TRADE SECRETS, PROBLEr1S OF PROTECT! ON
AND FEDERAL PREEMPTION • • • • • •
Et·1PHASIS ON THE I<NmHlOW AREA
T. L.
EDMONDS
FOREWARD
This material was developed under the guidance of Professor
Jere C. Wicker with the intent to pinpoint and suggest solutions to
the interaction problems of the patent and trade secret areas.
The area of "knOW'-how" in the trade secret sector is emphasized
because it is representative of one of the most important economic
aspects of patent licensing where protection may not be afforded by
the monopoly alone.
TABLE OF CONTENTS
Page No.
.. . ........... .
1.0 Introduction
2.0 Overview of Trade Secrets and Patents •••••• The
Gathering Storm
••••
1
2
2.1 Patents and Licensing
5
2.2 Trade Secrets •••••• An Introductory Statement
2.2.1 Definition and Types of Trade Secrets
7
8
2.2.2 Trade Secrets as Private Patents
9
2.2.3 The Dichotomy of Patent/No Trade Secret
11
2.2.4 Trade Secrets and the Expired Patent
14
2.2.5 Licensing of Trade Secrets
15
•••••
16
3.0 Protection and Loss of Trade Secrets
18
2.3 The Preemption Problem
3.1 Trade Secret Protection Requirements
20
3.2 Industrial Espionage
22
•• • • • • • •
3.2.1 Employees and Industrial Information
25
3. 2. 2 Theft of the Medium
29
4.0 The Know-How Dilemma •• •• •
4.1 Know-How as a Unique Property Right
33
35
4.2 Know-How Technology and the Patent License
37
5.0 Proposals for Trade Secret Protection and Control
38
5.1 Amendment to Patent Statute
38
5.2 The Scott Amendment
39
5.3 Possible Federal Statute for Trade Secret
5.4 State Law for Trade Secret Protection
41
41
5.5 Other Proposals in Unfair Competition Areas.
42
Protection
• • . . • • •
6.0 Conclusions and Forecast
7.0 Appendix • • • •• • • •
42
44
ii
1.0
IntIoduction
This survey is primarily to examine the trade secret area and
the related problems of preemption, with special emphasis on the "knowhow" aspect of Trade Secret Law and licensing.
The summary treatment
of such landmark cases as Sears, Roebuck & Co. v. Stiffel, 376 U.S.
225 (1964), Compco Corp. v. Day-Brite Lighting, Inc., 376 U.S. 234
(1964), and Lear v. Adkins, 395 U.S. 653 (1969) is to establish their
effects and place in the chain of events leading to the present cases
before the Circuit Courts of Appeal and the U.S . Supreme Court.
The
possibility of these later decisions appreciably altering the current
situation with regard to the impact of such cases as Lear is considered.
Possible legislative approaches are also reviewed.
The previous land-
mark cases are not extensively analyzed, since 'numerous articles have
covered them quite thoroughly.
Clarification is needed with respect to trade secrets, federal
preemption, and the relationship to the Patent Law area.
Whether the
thrust will come from proposed legislation, a new statutory approach,
or judicial resolution is not that apparent.
Observations in all of
these areas are presented for reference, and conclusions drawn based
on documentary material , as well as firsthand data drawn from the
business and technical communities.
2.0
Overview of Trade Secrets and Patents •••••• The Gathering Storm
The question of more or less protection of trade secrets through
federal preemption or other means is a continuing issue.
Beyond the
legal ramifications, the economic impact of trade secrets is significant.
As shown in the section on industrial espionage of this report, and in
supporting data, the loss that can be attributed to trade secret misappropriation by employees may be several billion dollars over a 5-10
year period.
Because of the requirement of secrecy, the actual losses
could even be higher due to lack of reporting or any assessment of
litigation in progress.
In the companion area of patents, however, some more precise data
as to the litigated aspects of infringement or wrongful use is available.
The cost of infringement litigation is notoriously expensive and the
odds heavily favor the defendant.
Some statistics on patent invalidity
determination show that over a 10-year period from January 1956 to
March 1967. based on cases reported in the United States Patents
Quarterly, that in 686 cases reported, plaintiffs were successful in
only 199, or a 29% favorable determination.
This shows clearly the
burden ·that must be sustained by the patentee.
In 49 cases reported
under "Torts 10 (5)" in the American Digest System from 1936 to 1966,
cas es dealing solely with unlawful appropriation of trade secrets,
plaintiffs were successful in 47% of these cases.
Mahon, Jr., Trade
Secrets and Patents Compared. Vol. L, No . 8 J. Pat. Off. Soc'y 536 at
540 (August, 1968).
It should be noted that this 47% for trade secret
litigation could be changed after the Lear decision, but not enough
data is yet available to be definitive. · It is also very likely that
2
the comparison ratio of 29%/47% may not be appreciably altered, based
on a survey also conducted using cases reported in the United States
Patent Quarterly.
