Jorda on Trade Secrets

RETIREMENT: THE FINAL FRONTIER

2009-07-08T14:51:00Z

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

The Trade Secret Owner Has de Facto Prior User Rights -- No. 23

2008-10-09T17:15:27Z

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.

]]> Trade Secrets that "[t]o give a patent to a subsequent inventor without barring him from suing the first inventor and secret user of the invention, would be to offer, as a reward to anyone who could discover the invention by independent research, the economic scalp of the first inventor and secret user." A similar sentiment, according to Bennet, resides in the cogent maxim, "A Constitutional award to one inventor does not mandate a Constitutional penalty to another." In the literature referred above, it is also emphasized that a prior user right or an in personam right includes three major elements: (1) it is a first inventor's common law right; (2) it is required by principles of equity and due process; and (3) not granting it amounts to taking property without compensation. The contrary position, espoused by patent über alles advocates, holds that when the choice is made to forego a patent and to rely instead on trade secret protection, the trade secret owner assumes the risk of being enjoined by the patentee. This is also a clearly untenable position. How can there be such an assumed risk when the Supreme Court recognized trade secrets as viable and compatible alternatives to patents and when per Bennet "no court has ever decided a case in which the issue was even raised."

The 1983 Gore v. Garlock decision has mistakenly been interpreted as putting an end to this debate by resolving the perceived conflict in favor of the patentee. Far from it, this case only held that trade secrets of a third party are not prior art. Such a holding is an entirely different proposition from a holding that the trade secret owner is an infringer vis-à-vis the patentee. Maintaining secrecy is a sine qua non in trade secret law and is not to be equated with "concealment" in patent law. This concealment means, in a 35 U.S.C, § 102(g) context, only too long a delay in filing a patent application in relation to another applicant, i.e., in a situation where both resort to the patent system. This is to be clearly distinguished from a situation where one party relies on the trade secret system and is outside the patent system altogether.

Exemplary Cases Prove The Compatibility of Patents and Trade Secrets -- No. 22

2008-10-02T17:03:16Z

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.

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These cases illustrate extremely well the value of trade secrets and, more importantly, the merits of marrying patents with trade secrets. Indeed, these cases show that GE and Wyeth could have the best of both worlds. Were GE's or Wyeth's policies to rely on trade secrets in this manner or, for that matter, Coca Cola's decision to keep their formula secret rather than to patent it, which could have been done, damnable? Clearly not.

Other recent decisions, such as, C&F Packing v. IBP and Pizza Hut ("Pizza Hut") and Celeritas Technologies v. Rockwell International also demonstrate that it is now well established that dual or multiple protection for IP is not only possible but essential to exploit the IP overlap and provide a fall back position.

In the Pizza Hut case, for instance, the court ordered Pizza Hut to pay $10.9 million to C&F for misappropriation of trade secrets. After many years of research, C&F had developed a process for making and freezing a precooked sausage for pizza toppings that had the characteristics of freshly cooked sausage and surpassed other precooked products in price, appearance, and taste. C&F had obtained one patent on the equipment to make the sausage and another patent on the process itself. It continued to improve the process after submitting its patent applications and kept its new developments as trade secrets.

Pizza Hut agreed to buy C&F's precooked sausage on the condition that C&F divulge its process to several other Pizza Hut suppliers, ostensibly to assure that backup suppliers were available to Pizza Hut. In exchange, Pizza Hut promised to purchase a large amount of precooked sausage from C&F. C&F disclosed the process to several Pizza Hut suppliers, entering into confidentiality agreements with them. Subsequently, Pizza Hut's other suppliers learned how to duplicate C&F's results, and Pizza Hut told C&F that it would not purchase any more sausage without drastic price reductions.

IBP was one of Pizza Hut's largest suppliers of meat products except sausage. Pizza Hut furnished IBP with a specification and formulation of the sausage toppings and IBP signed a confidentiality agreement with Pizza Hut concerning this information. IBP also hired a former supervisor in C&F's sausage plant as its own production superintendent but fired this employee five months later after it had implemented its sausage making process and Pizza Hut was buying the precooked sausage from IBP.

C&F then sued IBP and Pizza Hut for patent infringement and misappropriation of trade secrets. The court made two findings: first, on summary judgment before trial that the patents of C&F were invalid because the inventions had been on sale more than one year before the filing date, and second, after trial that C&F possessed valuable and enforceable trade secrets, which were indeed misappropriated.

