July 23, 2017

Trade Secrets: The Intellectual Property for the 21st Century?

The patent system has been under  attack by all three branches of the U.S. governmentin the past year. All is not lost, however, for companies and individuals that need to protect their valuable proprietary technical information. While trade secrets cannot fully replace patent protection in all respects, they do offer a viable alternative to patents for protecting intellectual property in many cases. In addition, while the value of patents in protecting IP has been under attack this year, trade secret protection has been on the rise with, for example, the California appellate court decision in Altavion, Inc. v. Konica Minolta Systems Laboratory, 226 Cal.App.4th 26. 171 Cal.Rptr.3d 714 (1st Dist. 2014).  that broadened the definition of what information can qualify as a trade secret. Moreover, there is a real possibility for the first time that Congress will finally pass a civil trade secrets protection law, which will mean that trade secrets will not be considered patent’s ugly step sister any longer.

Unlike patents, trade secrets are regulated primarily by state law. Almost every state has adopted some variation of the Uniform Trade Secrets Act (UTSA) that generally provides protection to any formula, pattern, device or compilation of information and provides a competitive advantage. The “sine qua non “of a trade secret is that the information is secret. Silvaco Data Systems v. Intel Corp., 184 Cal.App.4th 210, 221, 109 Cal.Rptr.3d 27 (2010). The owner must also take reasonable steps to maintain the secrecy. However, trade secret protection does not protect the independent development of the secret. In comparison, a patent may be obtained for “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” 35 U.S.C. § 101. In short the invention must be novel, useful, and non-obvious.

Prior to recent weakening of patent rights, the two most important advantages of trade secret protection as compared to patent protection were that trade secrets could theoretically be protected forever and the relative low cost in obtaining trade secret protection. For example, the formula for Coca-Cola has been protected as a trade secret for over 100 years because competitors have not been able to successfully reverse engineer it. In contrast, patent protection would have been lost many years ago and competitors would be offering sodas with tastes indistinguishable from Coca-Cola. Similar considerations apply with respect to licensing. Trade secrets, unlike patents can be licensed forever.  The right to obtain royalties for a patent ends upon the expiration of a patent. Brulotte v. Thys Co., 379 U.S. 29 (1964).

Now, however, recent Supreme Court decisions that have narrowed the scope of patent protection have, at the very least, highlighted some of the other advantages of trade secret protection. For example, the method for mitigating settlement risk described in the patent at-issue in Alice Corp. Ltd. V. CLS Bank Intern., 134 S.Ct 2347, which the Supreme Court held to be invalid because it was simply an abstract idea implemented by a computer could still have been protected as a trade secret had the inventor kept the method secret and not published it in the patent application. Because the Court found that it was not patent worthy anyone is free to use the invention. The inventor would have better off in keeping the commercially valuable information secret if patent protection was uncertain. Indeed, “because a ‘substantial number of patents’ are invalidated by courts, resulting in disclosure of an invention to competitors with no benefit, ‘many businesses now elect to protect commercially valuable information through reliance upon the state law of trade secret protection.’” 226 Cal.App.4th 26. 171 Cal.Rptr.3d 714 (1st Dist. 2014) (quoting Milgrim on Trade Secrets (2013) Definitional Aspects, § 1.01[a][2], p. 1-36).

Trade secret protection can extend to virtually any type of information that is secret and provides an actual or potential economic advantage over others. Indeed, this can include negative know-how (what doesn’t work) can be protected as a trade secret but not as a patent. This type of information can be particularly valuable since knowing what doesn’t work can save a company substantial research and development costs that can then be put to use in a potentially more lucrative manner.

The breadth of the type of information that can qualify for trade secret protection was also recently set forth by a California appellate court in Altavion, Inc. v. Konica Minolta Systems Laboratory, Inc., 226 Cal.App.4th 26. 171 Cal.Rptr.3d 714 (1st Dist. 2014). The court found that so long as patentable subject matter is not disclosed it can be protected as a trade secret. Id. at 55. “In other words, trade secret law may be used to sanction the misappropriation of an idea the plaintiff kept secret.” Id. The court also found that “even is some or all of he elements of [plaintiff’s] were in the public domain and thus unprotectable, the combination [of these elements] was a protectable trade secret if it was secret and had independent economic value.” Id. at 48. Thus, the concept for a barcode used to authenticate documents as a whole was protectable as a trade secret – without separately examining each of the individual elements.