This survey covered all of the Circuits on a com-
posite basis from February 1966 to March 1972 and dealt with patent
validity holdings after the decision in Graham v. John Deere Co., 383
U.S. 1 (1966), which affirmed the Eighth Circuit's holding of invalidity
of a patent 9 years after a Fifth Circuit holding of validity, and
after and before the holding in Blonder-Tongue Labs •• Inc. v. University
of Ill. Foundation, 402 U.S. 313 (1971), which dealt with the concept
of collateral estoppel.
The data are shown in tabular form in 7.0
Appendix of this survey.
The U.S. Supreme Court has been presented with opportunities to
develop uniform standards for obviousness in determination of validity,
but seems not only to avoid the issue as in Blonder-Tongue, but to take
each opportunity to enforce stricter standards and uphold fewer patents
as valid.
It appears that the Supreme Court last upheld the validity
of a patent in the case of United States v. Adams, 383 U.S. 39 (1966).
The last holding of validity prior to that was in 1944 in the case of
Goodyear Tire & Rubber Co. v. Ray-O-Vac Co., 321 U.S. 275 (1944).
Neither the facts of the cases or the subject matter sought to be
protected is that distinctive in technology to explain the selectivity
shown.
In fact, these upholdings of validity by the Supreme Court
have become such rare events that one commentator has suggested that
there be a detailed analysis of these decisions in order to determine
just what motivated the Court to reach such unusual results.
Comment,
Obviousness in the Eighth Circuit, 14 St. Louis U.L.J. 672 (1970).
3
So the ball seems to be back in the Circuit Courts as shown in the
survey on holdings of 'validity.
Some observations have been made re-
garding these figures, and the basic conclusion is that the Graham
holding has not precipitated the application of any uniform test for
obviousness .
It is also suggested that the Fifth, Sixth, and Seventh
Circuits with respective validity ratios of 46.5 percent, 51.8 percent,
and 48.9 percent are clearly applying different standards than the
Fourth, Eighth, Ninth, and District of Columbia Circuits, which show
validity ratios of 14 . 2 percent, 8.07 percent, 16.9 percent, and 16.6
percent respectively.
18 Villanova L. Rev. 207 at 226 (Dec . 1972).
While standards of obviousness are not the main concern in our
case, these figures tend to show that it is axiomatic that trade secret
and patent alternatives are complex.
The Circuit standards are un-
certain and the Supreme Court tends to be hostile to any subject but
threshold breakthroughs in technology.
The famous dissenting portion
of the minority opinion of Mr. Justice Black in the landmark case of
Lear v . Adkins, 395 U. S. 65'3 (1969) still looma as a warning that no
state has a right to author ize any kind of monopoly on what is claimed
to be a unique subject unless a patent has been obtained under the
Patent office.
This has been interpreted in many quarters as a signal
of federal preemption in the state trade secret area.
The Lear case
would stand principally for t he formal overruling of licensee estoppel
without this commentary from Black.
Licensee estoppel' was a doctrine
Whichprohibited the licensee from challenging the validity of t he
patent while enjoying the fruits of its use through licensing.
Whether
Lear is being distinguished to avoid adverse impact on the trade secret
4
to be a tenuous one at best.
Due to the
sig~ificant
economic impact it
could have in the multinational corporate area, however, some resolution
should be achieved either statutorily or by judicial distinctions.
2.1
Patents and Licensing
The licensing of patents is a version of the hedging game in
commodities, but has the additional aspect of vo1untariness or involuntariness, depending upon the antitrust aspects of the patent monopoly.
DuPont, for instance, was compelled by the Justice Department to license
the Nylon production process .
in this survey.
We are concerned with the voluntary aspect
While patent licensing has not had a placid history,
the most contemporary perturbations began in the area of product simulation of design patents in the two cases decided in 1964 by the U.S.
Supreme Court; Sears, Roebuck & Company v. Stiffe1 Company, 376 U.S.
225 (1964); and Compco Corporation v. Day Brite Lighting, Incorporated,
376 U.S. 234 (1964).
In these cases, the Supreme Court held that a
state has no right to prevent copying a competitor's product unless a
patent had been issued.
Unless the plaintiff owned a valid patent, no
cause of action would arise merely because the defendant copied the
product.
To move on to say that all trade secret contracts are unenforceable,
is something of an unwarranted step .
Neither Justice Harlan's distaste
for " private agreements among individuals" nor Justice Black's finding
and affirmation of a national policy in the patent laws, without identifying· the section so stating, would seem to develop a convincing case
of a threat to the progress of science.
The only penalty for failure
to disclose an invention or development is the loss of a right 1£
patent.
Patent Act, 35 U.S.C. 1102 (1952).
5
Private agreements affect
only those individuals privy to the agreement.
The rest of the world
is free to ignore the agreement, snd if the information is independently
discovered, the trsde secret is lost and all are free to use it.
This
independent discovery hss been referred to in technical jargon as
'reverse engineering "' •
Black's comments in the Lear decision had their impact on the lower
courts and Judge Motley in the Southern District of New York cited Mr.
Justice Black's views as suthority to wipe out the entire law of trade
secrets with one stroke of the pen in the case of Painton & Company
Ltd. v. Bourns, 442 F.2d 216 (2d Cir. 1971).
In this case the plaintiff
was licensed under defendant's British patent also received drawings
and engineering data related to manufacturing the devices.
