Jorda Secrets

Upon his transition to Emeritus Professor, Karl Jorda will no longer add new blogs. Pierce Law has decided to leave this blog up as a definitive source for the discussion on the complementariness of trade secrets and patents.

Professor Jorda's thinking on this topic culminated in the article:

Washburn Law Journal
Fall 2008
The Foulston Siefkin Lecture
PATENT AND TRADE SECRET COMPLEMENTARINESS: AN UNSUSPECTED SYNERGY
Karl F. Jorda

It is often alleged that trade secrets provide weaker protection as they are fraught with serious disadvantages.  Indeed, independent discovery and reverse engineering are defenses against trade secret misappropriation charges and leakage is a constant threat.  The Supreme Court in the Kewanee Oil case recognized this problem, and stated, "[P]atent law acts as a barrier, trade secret law functions relatively as a sieve." Moreover, there exists a belief that a later inventor/patentee of the same invention can enjoin a trade secret owner as an infringer from practicing his or her own invention

In the United States, section 273 of the Patent Code includes the "First Inventor Defense."  Unfortunately, this "first-to-invent-defense" provision bears little resemblance to a true prior user right provision, as exists abroad and as was initially introduced as part of proposed patent reform legislation.  The present version has exceptions and limitations that make it meaningless.  It is meaningless because "serious and effective preparation" for commercial use is excluded, and it is this development stage that is crucial.  The prior invention concerning which the defense is asserted is now required to have been reduced to practice more than one year before the patentee's filing date, and it is precisely within a year that inventions often are conceived independently by more than one inventor due to outside stimuli.  The defense, which was to apply only to manufacturing processes anyway, rather than across the board, as it should, was further constricted to cover only methods of doing business, newly patentable in the wake of the State Street Bank decision.

Very importantly, however, a good case can be made in the United States for the general proposition that the trade secret owner has a de facto prior user right to continue the practice of his trade secret based on two major premises.  The first is that much thoughtful literature, going back to at least 1944, postulated such a right. Secondly, the fact remains that it has never happened that the later patentee enjoined a trade secret owner.

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The industrial diamond process technology of General Electric Corporation (GE) and the Wyeth v. Natural Biologics and C&F Packing v. IBP and Pizza Hut decisions are excellent illustrations of the synergistic integration of patents and trade secrets for securing invulnerable exclusivity.

The artificial manufacture of diamonds for industrial uses was a very lucrative business for GE.  GE also had the best proprietary technology for making such diamonds.  GE patented much of its technology and some of the patents had already expired, so that much of the technology was in the technical literature and in the public domain.  However, GE also kept certain distinct inventions and developments secret.  American and foreign companies were very interested in obtaining licenses to this technology but GE refused to license anyone.  Unable to make progress with GE, certain foreign interests resorted to industrial espionage.  A trusted fast track star performer at GE, a national of the foreign country in question, who was above suspicion, was enticed with million dollar payments to spirit away GE's crown jewels.  Eventually, GE discovered the employee's deception, and the authorities caught, tried, and jailed him.

In Trade Secret Blogs Nos. 15 and 19, I asserted briefly but categorically that the "Best Mode" requirement of the Patent Statute is no impediment to the coexistence of patents and trade secrets, because this requirement is a very narrow and subjective one as it applies only at the time of filing, only to the knowledge of the inventor(s) and only to the claimed invention.

This assertion calls for amplification and explanation, especially since the "Best Mode" requirement is such as entrenched bugaboo.

Conventional wisdom holds that, because of the "best mode" requirement, which is embedded in American and many foreign patent laws, trade secret protection cannot coexist with patent protection.  This is a serious misconception.  Tom Arnold, the founder of the former Arnold, White & Dirkey firm in Houston, is in full agreement when he states that it is "flat wrong" to assume, as "many courts and even many patent lawyers seem prone" to do, that "because the patent statute requires a best mode disclosure, patents necessarily disclose or preempt all the trade secrets that are useful in the practice of the invention."

In the U.S. we have civil causes of action under federal law for infringement of patents, copyrights and trademarks. Alas, we do not have a federal civil cause of action for trade secret misappropriation! But we need one badly!

