PATENT/TRADE SECRET COMPLEMENTARINESS:PATENT/TRADE SECRET COMPLEMENTARINESS:AN UNSUSPECTED SYNERGYAN UNSUSPECTED SYNERGY

30th Annual Foulston Siefkin Lecture30th Annual Foulston Siefkin LectureWashburn University School of LawWashburn University School of Law

Topeka, KSTopeka, KS

February 29, 2008February 29, 2008

Karl F. JordaDavid Rines Professor of Intellectual Property Law

& Industrial InnovationDirector, Kenneth J. Germeshausen Center for the Law of Innovation & Entrepreneurship

Franklin Pierce Law CenterTwo White Street, Concord, NH 03301

Patent/Trade Secret Complementariness:Patent/Trade Secret Complementariness:An Unsuspected SynergyAn Unsuspected Synergy

OverviewOverview

I. Introduction

II. Integration of IPRs

III. Trade Secret Law– History of Trade Secrets– Definitions of Trade Secrets– Definition of Know-How– Characteristics of Trade Secrets– Safeguarding Trade Secrets– Misappropriation of Trade Secrets

IV. Importance of Trade Secrets

V. Patent/Trade Secret Complementariness

VI. Best Mode Requirement

VII. Exemplary Trade Secret Cases

VIII. Conclusion

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I.I. IntroductionIntroduction

Trade secrets have been treated as the “black sheep,” “stepchild” and “ugly sister” of the intellectual property system. And a noted professor even called trade secrets the “cesspool of the patent system.”

Deep-seated conventional wisdom has it that:

• Trade secrets are at best only supplements to patents.

• Patents and trade secrets are at best only alternative forms for protection of innovation.

• A patentable invention must be patented for protection, while only unpatentable know-how can be protected via trade secrets.

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I.I. IntroductionIntroduction

• Patents and trade secrets are mutually exclusive and one or the other has to be chosen for protection.

• The choice between the two is guided by their differences in terms of duration, scope and kind of protection, degree of exclusivity, and costs.

• Because patents provide disclosure of the invention as a quid pro quo for exclusivity, it is reprehensible to keep trade secrets.

• Trade secret protection is merely a matter of contract rights created via nondisclosure or confidentiality clauses or agreements.

• If a trade secret is itself a patentable invention, the danger exists that another will obtain a patent which would preclude the trade secret owner from using his/her own invention.

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II. II. Integration of IPRsIntegration of IPRs

In our knowledge-based high-tech era, it is important as a matter of IP

management policy and strategy to exploit the overlap between intellectual

property (IP) categories, especially between patents, copyrights, and trade

secrets, for dual or multiple protection. This results in synergistic integration and

secures invulnerable exclusivity.

Professor Jay Dratler in his Intellectual Property Law treatise (1991) was the first one to “tie all the fields of IP together.”

According to him, from former fragmentation by specialties, Intellectual Property Rights (IPRs) are now a “seamless web,” due to progress in technology and commerce.

In 1997 the authors of Intellectual Property in the New Technological Age also “avoid the fragmented coverage…by approaching IP as a unified whole” and concentrate on the “interaction between different types of IPRs.”

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Integration of IPRsIntegration of IPRs

Thus we now have a unified theory in the IP world, a single field of law with subsets and significant overlap between IP fields. Several IPRs are available for the same IP or different aspects of the same IP.

Not taking advantage of the overlap misses opportunities or, worse, amounts to “malpractice,” per Professor Dratler.

For example:• A corporate chief IP counsel instructing this speaker not even to mention trade

secrets in a seminar for the corporation’s R&D staff.• A senior partner of a NY law firm professing that he advises clients to forget

about trade secrets.

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Integration of IPRsIntegration of IPRs

Software — a cogent illustration:

Patents, copyrights and trade secrets are not incompatible but dovetail: the patents can protect patentable inventions or ideas, the copyright can protect the expression of these ideas, and the trade secrets can cover the tons of collateral know-how.

Because of the special character of software, sui generis protection, as was initially proposed and as exists for semiconductor chips, would be best suited.

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Integration of IPRsIntegration of IPRs

Copyright Law does not require disclosure of trade secrets• Software code with trade secrets can be copyrighted• Trade secrets can be redacted from the submission of the code to the Copyright Office• Per Copyright Circular 61 promulgated pursuant to statutory provision

— e.g. submitting only the first and last 25 pages with the trade secrets in the middle redacted out of the submission

Hence, trade secret protection may be maintained even when the code is copyrighted

Likewise, trade secret protection can exist with software patenting before filing, during pendency and even after issuance for all collateral information and know-how not disclosed in the specification

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Integration of IPRsIntegration of IPRs

One IP category, often patents, may be the center of gravity and more important than others.