The case
involved a combination of patent and trade secret license.
The plain-
tiff terminated the license but intended to continue to avail itself of
the trade secret information that accompanied the patent license and
refused to return manufacturing data, engineering drawings, etc.
The
defendant took the position it was entitled to the return of the drawings.
Plaintiff filed a declaratory judgment action· and both parties moved
for summary judgment.
Judge Motley held that defendant could retain
and use the data, and further, that there was no such thing as an enforceable contract where the consideration for the contract was the
conveyance of a trade secret, citing Mr. Justice Black's viewpoints in
the Lear case.
The fact that two different sets of rights were
involved (one in the: patent . rights and one in the manufacturing methods)
was not considered.
The Lear case was handling· a trade secret situation
that blended into .a patent and the Supreme Court treated royalties due
during the post patent period as a patent license differently from the
6
royalties due during the pre-patent period as a trade secret license .
The Bourns case prompted Congressional legislation by Senator Scott
of Pennsylvania, discussed infra in Section 5.2 of this survey.
The
Second Circuit showed its steady hand and reveraed the District Court
holding that no trade
secret cause of action would lie.
It did so by
emphasizing the holding in Lear to reaffirm and formalize the overruling of licensee estoppel.
This case is perhaps one of the best
examples of the interaction of the know-how aspect of trade secrets,
i.e., manufacturing methods and the actual ·purposive .process result.
In the case of Troxel Mfg. Co. v. Schwinn Bicycle Co., 465 F.2d
1253, (6th Cir. 1972) the issue of whether there should be a refund of
royalties actually paid after a judicial determination of patent
invalidity seems to have been settled in the negative.
The court also
denied a counterclaim for unpaid royalties which had accrued prior to
the affirmance of the invalidity decree.
The merits of this decision
are not debated here, but the case · illustrates the continued problems
in the licensing area, even under the federally preempted patent
monopoly.
,The question now begins to evolve that if there is a trade secret
license and later a patent license, is the trade secret area mutually
exclusive in form, is there a metamorphosis, or is one area a subset of
the other?
Since there is very little demarcation in judicial opinions
on this matter, it is an appropriate question to consider when comparing
the areas.
2.2
Trade Secrets •••••• An Introductory Statement
The term "trade secret" conjures up visions of esoteric knowledge
and activities worthy of Shakespearean cauldrons and the royal alchemists
7
toiling mightily to transform base metals into gold (not unlike
political alchemists of today).
Broadly speaking, the business commu-
nity and commercial law define a trade secret as any form of proprietary
intelligence that gives one person an advantage over a competitor.
It
is not too surprising that some of the more economic successes have had
their origin in carefully protected and properly used trade secrets.
The Coca Cola syrup recipe and the metallurgy of cymbals are but two
perfect examples.
It should be remembered, however, that antitrust
laws are as applicable in the area of trade secret use as they are in
the misuse of a patent monopoly, although the abuses could be totally
different.
A small patent monopoly could constitute an abuse, where a
trade secret might not .
2.2.1
Definition and Types of Trade Secrets
The most popular black letter law definition of a trade secret is
provided by IV Restatements of . Torts,
§
757, comment b at 5 (1939):
"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."
The subject matter constituting a trade secret has not been otherwise
restricted; it need not even be evidenced by some form of physical
matter.
R. Callmann, The Law of Unfair Competition, Trademarks and
Monopolies
§
51.1, at 352 (3d ed. 1968) .
A trade secret may draw on
elements of a known process or known ingredients .
Items as different
in substance as customer lists, formulas, chemicals, manufacturing
processes, and, lately, computer programs have been considered worthy
of trade secret protection.
The Restatements further discuss criteria which should be used
8
when determining whether one has a trade secret.
A court, for instance,
should also determine:
1.
To what extent is it known by employees and others in the
business?
2.
To what extent are measures taken to guard secrecy of
information?
3.
Of what value is the information to the employee and his
competitors?
4.
What amount of money and effort is expended by the employer
in developing the proprietary information?
5.
How easily may the information be properly acquired or
duplicated?
Things that have been afforded trade secret status by the courts
applying the Restatements definition· include soft drink formulas,
photographic processes, oxygen masks, mask hoses, and computer software.
Trade secret status has been denied for lacquer formula with a
lacquer manufactured under general formulas known throughout the trade,
a vapor blasting process for chrome plating, and in a recent Mississippi
case, techniques for manufacturing glass beads .
Cataphote Corporation
v. Hudson , 136 F.Supp. 1122 , (D.C. Miss. 1970).
2.2.2
Trade Secrets as Private Patents
The possibility of the trade secret area being merely a subset of
the patent sector,
nam~ly
a private form of a patent has been hinted at
obliquely .by several commentators.
The Lear case was an example of
litigation which would raise this question.
The subject matter of the
more sophisticated trade secret may ·also qualify for . a patent.
9
Assuming it meets the requirements of the patent statute, i.e . novelty,
utility, and unobviousness, the proprietor has an election of retaining
it as a trade secret or filing a patent application.
U.S.C.
§
101 (1952).
Patent Act, 35
But where the election is to go from one status
to another is where the difficulties arise.