According to Mark Halligan, the main reason for the "step-child treatment of trade secrets" is the fact that "trade secrets did not find a solid home in intellectual property law" as a property right until the seminal Supreme Court decisions in Kewanee Oil Co. v. Bicron Corp. in 1974 and Ruckelshaus v. Monsanto in 1984. This even though trade secret protection dates back to Roman times, every patent is born as a trade secret and over 90% of all new technology is grist for trade secrets. In my view, however, there is another more consequential reason for the "black sheep" status of trade secrets, which has been conferred upon them by what can be called the "patent über alles/trade secrets are the 'cesspool of the patent system'" school of thought, headed by Professor Kayton. Their beef is grounded on the secrecy aspect. It is considered reprehensible to keep inventions secret, inasmuch as this supposedly flies in the face of the patent system, the essence of which is disclosure of inventions for the benefit of the public. But this is an untenable colossal misconception, which I have documented as such in prior blogs and most particularly in Trade Secret Blog No. 8 ("Trade Secrets are Not Secrets").

Now why do we need to federalize trade secret law as a civil matter in light of the fact that we already have three statutes on the law books to pursue trade secret misappropriation? We have 1) the Uniform Trade Secrets Act (UTSA), promulgated in 1974 by the National Conference of Commissioners on Uniform State Laws and adopted in 45 states, the District of Columbia and the U.S. Virgin Islands, 2) the Economic Espionage Act of 1996 (EEA), which makes trade secret misappropriation a federal criminal offense, as well as 3) the Computer Fraud and Abuse Act of 2006 (CFAA), which provides civil and criminal causes of action for trade secret misappropriation involving computers and which is being invoked more and more frequently.

In prior blogs I railed aplenty about the many misconceptions about the patent/trade secret interface and the deep-seated belief that patents and trade secrets are incompatible.

A typical, illustrative and specific sample of such misperceptions comes from “The Trade Secret Handbook — Protecting Your Franchise System’s Competitive Advantage” by Michael Lockerby, American Bar Association, 2000.  In it the following relevant passages appear:

    How Do Trade Secrets Differ from Other Forms of Intellectual Property? (p.11)
    The issuance of a patent obviously destroys trade-secret protection.  However, the franchisor should maintain the confidentiality of any patentable trade secrets while the patent prosecution process is pending.  One reason that this is important is that a patent may never be issued.
    Can Trade-Secret Protection Coexist with Other Forms of Intellectual Property Protection? (p.12)

    There is considerable overlap between the scope of copyright protection and the scope of trade-secret protection.
    In contrast, patent protection is fundamentally inconsistent with trade-secret protection.  The quid pro quo for what is essentially a government-granted monopoly (sic) with respect to the patented invention is full disclosure so that it will be in the public domain upon expiration of the patent.  However, the patent prosecution process does allow for protection of trade secrets until such time as the patent actually issues.

These passages reveal misunderstandings and half-truths at best.  Let me parse these passages to see what is wrong with them.

“Issuance of a patent obviously destroys trade-secret protection.”

This is clearly too broad a statement and a half-truth.  Trade secret protection ceases to exist only for precisely that which is disclosed in the patent specification.  But patent applications are normally filed very early in the research stage, after a first reduction to practice, in order to obtain the earliest possible filing or priority date.  The specification of such an early application typically describes in relatively few pages only rudimentary lab or shop experiments done and samples or prototypes obtained.  Hence, patents rarely disclose the ultimate scaled-up commercial embodiments.  Tons of associated or collateral know-how not found in the specification are needed for commercial production and use of patented technology.

In the last blog I recited extensive findings from a 2003 IPO survey to the effect that 88% of the corporate respondents considered trade secrets as their really important intellectual assets. Interestingly, Dennis Crouch in his March 12 blog, offers a summarization written by James Bessen and Michael Meurer of their recent book Patent Failure. In it they note that

“Surveys also find that in most industries (pharmaceuticals are the exception!) R&D managers report that lead time, goodwill, trade secrecy and other means of appropriatia are more effective than patents in obtaining returns on their R&D investments (Levin et al. 1987, Cohen et al. 2000). For this reason, it is not surprising that survey research also finds that most inventions are not patented (Arundel and Kabla 1998, Cohen et al. 2000). On average, large European firms applied for patents on only 36% of product innovations and 25% of process innovations.”

Their answer to the obvious question “Why don’t patents reliably encourage R&D and growth?” is that “it is hard to sustain patent laws and institutions that make patents work like property.” That is an abstruse answer, to say the least, because patents do work like property because they are property. A better answer is that patents are not the be all and end all, as was recognized in the 2003 IPO survey, because they have limitations and weaknesses, i.e. strict patentability requirements, early publication and invent-around opportunity. And that is not all because the existence of three dozens of reasons for invalidity or unenforceability of patents cannot be overlooked. Likewise, other attrition factors for patents exist, such as:

• getting a patent and getting an enforceable patent are two different things,
• the average patent life is only five years due to non-payment of maintenance fees,
• enforcing a patent is a daunting and expensive task,
• only limited coverage is obtained in foreign countries, etc.