The above cases are perfect examples of trade secrets serving as fallback positions after patents expire or become invalid and no longer provide any protection. Indeed, a patent alone can be a slender reed in light of the existence of three dozens of invalidity and unenforceability reasons and other patent attrition factors, such as: narrow claims granted by a patent office, enforcement being a daunting and expensive undertaking and existence of only very limited or no coverage foreign countries, as well as other attrition factors.

Trade Secrets and the "Best Mode" Requirement -- No. 21

2008-09-30T16:45:17Z

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."

]]> only at the time of filing; (2) only to the knowledge of the inventor(s); and (3) only to the claimed invention. Consequently, the best mode requirement is actually no impediment to the coexistence of patents and trade secrets for almost any invention for the following reasons.

In order to obtain the earliest possible filing or priority date, inventors normally file patent applications very early in the research stage, after a first reduction to practice. 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 and a mode of carrying out the invention. Better modes, including the best mode, for commercial manufacture and use remain to be developed later in the development or pilot stage and after the filing of a first application.

Besides, manufacturing process details are, even if available at the time of filing, not a part of the statutorily required enablement and best mode disclosure of a patent. Decisional law leaves no doubt that disclosure of manufacturing details or production specifications is not required, as is clear from such decisions as Christianson v. Colt Industries, Wahl Instruments v. Acvious, Teleflex v. Ficosa North America, and Matsushita v. Cinram International. From these and similar decisions, Professor Chisum concludes, "[a]n inventor is not required to supply 'production specifications'" nor "processes or materials . . . for commercial manufacturing convenience or for accommodating the needs of a particular supplier or customer." And Tom Arnold opines, "Patents do not disclose the engineering detail of any particular embodiment of a product nor the production engineering for its commercial manufacture."

It is also noteworthy that the development of a best mode is often done by others; for example, specialists in process development and pharmaceutical formulation employed by assignees, as was the case in Glaxo v. Novopharm. This occurs without involvement of the inventor to whom knowledge of such a best mode cannot be imputed. Thus, the touchstone in this regard is the "mode" believed to be the best by the inventor, which is a subjective standard.

Interestingly, according to Professor Chisum, another rationale behind the best mode requirement is that the requirement is intended to allow the public to compete fairly with the patentee following the expiration of the patents. Chisum states that this rationale is not tenable as it ignores the realities of the patent system and the commercial market place because rarely will the disclosure--of the best mode set forth in an application--be of competitive interest when the patent expires.

Lastly, patent claims tend to be narrow for distance from the prior art to satisfy the novelty and unobviousness requirements of Sections 102 and 103 of the U.S. Patent Code. As stated above, the best mode requirement applies only to the claimed invention, as shown by Christianson v. Colt Industries, Northern Telecom v. Samsung Electronics, Eli Lilly v. Barr Labs and Applied Medical Resources v. US Surgical.

In a chapter entitled "Filing for Patent Protection Without Loss of Trade Secret Protection" in his book on Trade Secret Protection, Gale Peterson emphasizes that "the patent statute only requires a written description of the claimed invention and how to make and use the claimed invention." He advises therefore that, inasmuch as allowed claims on a patentable system cover "usually much less than the entire scope of the system, that the disclosure in the application be limited to that disclosure necessary to 'support' the claims in a [Section] 112 sense, and that every effort be taken to maintain the remainder of the system as a trade secret." Tom Arnold also affirms, "patents often do not disclose important secrets that nevertheless are within the scope of the patents' effective control."

The CFMT v. Yieldup International decision by the Court of Appeals for the Federal Circuit is likewise highly germane. The court stated, "Enablement does not require an inventor to meet lofty standards for success in the commercial marketplace. Title 35 does not require that a patent disclosure enable one of ordinary skill in the art to make and use a perfected, commercially viable embodiment absent a claim limitation to that effect. . . . [T]his court gauges enablement at the date of the filing, not in light of later developments." Such reasoning applies of course equally well to the best mode requirement.

In Peter Rosenberg's opinion, "[p]atents protect only a very small portion of the total technology involved in the commercial exploitation of an invention. . . . Considerable expenditure of time, effort, and capital is necessary to transform an [inventive concept] into a marketable product." In this process, he adds, valuable know-how is generated. Even if this know-how is inventive and protectable by patents, it can be maintained as trade secrets, as there is "nothing improper in patenting some inventions and keeping others trade secrets."