Beginning from the philosophy of patent practice under Venetian
laws in the 15th century, from which Great Britain and the United
States derived their approaches, the existence side by side of patent
and trade secret law has been no great problem.
Mandich, Venetian
Patents (1450-1550), 30 J. Pat. Off. SOC'y 166 (1948).
The Supreme Court of the United States became concerned when it
concluded that the trade secret proprietor might use the right of
election to circumvent the patent system· snd exact tribute from licenses
on trivia that would not rise to the level of invention required to
support a patent .
William J. Keating, General Patent Counsel, AMF
Incorporated,. suggests that a clear understanding of the patent and
trade secret area would allow us to say in the words of the Scots, "It
is not to worry."
4 Sw. Univ. L.R. 56 (1972).
It is submitted that
there is something to worry about, otherwise the decisions beginning
with Sears, Compco,
~.
Bourns and current cases claimed to distinguish
them, would not have produced the present uncertainty.
The owner of the trade secret acquires a valuable property right
through the common law's recognition that confidential business data
constitutes personal property, according to some authorities.
Trade Secrets, 8 1.01, pp. 1-2, 1-11.
Milgrim,
And although courts have recog-
nized a property right in such data under certain circumstances, it is
difficult to reconcile the treatment of such data on a court-to-court
10
judge-to-judge, or even day-to-day basis.
The difficulty arises, as in
Lear, where the character of the property which permits multiple,
simultaneous possession.
It would have been very persuasive if the
Lear court would have said that while patent protection was being
sought a trade secret became a quasi-patent or a private patent ·at that
point.
Upon denial of patent protection, it could then revert, and sub-
ject to preemption criteria, still have whatever protection a trade
secret should be accorded. ·The Lear court was more concerned, however,
in forging comprehensive criteria for the patent seeker in the interest
of public disclosure of vital information.
Although proposed revisions of patent laws in the U.S. does seem
to try and provide some exemption for trade secrets , there is little
indication that either ·the courts or legislatures have considered the
idea of the private patent status for a trade secret, either as an
election in the patent process or as a defined subset of the patent
structure .
The idea is interesting, but should probably be deferred
until some better criteria is developed for trade secret protection per
se. (See Sect. 5.0)
2.2.3
The Dichotomy of Patent/No Trade Secret
The scope of protection of the patent law is considerably broader
than trade secret protection which extends only to that class of people
who derive the information from the owner of the trade secret.
Indepen-
dent discovery of the information is a good defense to a trade secret
action, but not to a patent infringement action.
The situation which
is most distrubing in pinpointing the trade secret area, however, arises
where the information goes through a metamorphosis from trade secret to
patent with the rights of the parties changing throughout the various
11
stages.
As seen in Section 2.2.2
supra, Lear provided an outstanding
example of this, but it is by no means the last case to possess these
chameleon elements.
The exculsionary rights of a trade secret holder can last indefinitely if no one' else discovers the secrets legitimately, and this
spectre of a long-term monopoly seems to be the chief objection to their
existence.
But no data seems to be available to indicate how long trade
secrets generally do last, and it is a common assumption that a long
period of secrecy is the exception rather than the rule . Machlup,
Economic Review 33.
The most current case in the area of whether a trade secret can
find happiness when not vigorously promoted for patent status, even
though meeting patentable criteria, is Kewanee Oil Company v. Bicron
Corporation, 478 F.2d 1074 (6th Cir. 1973).
This case is quite typical
of the corporate merger and reorganization involving industrial technology.
The Kewanee Oil Company acquired a well-known maker of in-
dustrial catalysts, the Harshaw Chemical Company.
Harshaw also made
other types of activation crystals, such as the ones in controversy
here known as sodium iodide thallium activated scintillation crystals.
These crystals are used in connection with nuclear fission equipment
utilized in geophysical surveys searching for uranium and oil, space
exploration, and clinical measurement of radio isotopes.
This research
had begun in 1949 when Harshaw Chemical was an independent company.
The defendant corporation Bicron Corp. was created by former employees
of Harshaw Chemical, all of whom were associated in the development of
the cyrstals.
It was uncontested that the 40 trade secrets in question
had been in commercial use for more than one year prior to the
12
eommeneement of this lawsuit.
The Distriet Court for the Northern
Distriet Court of Ohio determined that 20 of these elaims were not
established as trade seerets, but issued permanent injunetions against
the defendants enjoining them from diselosing and/or using the other
20 trade seerets in question.
On appeal and eross appeal it was ad-
mitted by Kewanee eounsel that these trade seerets were appropriate
. subjeets for eonsideration for patents under the provisions of Title
35 U.S.C § 101.
Further, evidenee that similar patents had been
elaimed and granted.
Kewanee admitted that they were relying on pro-
teetion to extend the eommereial monopoly of the inventions beyond the
17 years granted by the Patent Laws.
The issue was squarely before the Sixth Cireuit as to whether a
state trade seeret law whieh proteets an invention, but whieh would be
an appropriate subjeet for a patent under the Patent Laws of the United
States, and whieh has been used eommereially for more than one year,
eonfliets with the polieies and purposes of Artiele I, Seetion 8 (Clause
8) of the Constitution and the Patent Laws adopted pursuant thereto.
