes as the respective parties have the bargaining power and skill to achieve. For these reasons, the scope of a consent decree must be discerned within its four corners, and not by reference to what might satisfy the purposes of one of the parties to it.

United States v. Armour & Co., 402 U.S. 673, 681–82 (1971)