Jorda on Trade Secrets

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

Thu, 09 Oct 2008 13:15:27 -0500

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.

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

Thu, 02 Oct 2008 13:03:16 -0500

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.

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

Tue, 30 Sep 2008 12:45:17 -0500

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."

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

Thu, 18 Sep 2008 11:47:06 -0500

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.

Patent/Trade Secret Complementariness -- No. 19

Wed, 23 Apr 2008 13:42:52 -0500

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.

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

Tue, 01 Apr 2008 10:00:00 -0500

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

Fri, 14 Mar 2008 14:43:14 -0500

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

Thu, 06 Mar 2008 13:41:53 -0500

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.

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

Fri, 15 Feb 2008 14:43:20 -0500

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).

Are trade secrets nothing but “baby patents”?

Fri, 18 Jan 2008 11:09:16 -0500

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.

Protection of Software via Patents and Trade Secrets

Fri, 07 Dec 2007 10:42:55 -0500

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.

Jorda on : Initial Patent/Trade Secret Evaluation Guide

Thu, 15 Nov 2007 11:00:31 -0500

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

Thu, 08 Nov 2007 08:00:00 -0500

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

Thu, 01 Nov 2007 08:00:00 -0500

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.

Jorda on: Trade Secrets Have a Long History

Thu, 25 Oct 2007 08:00:00 -0500

Trade secret law is the oldest form of IP protection, and already in Roman times the law afforded relief against a person who induced another’s employee (slave) to divulge secrets relating to the master’s commercial affairs. Trade secrecy was practiced extensively in the European guilds in the Middle Ages and beyond. Modern trade secret law evolved in England in the early 19th century — in response to the growing accumulation of technology and know-how and the increased mobility of employees. Recognized in U.S. by the middle of the 19th century, Peabody v. Norfolk (98 Mass. 452 (Mass. 1868)) held that a secret manufacturing process is property, protectable against misappropriation; secrecy obligation for an employee outlasts the term of employment; a trade secret can be disclosed confidentially to others who need to practice it and a recipient can be enjoined from using a misappropriated trade secret. This decision anticipates the characteristics of our present trade secret system and by the end of the 19th century the principal features of contemporary trade secret law were well established. It is interesting to note that Henry Perritt believes that indeed trade secrets are “the oldest form of IP protection” and that “patent law was developed as a way of protecting trade secrets without requiring them to be kept secret and thereby discouraging wider use of useful information.” (Henry H. Perritt Jr., Trade Secrets 1-1, 3-7 (Practising Law Institute 2d ed. 2006)) That makes patents supplements to trade secrets and not trade secrets supplements to patents as is commonly assumed.