The Sixth Cireuit said that based upon a primary Ohio ease, Huszar v.
Cineinnati Chemieal Works, 172 F.2d 6 (6th Cir. 1949) and the language
of Title 35 U.S.C. § 102(b), whieh said that a patent may not issue on
an invention whieh has been in pub lie use or on sale more than one year
prior to the date of the applieation of the patent, that patent pro teetion was not possible and the use of the invention for eommereial purposes would be eonsidered pub lie use.
The federal preemption was present
and Ohio state trade seeret law eould not prevail.
The Court then said
that they realized that other Cireuits did not agree that there was a
eonfliet between the United States Patent Laws and the Trade Seeret Laws
13
of the states, within the meaning of the Supremacy Clause of the
Constitution.
The cases cited as references were:
2nd Circuit
Painton & Co. v. Bourns, Inc., 442 F.2d 216
(2d Cir . 1971)
4th Circuit
Servo Corp. of America V. General Electric Co.,
337 F.2d 716, (4th Cir. 1964), 383 U.S. 934 (1966),
rehearing denied, 384 U.S. 914 (1966)
5th Circuit
Water Services; Inc. v. Tesco Chemicals, Inc.,
410 F.2d 163 (5th Cir. 1969)
9th Circuit
Dekar Industries Inc. v. Bissett-Berman Corp.,
434 F.2d 1304 (9th Cir. 1970), cert. den.,
402 U.S. 945 (1971)
Neither the Kewanee case nor those cited as holding differently
as to trade secret and patent law conflicts, dealt with specifically
the transitional stages of the invention found in Lear.
So it is
questionable whether any decision of the Supreme Court on Kewanee would
clarify the trade secret and patent law conflict and additionally distinguish Lear for more than mitigating Mr. Justice Black's comments.
It may be too much to hope that they would restore the trade secret
status to an independent one or at least give guidelines as to what
should be done.
The 1~0 patent applied for/trade secret may be 10s~7
equation could still exist concurrently with a delaration of no conflict.
2.2.4
Trade Secrets and the Expired Patent
One of the frequent concerns of commentators and jurists is that
the expiration of a patent monopoly might still not effectively remove
the possibility of additional rights under a trade secret law.
to have been well settled in Kellogg CO.
V.
It seems
National Biscuit Co., 305
U.S. III (1938) that the state power in the area of expired patents, at
least with respect to the law of unfair competition, was preempted by
the federal patent policy.
Sears-Compco were concerned with preventing
14
anyone from using unpatented developments or invalid patents to further
a monopoly under state trade secret law.
The only question that neither
the Kellogg decision nor Sears-Compco sheds any light on is in the knowhow licensing area, where a patent has expired, but the ancillary knowhow is still a valuable consideration.
This leads logically to the
question of licensing. ·
2.2.5
Licensing of Trade Secrets
The exact extent of licensing in this area of trade secrets is
difficult to determine, but if the know-how area ancillary to patent
licenses is also considered, it is believed to be significantly greater
than patent licensing.
A patent grant confers total monopoly for 17 .years.
Trade secret
agreements and know-how licenses are made between parties knowing enough ...
about the technological field to guage the risk of legitimate discovery.
The unanswered question in Lear as to whether an agreement to pay royalties for a trade secret is enforceable is a nagging one.
The Second Circuit in ·t he !-ear decision dismissed the issue that
absence of compulsory disclosure in the trade secret area could result
in an inventor dying with his secret, depriving the public of its usefulness.
In doing so, it came up with three categories of potential
trade secret licensors:
(1) The owner of a trade secret which believed
to be a validly patentab1e ·invention; (2) the owner of a trade secret
which is not patentable; and (3) the owner of a trade secret whose
patentability is considered dubious.
In the first category the Second Circuit said that there would be
no substantial withholding of patent applications because a licensee
would pay more for the patent monopoly.
15
This might be true in cases
where reverse engineering is relatively simple, but questionable in
many instances.
The second category where the owner knows the trade secret is
unpatentable is the area ·where a great deal of the "know-how" technology
is located.
If licensing agreements are unenforceable here, then two
results might occur.
One would be the flooding of the patent office
with frivolous applications, since there is nothing to be lost by
trying, or the second being simply a decline in research in the areas
where ·patents are not currently in vogue .
The third category discussed by the Second Circuit is that in which
the owner of a trade secret is doubtful or unsure of whether his idea
is patentable.
Any denial of trade secret protection here might again
stimulate applications for the only ·protection available.
All three of these categories simply add up to the desirability of
an alternative means of protection where a patent may not issue.
There
is no persuasive evidence of an economic or contractual nature that
militates against the valid·ity of trade secret licensing.
Whatever
. public policy arguments exist aeem to be found in the interpretation
of the string of cases beginning with Seara-Compco, Lear, . Kewanee, and
others.
2.3
The Preemption Problem
There is virtually no disagreement as to federal preemption in the
area of the patent monopoly, although some confusion does exist as to
validity attacks through state courts.
The real controversy exists
in the twilight zone of the common law elements of the trade secret and
the statutory overlap of the constitutionally developed patent area.
