This is extremely interesting to me. It completely conflicts with the Microsoft Employee Agreement. While Microsoft has some tolerance for moonlighting (conditioned on many things such as managerial approval), if the processes are not follow it defaults to assumed ownership of all IP created by employees.
It's not uncommon for employment contracts to claim rights/powers that are invalid. When I lived in California it was common to see rights assignment in contracts even though a case would never make it to court in most cases, as I understand it. (IANAL)
California is still own equipment, own time, lack of conflict, can't argue. Doesn't mean the employer can't make things difficult for you since they have the bigger pocket book.
The employee agreement I signed* a long time back basically reads like a contractual restatement of RCW 49.44.140. Manager approval used to be required for employees not based in Washington but that was eliminated years ago. The moonlighting and employment agreements are required reading for us prior to developing independent apps for Windows Phone.
* - I am a long-time (greater than 10 years) Microsoft employee.