It is clear, then, from all the above citations and quotations, that authorities and court decisions amply support my foregoing conclusions. This demonstrates that the best mode requirement is a very narrow defense at best. In fact, according to a recent decision, the Court of Appeals for the Federal Circuit has held claims invalid for failure to satisfy the best mode requirement on only seven occasions.

Federalizing Trade Secret Law: A Cause Whose Time Has Come -- No. 20

2008-09-18T15:47:06Z

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.

]]> The above statutes unfortunately have many significant barriers, limitations and shortcomings; hence, it is not surprising that there is a growing and justifiable clamor for a federal civil trade secret law.

A growing literature exemplifies this call for federalization. The most recent article was authored by Mark Halligan and published in The John Marshall Review of Intellectual Property (7 J. Marshall Rev. Intell. Prop. L. 656, 2008( under the title "Protection of U.S. Trade Secrets: Critical Amendments to the Economic Espionage Act of 1996." Earlier expositive publications are:

• Marina Lao, "Federalizing Trade Secrets Law in an Info Economy," 59 Ohio St. L.J. 1633, 1998 and
• Christopher Rebel J. Pace, "The Case for a Federal Trade Secrets Act," 8 Harv. J.L. & Tech. 427, 1995.

In his fresh-off-the-press John Marshall article, Mark Halligan recites a long list of problems, especially with the EEA.

• Under the EEA trade secret litigation is within the prosecutorial discretion of the Justice Department with decision-making in the hands of the Attorney General, Deputy Attorney General or Assistant Attorney General and concurrence from the President.
• EEA prosecutions have been targeted only to egregious and open-and-shut cases, evidencing a reluctance to resort to it. In fact, as of 2006 there have been only 34 EEA cases, mostly in the Northern District of California, and none in 80% of the 86 federal judicial districts.
• Under the EEA there is a high burden of proof requiring proof beyond a reasonable doubt to obtain a criminal conviction. This is further fraught with the 5th Amendment privilege against self-incrimination.
• The United States, it can be said, is not in compliance with the NAFTA and TRIPs Agreements, which require national standards for trade secret protection, i.e. a federal civil statute, inasmuch as some states (New York, Massachusetts, Texas and others) do not even have any state trade secret statute but merely rely on common law.

Anent the UTSA and the CFAA the problems are the following:

Under UTSA there is a lack of uniformity in state trade secret laws, with states varying widely in their treatment of trade secret misappropriation. Hence, trade secret cases are subject to procedural and other vagaries of litigation in state courts. And this is in addition to tricky choice-of-law issues.

And the CFAA is also a criminal statute of uncertain scope, which is primarily aimed at computer crimes.

To remedy this situation, Mark Halligan proposes a few "simple and straightforward" amendments to the EEA to provide also a private cause of action, as set forth in Appendix A of his article.

His EEA amendments would also provide for badly needed national service of process, statutory recognition of civil ex parte seizure orders as well as extend the benefits of extraterritorial jurisdiction to EEA civil actions for increased deterrence of economic espionage and trade secret theft and increased economic vitality of U.S. corporations both domestically and internationally.

Patent/Trade Secret Complementariness -- No. 19

2008-04-23T17:42:52Z

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.
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Another cogent insight from Tom Arnold resides in his statement 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.” Note there is not even preemption.

In light of these authoritative pronouncements, it is amply clear that trade secrets can coexist with patents and survive patents upon expiration or invalidation. In this regard, the Pizza Hut case provides a telling lesson. In C&F Packing v. IBP and Pizza Hut, Fed. Cir. 2000, where two C&F patents on a manufacturing process for pizza sausage toppings were held invalid on summary judgment on on-sale bar grounds but their trade secrets on this process were held enforceable after trial, Pizza Hut had to pay $10.9 million for trade secret misappropriation.

“The franchisor should maintain the confidentiality of any patentable trade secrets while the patent prosecution process is pending.”

This again is a half-truth at best because any collateral know-how and improvements that are important or indispensable to the practice of the subject invention but not disclosed in the spec should be maintained as trade secrets also after the patent issuance. See the Pizza Hut case. And invention disclosures of course also should be closely guarded before filing as one of the best examples of a species of trade secret that comes to mind. Thus, it is not only during the patent pendency that trade secrecy needs be maintained.