There is so little information in the area of whether federal
16
preemption extends to the know-how area of patent licensing as a separate
entity that almost all published viewpoints are concerned with abuses
of know-how licensing and the use of antitrust laws.
These abuses are
discussed in such cases as Times Picayune Publishing Co. v. United States,
345 U.S. 594 (1953),. which dealt with tying agreements in competitive
products, and United States v. National Lead Co., 63 F. Supp. 513 (S.D.
N.Y. 1945), aff'd, 332 U.S. 319 (1947), which dealt with the Territorial
Anci11arity Doctrine (territorial restrictions accompanied by a grant
of know-how).
An excellent summary of limitations on patent license
restrictions may be found in a law review article by Harold Marquis,
58 Iowa L. Rev. 41 (1972).
This survey will not deal with the antitrust aspects because this
would apply a remedy as mechanism for justification of preemption.
is submitted that a more fundamental analysis is required.
It
The basic
concern is whether federal preemption has happened in the trade secret
area by induction, and if not, should there be a federal policy?
These
possible solutions are discussed in Section 5.0 of this report, assuming
that more definitive measures are needed.
A very pertinent question is what would be federally preempted in
a trade secret area?
Would this include every possible secret of art,
or would the rigid patent standards' be the same in the trade secret
area?
If s,o , then there might be an area of know-how which could
suddenly be without protection anywhere.
This could precipitate harsher
approaches to licensing and liquidated contract clauses among larger
industrial and business enterprises.
The smaller business enterprise
could be forced to even more desperate measures.
One authority has
categorized the range of subject matter an industrialist would wish to
17
protect by trade secret law as follows:
(1)
patentable inventions
(2)
inventions short of the statutory standard of novelty and
invention
(3)
technology associated with product (e.g. plans, specifications)
(4)
non-technological, internal business organization, and
operating methods, and
(5)
general methods of doing business, advertising campaigns,
market research studies, lists of customers, and supplies.
Milbank, !inders Keepers, Licensors Weepers, 52 J. Pat. Off. Soc'y
343, 344 (1970)
Courts and legislatures have failed to recognize the importance of
distinguishing between the five categories and deciding what protection
is appropriate ',in each categqry . . The :third ·.and ifourth .:catego;ries :
generally encompass the know-how area.
The most prevalent activity in trade secret areas today is not their
blatant misuse against public policy, but the problems arising from their
theft and the defenses raised that · there is no' trade secret at all due
to federal preemption in other areas.
With or without the preemption
properly focused, trade secrets have too great an economic impact to not
have some protection provided them.
Technology and know-how licensing
bring into the United States over $1 billion in foreign exchange each
year, and this figure is growing . Bourns case, supra, 226 n.7.
3.0
Protection and Loss of Trade Secrets
Germany, Austria, Norway, Denmark, Sweden, Italy, France, Belgium,
and the Netherlands protect industrial know-how under various provisions
of unfair competition law.
Newcomer, Legal Protection aId Licensing of
"Know-How" Internationally, 7 Am. Bus. L.J • . 227, 230-32 (1970).
18
In. this
era of expanding international trade protection of know-how agreements
is necessary and desirable, because some of the most sought after
American information by foreign competitors is in the area of non-technical operating methods and general methods of ·doing business, but they ·
are not · exc1usive1y scientific nor technological and do not serve as
a springboard for further industrial research.
But when these methods
and practices telescope with the plans, processes, and operating procedures they form the basis of the know-how area.
According to some
experts, in spite of the fact that trade secrets ·have no dimensional
existence, they can be purchased, stolen or leased like any other
property.
Mi1grim, Trade Secrets,
§
1.02 at 1-12, 50, 1-15. Douglas
Johnson, a crime expert at Pace College in New York City, claims
$2 billion in trade secrets have been lost by industry since 1960.
Schneider, Protecting Trade Secrets, 8 Trial 55 (Jan./Feb. 1972).
There are three general ways a trade secret can become generally
known and enter the public domain in a reasonably ascertainable form;
thus, becoming a trade secret no longer: (a) by issuance of a patent;
(b) inherently upon commercialization or (c) by misappropriation.
One of the least discussed aspects of this knowledge and subsequent loss
of a valuable right is the impact on ·the company in the eyes of their
business · and industrial contemporaries. · Any infringement suit in the
patent area is immediately published in the Official Gazette of the
Patent Office and hunting season is duly announced.
a trade secret "loss" may be less devastating.
On the other hand,
The suit itself may
attract less attention and no federal and official organ keeps judicial
score with glaring regularity.
The loss may be very real, however, and should not be minimized
19
because there is very little publicity during the heat of battle.
3.1
Trade Secret Protection Requirements
The standards, governing what, may warrant protection as a trade
secret are not so exacting as those for patents.
Secrets
§
8.02, at 5, 8-7 (1970).
R. Milgrim, Trade
All that need be shown for the enforce-
ment of a trade secret is: (1) the information or device is in fact a
secret, that is, not a matter of public knowledge; (2) there is some
degree of novelty, although it may fall considerably short of that
required for a patent, and (3) there has been a wrongful appropriation
of the trade secret, usually, but not necessarily resulting from a
breach of an obligation not to disclose.