Another important potential advantage of trade secrets is that in many instances it can be much easier to establish liability for trade secret theft than to establish patent infringement. To establish literal infringement, the accused product must include each and every element of a single claim in order to literally infringe that claim. Otherwise the claim of infringement must rest on the doctrine of equivalents which since the Supreme Court decision in Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17 (1997) has become very limited. In addition, the Supreme Court recently narrowed the scope of contributory infringement in Limelight Networks Inc. v. Akamai Technologies Inc., 134 S.Ct. 2111 (2014) in which it reversed the Federal Circuit holding that a defendant is not liable for inducing infringement under 35 U.S.C. § 271(b) when no party has directly infringed under Section 271(a) or any other statutory provision.

In comparison, a finding of trade secret misappropriation does not require a showing that all the elements have been copied. Instead, it can rest on access and substantial similarity. Thus, where the defendant cannot rebut these elements by establishing independent development of the infringing product, then the defendant is likely to be found liable for trade secret misappropriation.

Another important trade secret advantage is the limitations that have been placed on the recovery of patent damages. In particular, the plaintiff in a patent case must show actual damages and there is no recovery for unjust enrichment. 35 U.S.C. § 284. In contrast, damages for trade secret misappropriation can include both the actual loss caused by the misappropriation and the unjust enrichment caused by misappropriation that is not taken account in computing actual losses. UTSA § 3(a). The availability of unjust enrichment as a remedy may lead to a substantial award.

Other potential advantages for trade secret protection are the lower bar to recover increased damages for willful and deliberate misappropriation as compared to willful and deliberate infringement in a patent suit and the relative ease that a victim of trade secret misappropriation may be entitled to an injunction as compared to owner of a patent after the Supreme Court’s decision in eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), which overturned the presumption of granting automatic injunctions upon a finding of patent infringement. The patentee must now also satisfy the well-established four prong test for infringement. In contrast, because once trade secrets are disclosed they are lost forever, an injunction to prevent trade secret misappropriation can be issued to prevent both “actual” or “threatened” misappropriation.

Perhaps, up until now, the greatest potential downside for protecting information as a trade secret was the lack of a federal civil trade secret law. The Economic Espionage Act which provides criminal liability for trade secret misappropriation, currently only authorizes civil actions by the Attorney General but not private parties. Accordingly, unless diversity jurisdiction exists or there is some other basis for jurisdiction such as a cause of action brought under the federal Computer Fraud and Abuse Act, there is no basis to bring a civil trade secret action in a federal court. Instead plaintiffs are left to assert trade secret claims in state court under various state statutory adoptions of the UTSA. There are inconsistencies and differences among the states concerning their specific adoption of the UTSA and state court’s interpretation of critical components including the basis for damages/royalties, preemption by federal law, trade secret identification, reasonable secrecy measures, statute of limitations and reverse engineering. In short, companies may be faced with differing and conflicting standards when attempting to protect their trade secrets.

Now this finally may change. While Congress has for many years considered the possibility of creating a civil cause of action for private litigants in federal court for trade secret misappropriation, the bills never went very far. However, there are currently civil trade secret bills pending in both the Senate and the House. Most recently, on July 29, 2014, the Trade Secret Protection Act of 2014 was introduced into the House by a bi-partisan group led by George Holding (R-N.C.) and Jerrold Nadler (D-N.C.). While there are some notable differences between the Senate and House version of the bills, it has been reported that there may not be any significant opposition in the Senate to the House version increasing the odds of passage. In addition many Fortune 500 companies have come out in favor of such law. Opponents of the bills cite federalism concerns, legislation in search of a problem, the alleged over breadth of the certain language in the bills relating to seizure of infringing products and the perceived increased burden on federal courts. It is possible that votes on the bills will take place as early as mid-September.

While trade secrets cannot replace patents in all instances, and are generally most useful where the inventions are easily kept secret and are incapable of easy reverse engineering, they do offer a number of advantages over patents, not all of which have been discussed in this article, and companies would be remiss not to seriously consider trade secrets in their overall intellectual property protection program. Further, the passage by Congress of a civil trade secrets bill would provide considerable momentum to the changing perception that trade secrets should no longer take the back seat to patents as a method for protecting intellectual property and may become the intellectual property of choice for the 21st century.

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