“Patent protection is fundamentally inconsistent with trade-secret protection.”

On the contrary! In fact, patents and trade secrets dovetail inextricably as they are highly complementary and mutually reinforcing. All patents are born as trade secrets. Trade secrets are the first line of defense: they precede patents, accompany patents, and follow patents.

In fact, they are inextricably intertwined, because the bulk of R&D data and results or associated, collateral know-how for any commercially important innovation cannot and need not be included in a patent application but deserves, and requires, protection which trade secrets can provide. It is unnecessary and, in fact, shortsighted to choose one over the other. The question is not whether to patent or to padlock but rather what to patent and what to keep a trade secret and whether it is best to patent as well as to padlock, that is, integrate patents and trade secrets for optimal synergistic protection of any innovation.

“The quid pro quo is…full disclosure so that the invention will be in the public domain upon expiration of the patent.”

First of all, full disclosure refers to or includes enablement and best mode. But the best mode requirement is no impediment to the coexistence of patents and trade secrets because this requirement is a very subjective one as it applies
• only at the time of filing,
• only to the knowledge of the inventor, and
• only to the claimed invention.

And most importantly, after expiration 20 years later a best mode disclosure in a patent is most likely to be completely moot.

Here let me again quote Professor Chisum: “(A)nother rationale behind the best mode requirement that it is intended to allow the public to compete fairly with the patentee following the expiration of the patents, is not tenable as it ignores the realities of the patent system and the commercial market place because rarely will that disclosure be of competitive interest when the patent expires.”

This reveals another disconnect between a patent system that was instituted over 200 years ago to protect plowshares and simple implements and a patent system for protection of present-day high-tech innovation.

More survey results regarding the value of trade secrets as compared to patents -- No. 18

2008-04-01T14:00:00Z

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.

2003 IPO Survey Results -- No. 17

2008-03-14T18:43:14Z

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.

The Putative "Differences" Between Patents & Trade Secrets Supposedly Determining the Choice Between Them Are Not There -- No. 16

2008-03-06T18:41:53Z

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. ]]> On the other hand, when it comes to trade secrets the term may be indefinite but that is rarely the case, the notable examples of the Coca-Cola formula, the musical instrument cymbal, the Angostura Bitters, etc. to the contrary notwithstanding. Most products or devices are subject to analysis or reverse engineering sooner or later and manufacturing techniques more susceptible to trade secrecy may also lose secrecy in various ways. Trade secrecy may dissipate in a matter of a few years in view of the high degree of employee mobility and inadvertent or deliberate leakage. Again the perceived differences in duration may not exist as a practical matter.

Anent subject matter scope of protection via patents and trade secrets, the common perception is that the scope of possible protection for trade secrets is much broader than for patents. If § 101 of the Patent Code is compared with the definition of a trade secret from the Uniform Trade Secret Code, that appears to be the case. The list of patentable categories according to the Patent Code (process, machine, manufacture or composition of matter) is a very brief one indeed, while the definition of trade secrets is open-ended, especially since it also includes commercial matters, such as, customer lists and other business information. However, on closer scrutiny and taking into account the Supreme Court decision in Chakrabarty (1980 — establishing the patentability of living organisms) to the effect that “everything under the sun that is made by man” is patentable, and the holding in State Street Bank that formerly unpatentable business methods and computer programs are also patentable, the scope of patent protection is equally all-encompassing. It is true that to be patentable fairly stringent requirements must be met in terms of novelty, utility and unobviousness, etc. but on the trade secrets side there are also fairly stringent requirements in terms of commercial value and secrecy measures that have to be put in place and maintained. Thus it appears that the differences when it comes to scope of protectable subject matter are not very large at all, if there are any.

Even with respect to the nature of protection, the question arises whether there is really a crucial difference. It is true that patents confer exclusive rights, that is the right to exclude others from making, using, offering to sell, selling or importing a given invention. On the other hand, trade secrets provide no protection against independent developers or those who reverse-engineer or analyze products that are secret or are produced by secret processes. But here too a patent application or patent, after they are published and the invention is disclosed, often spur competitors to invent around and develop improved products which may be separately patented and may not be dominated and become commercially much more important than the earlier more basic invention. The trade secret, on the other hand, if proper security measures are taken, may be safely maintained for a longer period of time. Also an important patent may cause competitors to seek invalidation.