Without such a misappropriation,
there is very little chance for redress.
A trade secret can be a device
or process whose novelty is clearly anticipated by the prior art in the
field.
The novelty and non-obviouaness, as uaed in the Patent Act, are
not requisites for a trade secret, and the types of protectiona afforded
an owner against the discloaure of his trade secret may vary from jurisdiction to jurisdiction.
competition laws.
In
some states protection is afforded by unfair
The ' problem with these time-honored requirements and
protection schemes is that they represent an uncertain path in view of
the Sears to Compco to Lear decision triad .
The most recent case at the time of this survey dealing with the
impact of these decisions is a U.S. Supreme Court decision Goldstein v.
California, 93 S.Ct. 2303 (1973).
This case deals with tape recording
piracy and a conviction of petitioners under g 653h of the California
Penal Code.
Petitioners contended that this statute was in conflict
with the Copyright Clause Art. I S 8. cl. 8. of the Constitution and the
federal ststutes enacted thereunder.
20
The Sears-Compco cases were cited
in support of their contention.
The Supreme Court upheld their con-
viction in the opinion handed down on June 18, 1973 in a divided 5-4
opinion.
Whether this case has filed the edges of the Sears-Compco
and Lear decisions with respect to state trade secret areas is not tha t
clear.
It is tempting to say so, but this is primarily the copyright
area which is addressed by the Supreme Court.
The language used in the
majority opinton continually confined itself to copyrights.
Some
excerpted language bears this out:
"Similarly, it is difficult to see how the concurrent exe rcise
of the power to grant copyrights by Congress and the States
will necessarily and inevitably lead to difficulty "
"No reason exists why Congress must take affirmative action
either to authorize protection of all categories of
writ i ngs or to free them from all restraint . We therefore
conclude that, under the Constitution, the States have not
relinquished all power to grant to authors 'the exclusive
Right to their respective Writings.'
"Our conclusion that California did not surrender its
power to issue copyrights does not end the i nquiry • • • "
The Sears-Compco cases could be mitigated at this point by the Goldstein
opinion due to the relationship of design patents and tradema rks.
Lear was a case of mechanical patent and trade secret.
But
The translation
of Goldstein as an overlay of Lear is not that 'obvious .
It is submitted
that the decision of the Supreme Court in the Kewanee case could be more
instructive , when this situation is reviewed ·and decided .
The common law has evolved three basic elements of a cause of action
in protection trade secrets : (1) proof of the existence of an idea not
generally known and treated by the owner as a secret; (2) improper disclosure or use; and (3) proof of loss, either present or future.
Iowa L; Rev. 66-68 & nn.20, 30, 34 (1966).
52
As to the first element, con-
fusion has reigned as to what sort of thing is to be protected, and in
21
the second element, it has been unclear what conduct is proscribed with
regard to a trade secret.
While remedies are available, neither leading
authorities nor most cases have delineated with any precision just what
sort of improper "disclosure" or "use" the remedies are directed against.
Misappropriation is itself divisible · into two parts, that is, an industrial concern seeking to misappropriate secrets of a competitor can
either attempt to subvert the latter's employees to whom the secret has
been voluntarily disclosed or engage someone not privy to the secret to
obtain it by whatever improper means are most effective.
Subversion of
employees has received the bulk of attention in both the literature and
the courts.
Modern industrial espionage has been in large part neglected.
Both merit treatment.
3.2
120 U. Penn. · L. Rev. 378, at 382 (1971).
Indust r i Al Espionage
The lapse in the common l aw development which has laid the
groundwork for a thriving, though unsanctioned business may ultimately
be traced back to Justice Holmes and to an unforeseen consequence of
the judicial tendency to achieve equity with economy.
In an early
leading case, Holmes delivered a statement that has become as famous
in its quotation as unfortunate in its consequences :
"The word property as applied to trademarks .and trade secrets
is an unanalyzed expression of certain secondary consequences
of the primary fact that the law makes some rudimentary
requirements of good faith."
This statement was in the case of E.I. du Pont de Nemours Powder Co. v.
Masland, 244 U.S. 100, 102 (1917).
The suit was to enjoin an employee
from setting up his own business based on the secret of his employer.
With the potential · damsge clear and with the more immediate grounds of
breach of contract available, Holmes felt no need to consider the
22
additional claim that property had been wrongfully appropriated.
In his
words t
"The property may be denied but the confidence cannot be.
Therefore the starting point for the present matter is
not property or due process of law, but that the defendant
stood in confidential relations with the plaintiffs."
In accord with Holmes' analysis , a majority of legal scholars and · courts
have deemphasized the question of the plaintiff's property rights and
inte~~
against the world with respect to a trade secret.
It might be
questioned whether the early recognition of a property right would have
lessened the privity or fiduciary breaches, since a survey published in
1959 by the Harvard Business Review ·disclosed that a large number of
business executives would consider hiring competitor's employees for
the sole purpose of obtaining competitor's secrets.
Furash, Industrial
Espionage., 37 Harv. Bus. Rev., Nov-Dec 1959, pp. 154-157.