Still it is very important to go the patent route but it should be complemented by trade secret protection for collateral know-how to assure a fall-back position a la Pizza Hut decision, where patents were invalidated on summary judgment on on-sale bar grounds but the complementary trade secrets were validated after trial.

In an earlier blog I referred to the 2003 Survey of the Intellectual Property Owners on Strategic Management of Intellectual Property and related that the results showed, according to 88% of the responses, that the really important intellectual assets are skills and knowledge which implicates trade secrets.

Among other specific findings in this IPO Survey anent trade secrets are the following:

All but 6% of responding companies do compete on the basis of proprietary technology.

Loss of trade secret protection would damage 80% of respondents’ ability to sustain their competitive advantage.

All but 3% of respondents build competitive advantage on internally developed know-how.

Only 1/3 of respondents would maintain R&D spending after losing trade secret protection.

Over 2/3 of respondents report that NCAs and NDAs are effective in their industry.

43% of respondents agree that many of their most important ideas cannot be effectively protected with patents due to serious limits to patent protection.

67% of respondents believe that most patents are not thought to be insuperable obstacles and can be invented around.

Two-thirds of respondents agreed that trade secret law is an effective way for them to retain control of important technology.

In light of these results, let no-one treat trade secrets as the “black sheep,” “orphan,” “stepchild,” or “ugly sister” of the intellectual property system, as the members of the “Patent über alles/trade secrets are the cesspool of the patent system” school of thought are wont to do.

In the past — and even today — if trade secrecy was contemplated at all, for example for manufacturing process technology, which can be secreted unlike gadgets or machinery, which can be reverse-engineered, the question always was phrased in the alternative.  For example, titles of articles discussing the matter read “Trade Secret vs. Patent Protection,” “To patent or not to patent?,” “Trade Secret or Patent?,” “To Patent or to Padlock?,” etc.  Anent this choice, the respective advantages and disadvantages, for example, in terms of duration and scope of protection, are considered controlling.  However, on scrutiny the perceived differences are not there.  The patent life may be more or less than twenty years from filing and a garden-variety type of trade secret, far from being indefinite, may last but a few years.  Nor is there a difference as regards the scope of protection with “everything under the sun made by man” being patentable.  And while a patent does, and a trade secret does not, protect against independent discovery, a patent leads to efforts by competitors to design or invent around and a trade secret, properly guarded and secured, may withstand attempts to crack it.

In greater detail, as for the respective duration of patents and trade secrets, it is simplistic to state that the patent life is twenty years from filing and trade secrets last indefinitely and let it go at that.  Patents too can last longer than twenty years. They can be extended by up to five years or longer under the Drug Price Competition and Patent Term Restoration Act of 1984, the Uruguay Round Agreements Act of 1994 and the American Inventors Protection Act of 1999 or by private acts.  Patent coverage can also be extended by a process of “evergreening,” that is, by filing for improvement patents. And of course a patent can have a life of less than 20 years if it lapses for non-payment of maintenance fees or if the patent or patent claims are held invalid or are abandoned, disclaimed or dedicated.

Anent the subject of Patent/Trade Secret complementariness, the best-mode requirement is a big bugaboo, based on the colossal misconception that patents and trade secrets are completely incompatible because of the best-mode requirement. In fact, there is nothing wrong with obtaining patent protection for a patentable invention and maintaining trade secret protection for the volumes of associated or collateral knowledge and know-how which is not contained in the patent specification after disclosing the "best mode," whatever it may be at the time of filing when only embryonic R&D data may be available.

There is another huge misconception about the best-mode requirement and that is that it is unique to U.S. patent law. Most recently, I noted a statement to that effect in the 2008 edition of Patent Law in a Nutshell, authored by none other than CAFC Judge Randall Rader, George Washington University Professor Martin Adelman et al. That did it for me and I dispatched the following remonstration to them:

"Gentlemen,

Recently I leafed through your 2008 edition of Patent Law in a Nutshell. It's a gem of a book. Congratulations! In doing so, I paid some attention to the "Best Mode" chapter, as I believe that the best mode requirement is no impediment to relying simultaneously on trade secret as well a patent protection for almost any invention, i.e. trade secrets protection for the tons of collateral knowledge and know-how which is not contained in the specification after disclosing the best mode, whatever it may be at the time of filing when most often only embryonic R&D data are available. See my piece on "The Best Mode Requirement: What is Fact and What is Fiction," Germeshausen Center Newsletter, Winter/Spring 2004, p.13-15 (www.piercelaw.edu/germeshausen/news.php).