Regarding touted differences in terms of costs and efforts required in obtaining and maintaining patents and in securing and maintaining trade secrets, there may not be much of a difference either, even though it is true that patenting can be expensive. However, implementing measures to safeguard trade secrets, if not already in place for other business and legal reasons, may be equally expensive or over a period of time even more expensive. But the matter of cost and effort is of no import when it comes to protecting important technology.

Trade Secrets and the Best Mode Requirement -- No. 15

2008-02-15T19:43:20Z

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). I couldn't agree more with your conclusion and recommendation that the best mode requirement is a "misfit" and "unnecessary vestige" and should therefore be scrapped and I commend you for stating it so forcefully. Just a couple of queries. You state on p.216 that "the United States is the only country with a best mode requirement." Such a statement appears also on p.497 of your Cases & Materials on Patent Law, Second Edition. I've seen or heard such statements often. Everybody says it. For example, Kevin McGough states that "(o)ther nations don't have this requirement." (IP Law & Business, June 2004, p.34). Even Donald Chisum says it in his "Best Mode Concealment..." article p.279 of "Computer & High Technology Law Journal," Vol. 13, 1997. I did so myself. In my article on the best mode requirement, referenced above, I too allowed as how it is "unique to U.S. patent law." However, a Brazilian alumnus of mine, Joao Marcos Silveira, promptly corrected me upon reading my article by quoting Art. 24 of the Brazilian Industrial Property Law: "The specification shall clearly and sufficiently describe the subject matter, in a way as to enable a person skilled in the art to which it pertains to carry it out, and shall set forth, when applicable, the best mode of execution." This raised the following question for me: If Brazil, what about other countries? So I posed this question to Dr. Konrad Becker in Basel, Switzerland (former Ciba-Geigy Patent Department Director, now Pierce Law Adjunct Professor) and this is what he reported back: "Up to now, I also had the (wrong) impression that the 'best mode requirement' is unique to US patent law. I have made a quick search for 'best mode' (or rather 'best') which allows to find 'best method,' 'best manner' and the like) in the WIPO collection of laws for electronic access (www.wipo.int/clea/en) and found the following information: 'Best mode' requirements can be found in Brazil and China, but also in the Andean Pact Decree 486 and the corresponding national laws, and in the laws of Mexico, Panama, Nicaragua, Belize, Argentina, New Zealand, Australia, India, South Africa and Kenya." So there you have it! The requirement is not at all uncommon abroad. Incidentally, South Africa amended their Patents Act in 2002 and removed the best mode requirement by deleting the phrase "disclose the best method of performing the invention known to the applicant at the time when the specification is lodged at the patent office" and by adding to the written description requirement the phrase "in order to enable the invention to be performed by a person skilled in the art of such invention." In other words, enablement is good enough, as you also pointed out. Forgive me for also questioning your statement on p.212 "...continuing applications -- including continuations, divisionals, and continuations-in-part -- that claim priority to an earlier application do not require an update of the best mode disclosure." That certainly is true for continuations and divisionals but is it also true for CIP's? I don't think so and my colleague Professor Tom Field agrees with me. Already in 1977 when I was Chief IP Counsel at Ciba-Geigy I stated in Patent Bulletin No. 6 that "...R&D and Patent staffs will have to continue to pay special attention to the best mode requirement at the time of filing new as well as CIP applications." So my firm belief has always been that if you file a continuation-in-part to add and cover new matter, for which you don't get the parent filing date, you would also have to include any new best mode that was developed after the parent filing date. How can it be otherwise? The Transco decision (Transco Products v. Performance Contracting, 32 U.S. P.Q. 2d 1077, (Fed. Cir. 1994)), with its extensive discussion of the difference in terms of new matter and effective filing date between continuation and divisionals, on the one hand, and CIP's on the other hand, merely holds that a best mode disclosure need not be updated when filing a continuing application that contains no new matter. It does not hold and is not susceptible to an interpretation that a CIP application containing new matter can exclude an expanded or a better mode when developed after filing of a parent application."

Are trade secrets nothing but “baby patents”?