Other IP categories are then supplementary but very valuable to

• cover additional subject matter,

• strengthen exclusivity,

• invoke additional remedies in litigation,

• standup if a primary IPR becomes invalid

and thus provide synergy and optimize legal protection.

The most important IP management and licensing policy and strategy is

exploiting the overlap between patents and trade secrets.

Illustrative examples are:

• GE’s industrial diamond process technology

• Wyeth’s Premarin process

• Pizza Hut decision

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IP Integration ConceptsIP Integration Concepts

EXPLOIT THE OVERLAPDEVELOP FALL BACK POSITION

CREATE A WEB OF RIGHTSBUILD AN IP ESTATE

BUILD A WALLBUILD A RINGFENCE (INDIA)

OVERPROTECTLAY A MINEFIELD

for

SYNERGISTIC EFFECTvia

DUAL OR MULTIPLE PROTECTION

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Pitney Bowes Mail ProcessorPitney Bowes Mail Processor“Simple Machine” with over 100 Patents“Simple Machine” with over 100 Patents

Trade Secrets

TechnicalInformation

BusinessInformation

Readily Ascertainable

Personal Skill Generally Known

No Utility Not Novel

Patents

Obviousness

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INTELLECTUAL PROPERTY (IP)INTELLECTUAL PROPERTY (IP)&&

INTELLECTUAL PROPERTY RIGHT (IPR)INTELLECTUAL PROPERTY RIGHT (IPR)

IP IPRInvention Patent, Trade SecretKnow-how, Invention Trade SecretBrandname TrademarkWork of Authorship Copyright

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III. III. Trade Secret LawTrade Secret Law

History Of Trade Secrets History Of Trade Secrets

"Trade Secret law is the oldest form of intellectual property protection, " according to Perritt. (Cave people?!)Back 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 law evolved in England in 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 middle of 19th century, Peabody v. Norfolk (1868) held that a secret manufacturing process is property, protectable against misappropriation; secrecy obligation for an employee outlasts 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.By the end of the 19th century the principal features of contemporary law were well established. 1939 the Restatement of Torts attempted to “codify” it.

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Definition Of “Trade Secret”Definition Of “Trade Secret”

1. A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. (Restatement of Torts, § 757 comment b (1939))

2. A trade secret is any information, including a formula, pattern, compilation, device, method, technique, or process, that:(i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.(Unif. Trade Secrets Act § l(4), 14 U.L.A. 372 (1985 & Supp. 1989)

3. A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others. (Restatement (Third) of Unfair Competition, § 39 (1995))

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Trade Secret FactorsTrade Secret Factors

The Restatement of Torts adopted and the courts relied on the following criteria for determining whether a trade secret exists:

(1) the extent to which the information is known outside of the business;

(2) the extent to which it is known by employees and others involved in the business;

(3) the extent of measures taken to guard the secrecy of the information;

(4) the value of the information to the business and to competitors;

(5) the amount of effort or money expended in developing the information;

(6) the ease or difficulty with which the information could be properly acquired or duplicated by others.

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EEA DefinitionEEA Definition

ECONOMIC ESPIONAGE ACT (EEA) DEFINITIONThe term “trade secret” means all forms and types of financial,

business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, memorialized physically, electronically, graphically, photographically, or in writing if —

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being

readily ascertainable through proper means by, the public.

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TRIPS DefinitionTRIPS Definition

Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information:

(a) Is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kinds of information in question;

(b) Has commercial value because it is secret; and(c) Has been subject to reasonable steps under the circumstances,

but the person lawfully in control of the information, to keep it secret.

(TRIPS Agreement, Part II, Sect. 7: Protection of Undisclosed Information, Art. 39, Par. 2, 1994)

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Definition Of Know-howDefinition Of Know-how

Know-how. The knowledge and skill required to do something correctly. (Dictionary Definition)

Know-how. Information that enables one to accomplish a particular task or to operate a particular device or process. (McCarthy’s Desk Encyclopedia of Intellectual Property, Second Edition, p.236)

Know-how is knowledge and experience of a technical, commercial, administrative, financial or other nature, which is practically applicable in the operation of an enterprise or the practice of a profession. (AIPPI Resolution – Mexico Congress – 1973)

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Characteristics Of Trade SecretsCharacteristics Of Trade Secrets

No registration requirement.No subject matter or term limitation.No tangibility requirement.No strict novelty requirement.Subject matter must not be generally known or available.But secrecy is the most important criterion — a sine qua non.There are no exceptions.Affirmative measures must be taken to safeguard a trade secret.Sufficient economic value or competitive advantage is also a requisite.Proper criterion is not “actual use” but “of value to company”, i.e. negative results can also give a competitive advantage.