2008-01-18T16:09:16Z

Are trade secrets nothing but “baby patents”? After incredibly derogatory and defamatory statements about trade secrets, which I have heard in the past, such as, “trade secrets don’t have a single redeeming virtue” from a corporate chief IP counsel and “trade secrets are the cesspool of the patent system” from a Washington, DC IP professor, comes the dismissive statement that trade secrets are nothing but “baby patents”. This opinion was expressed in a recent meeting, which I attended, of West Legalworks in New York City on “Advanced Strategies for Cultivating, Exploiting, Tracking and Protecting Your Intellectual Property,” by the moderator of a Roundtable Discussion on “Choosing the Optimal IP Strategy for Your Company”. As I cover trade secrets, trade secret licensing and hybrid patent/trade secret licensing in my Technology Licensing course, it occurred to me that this “baby patent” comment would be a good problem for the final exam in this course on December 13, 2007. I asked the students to write a brief essay on whether this statement is a correct or an incorrect characterization of trade secrets. ]]> Trade secrets cannot be considered as “baby patents.” Trade secrets are so important that they should not be considered as “baby patents.” Patents and trade secrets are actually highly complementary and mutually reinforcing. The truth is that patents and trade secrets can not only coexist, but dovetail and are in harmony rather than in conflict with each other. “(T)rade secret-patent coexistence is well-established, and the two are in harmony because they serve different economic and ethical functions.” (Prof. Donald Chisum) Indeed, patents and trade secrets are inextricable intertwined, because the bulk of R&D data and results or associated, collateral know-how for any but the simplest invention, cannot and need not be included in a patent specification even if in hand before filing, but deserves and requires, protection via trade secrets. And such data and know-how are immensely important because, as a practical matter, patented technology without access to associated or collateral know-how is often not enough for commercial use because patents rarely disclose the ultimate scaled-up commercial embodiments. Trade secrets are a component of almost every technology license and can increase the value of a license up to 3 to 10 times the value of the deal if no trade secrets are involved (per Mel Jager). It’s also noteworthy that patents are but tips of icebergs in an ocean of trade secrets, with over 90% of all new technology being covered by trade secrets and over 80% of all technology licenses covering proprietary know-how, i.e. trade secrets, or constituting hybrid licenses embracing patents and trade secrets. Any contention that trade secrets cannot coexist with patents on a given invention overlooks the simple truths that the best made requirement applies i) only at the time of filing ii) only to the knowledge of the inventor, and iii) only to the claimed invention. In conclusion, let it be said that it is unproductive to base decisions for protecting innovative technology and commercial and technical know-how via patents or trade secrets solely on postulated differences between the two and the presumed respective advantages and disadvantages flowing therefrom. Trade secrets are a viable mode of protection and can be used in lieu of patents but, more importantly, they can and should be relied upon side by side with patents to protect any given invention as well as the volumes of collateral know-how, because for from being irreconcilable, patents and trade secrets in fact make for a happy marriage as equal partners. Hence, it is patents and (not “or”) trade secrets. With patents and trade secrets it is clearly possible to cover additional subject matter, invoke different remedies in litigation and have one standup when the other becomes invalid or unenforceable and thereby exploit the overlap and strengthen exclusivity. Utilizing both routes for optimal protection should be a critical part of any IP management strategy.