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Safeguarding Trade SecretsSafeguarding Trade Secrets

Memorialize the trade secret policy in writingInform employees of trade secretsHave employees sign Employment Agreements with confidentiality obligationsConduct exit interviewsRestrict access to trade secrets (on need-to-know basis)Lock gates and cabinetsLabel trade secret documentsRestrict public accessibilityScreen speeches and publicationsUse contracts in dealing with third parties

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Misappropriation Of Trade SecretsMisappropriation Of Trade Secrets

Acquisition by improper meansAcquisition by accident or mistakeUse of or disclosure of a trade secret

a) Acquired improperlyb) 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.”

“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.

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IV. IV. Importance of Trade SecretsImportance of Trade Secrets

Trade secrets are the crown jewels” of corporations — not the “cesspool of the patent system.”

Mark Halligan: “Trade secrets are the IP of the new millennium and can no longer be treated as a stepchild.”

James Pooley: “Forget patents, trademarks and copyrights…trade secrets could be your company’s most important and valuable assets.”

Trade secret misappropriation cost Walt Disney $240 million, Cargill $300 million and Toshiba $465 million.

88% of responses in an IPO Survey indicate trade secrets to be the really important and most valuable intellectual assets because patents have limits: patentability requirements, publication, invent-around feasibility.

Publicly traded U.S. companies own an estimated $5 trillion in trade-secret information.

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Importance of Trade SecretsImportance of Trade Secrets

Trade secret protection operates without delay and undue cost against the world — unlike patents which are territorial and so expensive to obtain and maintain that only very selective foreign filing is done.

Patents are tips of icebergs in an ocean of trade secrets• Trade secrets cover over 90% of new technology, • Over 80% of technology licenses cover trade secrets or are

hybrid licenses• Trade secrets are the “workhorse of tech transfer.” (Bob

Sherwood).

Trade secrecy strengthens other IP assets held by companies. Coca-Cola’s trademark is stronger because they protect their secret formula as a trade secret.

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V. V. Patent/Trade Secret ComplementarinessPatent/Trade Secret Complementariness

• Supreme Court (Kewanee Oil, 1974): perfectly viable alternatives.

• Not mutually exclusive but mutually reinforcing — dovetail, in harmony

• “Coexistence is well-established.” (Don Chisum).• Inextricably intertwined: Most R&D data and collateral know-

how cannot and need not be included in patent applications — grist for trade secrets.

• All patents are born as trade secrets. Trade secrets precede, accompany and follow patents.

• Tom Arnold: it’s “flat wrong” to assume that “because the patent law requires a best mode requirement, patents necessarily disclose or preempt all the trade secrets that are useful in the practice of the invention.”

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Patent/Trade Secret ComplementarinessPatent/Trade Secret Complementariness

1.In the critical R&D state and before any patents issue, trade secret law “dovetails” with patent law. (Bonito Boats)2.Assuming that a development has been enabled and the best mode described, all associated, collateral know-how not disclosed, whether or not inventive, can be retained as a trade secret.3. All R&D data, including data pertaining to better modes, developed after filing, again whether or not inventive, can also be protected as trade secrets.4. With respect to technologically complex developments consisting of many patentable inventions and volumes of associated know-how, complementary patenting and secreting is tantamount to having the best of both worlds. E.g. GE’s industrial diamond process technology.

The question then 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.

Best policy and strategy is to patent as well as to padlock.

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Patent/Trade Secret Complementariness Patent/Trade Secret Complementariness Best Operational PracticeBest Operational Practice

Patents and trade secrets dovetail — exploit overlap and obtain dual protection, as follows:

• File broad application or several applications simultaneously or sequentially as early as possible• Time-honored maxim: “file early, file often”. “It is better to be a first applicant than a first inventor.”• This is not necessarily a decision in favor of patenting — gains time, keeps options open. Pending applications are secret.• If allowed, decide to take out or abandon and keep secret.• If not allowed and not published, have trade secrecy.• Continue filing on patentable improvements throughout R&D stage and

beyond.• E.g. over 100 patents on a Pitney Bowes mail processor — a “simple

machine.” Go for big numbers, e.g. IBM.• Above all, keep the volumes of collateral know-how secret.

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Patent/Trade Secret ComplementarinessPatent/Trade Secret Complementariness

As a practical matter, licenses under patents without access to associated, collateral know-how are often not enough because patents rarely disclose the ultimate scaled-up commercial embodiments of products and processes.

“In many cases, particularly in chemical technology, the know-how is the most important part of a technology transfer agreement.” (Homer Blair).

“It is common practice in industry to seek and obtain patents on that part of a technology that is amenable to patent protection, while maintaining related technological data and other information in confidence.” (Peter Rosenberg).

In technology licensing “related patent rights generally are mentioned late in the discussion and are perceived to have ‘insignificant’ value relative to the know-how.” (Michael Ward, Honeywell VP Licensing).

“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.” (Melvin Jager).

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Patent/Trade Secret ComplementarinessPatent/Trade Secret Complementariness

“One potential shortcoming of focusing on patents as a measure of innovation, besides the fact that it ignores the other types of intellectual property, is that patents are often valueless absent the ‘know-how’ that translates protected intellectual property into viable products.” (Gavin Clarkson, Harvard).

A company with one or more patents for its technology will usually have substantial valuable technical and business information related to, but outside the direct coverage or disclosure obligations of , its patent.. The company can maintain vigorous efforts in both areas of legal protection. (Jerry Cohen).

“It is frequently stated that know-how is the most valuable element of technology transfer. This is consistent with the writer’s own experience.” (Robert Goldscheider).

Failed Brazilian tactic — translate foreign patentsCiba-Geigy examples: Eastman-Kodak and DuPont licenses

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VI. VI. The Best Mode RequirementThe Best Mode Requirement

The “best mode” requirement applies• only to the knowledge of the inventor, • only at the time of filing and• only to the claimed invention.

Hence best mode requirement is no impediment, because — 1. Patent applications are filed early in the R&D stage to get the earliest possible filing

or priority date.

2. The specification normally describes in but a few pages only rudimentary lab experiments or prototypes.

3. The best mode for commercial manufacture and use remains to be developed later.

4. Patent claims tend to be narrow for distance from the prior art.

5. As shown by case law, manufacturing process details are, even if available, not a part of the statutory-required best mode disclosure of a patent.

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The Best Mode RequirementThe Best Mode Requirement

Don Chisum, author of multi-volume patent law treatise:When a patent expires, the “best mode,” if any, set forth in the specification, is no longer of competitive interest.

Tom Arnold, founder of Arnold, White & Durkee: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.” (1988 Licensing Law Handbook).

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Prior User RightsPrior User Rights

Can a trade secret owner be enjoined as infringer from practicing his/her own invention by

a later inventor/patentee of the same invention?

This has never happened (and never will happen).

Trade secret owner has de facto “prior user right” based on

• first inventor’s common law right

• principles of equity and due process and

• denial amounting to taking property without compensation

“A constitutional award to one inventor does not mandate a constitutional penalty to

another.” (Bennett)

“To 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.” (Ellis)

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The “Differences” Between Patents & Trade SecretsThe “Differences” Between Patents & Trade Secrets

Conventional wisdom: patents and trade secrets are incompatible and one or the other must be chosen. Choice depends on the perceived differences and on the respective advantages and disadvantages in terms of duration, scope and type of protection and cost.On closer scrutiny the differences are not there.Patent life may be more or less than 20 years.Most trade secrets last but a short time.Patents unlike trade secrets protect against independent discovery, but patents enable efforts to design or invent around.

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VIII. VIII. Exemplary Trade Secret CasesExemplary Trade Secret Cases

1. GE’s exclusive industrial diamond process technology• Held patents (some expired) and trade secrets• Refused to grant licenses• Fast-track GE scientist stole trade secrets for Far Eastern interests for million

dollar payments• In the end got caught, tried, jailed

2. Wyeth’s exclusive Premarin manufacturing process• Had market exclusivity since 1942• Patents expired decades ago• Closely guarded its trade secrets• Natural Biologics stole these trade secrets• Wyeth sued, got sweeping injunction

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Exemplary Trade Secret CasesExemplary Trade Secret Cases

3. Pizza Hut case

• Pizza Hut supplier, C&F Packing, invented and patented a manufacturing process for pizza sausage toppings and kept improvements secret

• Pizza Hut misappropriated trade secrets and got sued

• Court decisions:

1. On summary judgment: Patents are invalid on on-sale bar grounds

2. After trial: Trade secrets are enforceable and Pizza Hut had to pay $10.9 million

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VIII. VIII. ConclusionConclusion

To summarize, patents and trade secrets are viable alternative modes of protection in the IP field.

It is patents and (not “or”) trade secrets, because they can and should be relied upon at the same time and side by side to protect any given invention or innovation.

Far from being irreconcilable, they in fact make for a happy marriage with patents protecting patentable inventions, and trade secrets protecting the volumes of collateral know-how.

Thus a policy and practice of utilizing both routes for optimal protection and invulnerable exclusivity is rational, practical and profitable.