Protection of Software via Patents and Trade Secrets

2007-12-07T15:42:55Z

This past Monday, December 3, 2007, I gave a talk in Cartagena, Colombia on the Patent/Trade Secret interface in the protection of software. I was invited to do so by ASIPI (Interamerican Association of Intellectual Property) at their XIII Work Sessions and Administrative Council Meeting, held in Cartagena on November 30 to December 5. This meeting featured seven panel discussions, one of which (Panel 4) dealt with the controversial topic of “Software Protection via Patents.” It was to explore the controversy from business, academic and governmental perspectives and also “discuss alternative ways to protect innovation in the software industry.” With James Pooley (AIPLA President) as moderator, Dick Wilder of Microsoft represented business and Giancarlo Marcenaro of the Colombian Superintendence of Industry & Commerce spoke for government. Protection of alternative ways was my topic. The paper, which I prepared for the panel discussion and which will be translated into Spanish and published in ASIPI’s Derechos Intellectuales series, dealt first, because of the title, with the development of software patents, the current USPTO regulations, current cases shaping software patent protection, the differences between US, European, Japanese, and Korean software patent protection. It also gives an example of software patent enforcement, examines the impact of software patents on innovation and entry into the software market, and briefly outlines how Open Source Software Licenses can affect software patents. The crux of my presentation, however, was that all IP categories can be enlisted in a complementary, rather than alternative, way to protect software. I advocated reliance on trade secrets while obtaining copyright as well as patent protection on software. Finally, my paper postulates that sui generis protection would be the most suitable form of protection, as was proposed when the issue first arose in the mid-sixties. The first point I made related to the importance of integrating all IP categories for synergistic multiple protection via exploitation of the overlap because this can cover additional subject matter, strengthen exclusivity, afford additional remedies and provide backup in case of invalidation of an IPR. Then I focused on how trade secrets are compatible with and complement copyright protection, which is true only for software, inasmuch as the Copyright Statute and a regulation of the Copyright Office (Copyright Circular 61) permits the blocking out of trade secrets by, e.g., submitting only the first and last 25 pages of the copyright application. This recognizes officially the existence of trade secrets in software development and the need to protect them without foregoing copyright protection. Importantly, trade secrets are also compatible and complementary with patents to protect software. Patent applications need only disclose the best mode and enablement of the software innovation and the code itself and collateral know-how need not be disclosed, but can be maintained as trade secrets. The glue holding the patentable and trade secret ideas together, which transforms these ideas into expression, is often the technical know-how, the grist for trade secrets. Software libraries, compilers, implementation schemes, and code optimizations techniques constitute just the tip of the iceberg in the average software company’s know-how. Any contention that trade secrets cannot coexist with patents on a given invention because of the best mode requirement, overlooks the simple truths that this requirement applies: • Only at the time of filing, • Only to the knowledge of the inventors, and • Only to the claimed invention. In fact, the best mode requirement is actually no impediment to the coexistence of patents and trade secrets for almost any invention. Patent applications are normally filed very early, providing only rudimentary R&D data. Tom Arnold asserted that it is “flat wrong” to assume, as “many courts and even patent lawyer 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.” (1988 Licensing Law Handbook). Almost every software program consists of a combination of patentable material, copyrightable material and proprietary information and know-how, i.e. trade secrets. Copyright protects against literal copying of the code, in whole or part. Trade secrets, allowed to be redacted out of the copyrighted code, protect important innovations that, for one reason or another are not disclosed in a patent application, as well as collateral know-how. The patented inventions, of course, fall under the protection of the Patent Act. Thus, it is clear that software protection is possible via trade secrets, copyrights or patents individually or simultaneously under the Copyright Statute together and side by side with trade secrets as well as under the Patent Law again in conjunction with trade secrets. The best of all worlds! In no other area of artistic or technological innovation is such total integration and exploitation of overlaps across the IP spectrum possible. However, I submit that such an all-inclusive protection scheme would be rather convoluted and expensive and because of this and because each applicable IP category has shortcomings as means for effective software protection, given the special nature of software, a sui generis type of protection system should have been fashioned. Many believed that copyright protection was inappropriate for being an “artificial construct,” inasmuch as the aims of copyright law and computer programming are diametrically opposed, the former stressing subjective, individualistic, creative elements and the latter, objective, technical and scientific systematization. Software is functional, non-literal by nature as it performs a task or generates output. Also a copyright term for 100 years is incongruous for protection of ephemeral software programs. However, there are also significant problems with patenting software, in particular the statutory subject matter (algorithm) issue and the non-obviousness requirement. With patent and copyright forms of protection thus being “Procrustean beds,” the notion of a sui generis form of protection for software had considerable appeal. Indeed, I remember well that the first impulse by the IP profession back in 1965, when the issue first arose, was to provide a sui generis form of protection and sui generis IP protection is not uncommon at all. It exists for the protection of plants and artistic products. Moreover and very significantly, Congress, in 1984, fashioned the Semiconductor Chip Protection Act (17 U.S.C. § 901) to protect mask works for ten years in a copyright-like manner. This was done hastily and improvidently according to some practitioners and this statute is apparently rarely used. While the Intellectual Property Owners Association (IPO) and others are strongly in favor of a “unitary patent system,” it can be argued equally or more forcefully that a “frozen in time one size fits all patent system” (per former PTO Commissioner Bruce Lehman) is not well suited for protection of software, given its special, i.e. sui generis nature. Also, Congress had no hesitation to pass the Vessel Hull Design Protection Act of 1998 as sui generis protection (17 USC 1301 et seq.) and recently even passed broadening amendments. And protection for databases via a sui generis protection regime has also been under consideration. In conclusion, it is incontrovertible that both copyrights and patents in conjunction with trade secrets are available for synergistic multiple protection of software. However, from a puristic point of view, properly drafted sui generis protection for software could provide more appropriate and less controversial protection for software. Karl F. Jorda

Jorda on : Initial Patent/Trade Secret Evaluation Guide

2007-11-15T16:00:31Z

A reoccurring question in intellectual property management involves the initial election between seeking patent protection on a given development and attempting to maintain trade secrecy in that development. To facilitate this initial election and to determine the center of gravity (often patents for products and trade secrets for processes), I developed the following “Initial Patent/Trade Secret Evaluation Questionnaire.” To avoid the implications of “invention” and to cover the wide variety of innovations which may be addressed by this questionnaire, the term “development” is used in a generic sense. Download the Questionnaire and Considerations The eleven questions in this questionnaire have been arranged not in the order of perceived importance but by “function,” roughly following the areas of marketing (Questions 1-4), technical (Questions 5-8), and legal (Questions 9-11). Each question would be answered on a scale of 1 to 10. These values are then totaled. With the current number of questions, this sum would range from 11 to 110. If the sum approaches the higher end of the scale (above 75), trade-secret protection would seem favorable; a sum at the lower end (below 45) would suggest that patent protection would be more advantageous. At times, values in the middle range (45–75) will result. Such a score suggests that it doesn’t really matter which approach is followed initially. For example, trade-secret protection might be appropriate for manufacturing-process technology, which competitors might find easier to re-create; patents make sense for products that can be analyzed or reverse engineered. However, there need be no prejudice about resorting to the other strategy to protect collateral aspects and improvements.

Jorda on : Exploitation of the Overlap Between Patents and Trade Secrets is Paramount

2007-11-08T13:00:00Z

At this point I should make it unequivocally clear that my position is not that trade secrets should be embraced in favor of patents, nor is it my intention to denigrate patents in any way by embracing trade secrets over patents. What I have practiced in my career and what I endorse as the best policy and practice is to obtain patents as center of gravity in an intellectual property portfolio and maintain trade secrets as underpinnings for patents to protect unpatentable collateral know-how and show-how. Books, articles and presentations on intellectual property rights almost always, even nowadays, speak to patents, copyrights and trademarks as discreet subjects and with scant coverage of trade secrets. However, doing so overlooks the fact that legal protection of innovation of any kind, especially in high-tech fields, requires the use of more than one intellectual property category. This results in integration of intellectual property rights for dual, triple or multiple protection.

Jorda on : Trade Secrets Have Special Attributes

2007-11-01T12:00:00Z

From the definitions of trade secrets given earlier, the following salient characteristics of trade secrets can be perceived. There is no subject matter or term limitation, nor is there a registration requirement and, in fact, there is not even a tangibility requirement. Furthermore, there is no strict novelty requirement, and trade secret protection obtains as long as the subject matter is not generally known or available. But secrecy is the most important criterion — a sine qua non — without exceptions. Hence, reasonable affirmative measures must be taken to safeguard and maintain trade secrecy. Among such measures are: • Memorializing a trade secret policy in writing • Informing employees of the trade secret policy • Having employees sign Employment Agreements with confidentiality obligations • Restricting access to trade secrets (on need-to-know basis) • Restricting public accessibility (escorting visitors) • Locking gates and cabinets to sites that house trade secrets • Labeling trade secret documents as proprietary and confidential • Screening speeches and publications of employees • Using secrecy contracts in dealing with third parties • Conducting exit interviews with departing employees, etc. While sufficient economic value or competitive advantage is also an indispensable requisite, the proper touchstone is not “actual use” but only “value to owner,” which means that negative R&D results can also provide a competitive advantage according to the law of the Unites States. Misappropriation of trade secrets is actionable if there is acquisition by improper means, or there is use or disclosure of a trade secret that was acquired improperly or in violation of a duty to maintain confidentiality. “Improper means” includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means, while “proper means,” which do not support a claim for misappropriation, include independent discovery, reverse engineering, or discovery from observing what has been allowed to enter the public domain. Remedies for misappropriation of trade secrets include actual and punitive damages, profits, reasonable royalties and injunctions.