But the
additional penalty for theft of a property right may have made the early
espionage safaris a little more expensive to contemplate.
It should not be
ass~ed
that only the · more exotic of unusual
enterprises engage in the trade secret practice.
In the mid 1960's it
was fairly ·common knowledge among the chemical engineering commuriity
that several companies were achieving new manufacturing processes via
different catalysts or equipment rearrangement in the production of
basic chemical compounds.
One such process was thought to be the man-
ufacture of Methanol, a well-known commodity in the chemical market.
The patent departments of these companies, as well as patent counsel in
petrochemical departments of petroleum companies were advising against
seeking patent protection in some situations.
DuPont was in the process of such a plant extension in the facility
23
at Beaumont , Texas .
On March 19, 1969, Rolfe and Gary Christopher,
photographers, took to the air and busily practiced their trade over
the partially completed facilities .
DuPont intended to have the
complex enclosed, but some of the buildings were unfinished and the
equipment exposed at the time of the aerial intrusion.
DuPont investi-
gated immediately, learned the identity of the Christophers and the
object of their mission : to obtain 16 photographs of the plant.
DuPont
contacted them and asked them to reveal the name of the person or corporation requesting the photographs and to return the photographs to
them .
The Christophers declined and · later delivered the fruit of their
labor to the client.
DuPont filed a diversity action in federal district
court asking an injunction and damages for wrongfully obtaining the
photographs .
The complaint recited the research involved in the process,
the spec ial protections taken to protect it, and the value of the photographs in deducing the secret.
The Christophers confidently moved for dis-
missal for failure to state a claim and duPont countered with an order
compelling disclosure of the identity of its competitor.
DuPont won
both contests , the Fifth Circuit affirmed the trial judge ' s refusal to
dismiss, and the Supreme Court of the United States denied certeriori
and rehearing.
Using all arguments which had prevailed previously in
other litigation the Christophers argued that misappropriation of trade
secrets cannot be actionable absent trespass , breach of confidential
relationship, or violation of an explicit legal prohibition, and they
had conducted all of their activities in public air space.
of appeals rejected these contentions.
The court
The federal district court
sitting in diversity found no Texas precedents which dealt specifically
with this , but the Texas Supreme Court had adopted section 757 of the
24
Restatements of Torts which also provided as a grounds of recovery
discovery by "improper means."
In the final form section 757 used only
the term "improper means" and added a disclaimer indicating both a lack
of confidence in the feasibility of such a list, as well as a sense of
the future with regard to sophisticated techniques.
Arid so, the Fifth Circuit made an explicit ruling that aerial
photography is an improper means to obtain a trade secret and would
seem to endorse the Restatement incisively.
But the court showed un-
certainty when it had to set forth .again the "reverse engineering"
standards.
The door of the Restatement was unlatched, but each court
can now fill in blanks with "improper" and open it in whatever -category
it pleases; thus, developing the list ad hoc that the drafters refused
to put there in the beginning .
E.I. duPont deNemours [, Co.
v.
Christopher, 431 F.2d 1012 (5th Cir. 1970), cert. denied , 400 U.S. 1024,
rehearing denied, 401 U.S. 967 (1971).
The Christopher decision is cited by many commentators as a sign
of the return to equilibrium in the trade secret area, but taken in an
isolated sense, it may not do more than say that one Circuit believes that
"improper means" of obtaining a trade secret is now actionable and that
one of the improper means is definitely aerial photography without permission.
From the standpoint of the state of Texas they affirm the
Restatements position.
At least a warning shot has been fired across
the bow of the overt interloper.
3.2.1
Employees and Industrial Information
As many nationally known members of the Patent Bar have written, one
who claims he has a trade secret must exercise eternal vigilance.
This
calls for constant warnings to whom the trade secret has become known,
25
obtaining from each an .agreement preferably in writing acknowledging its
secrecy and promising to respect it.
manufacturing area is not enough.
To exclude the public from the
The employer who takes "scant pre-
cautions" in guarding secrecy will be refused trade-secret protection by
the court, particularly in such sophisticated areas as computer programming.
Republic Systems and Programming. Inc. v. Computer Assistance,
Inc., 322 F. Supp. 619 (D.C. Conn. 1970).
Since the mobile employee syndrome is still the modus operandi
in American business and industry, the outstanding "how to do it" and
"what to look for" manual in industrial espionage and trade secret protection by Dr. Worth Wade is worth reviewing.
W. Wade, Industrial
Espionage and Misuse of TLade Secret, Advance House Publishers, Advance,
Pa. (1964).
Dr. Wade is a chemist and a registered patent attorney with
over 30 years of corporate experience of which the last 15 were concerned
with the protection of proprietary rights .
He is a frequent lecturer
and the author of many books and articles.
The thing about this volume
is that it is replete with the type of information that everyone from the
Director of Research to t he Director of Pldnt Security would be interested
in to batten the corporate hatch.
There are forms, hints as to where
information is gathered, and an analysis of the latest techniques in
infiltrating vulnerable areas.
The most interesting fact about the tone
of the book is that it seems to be predicated on the assumption that
protection of a tangible property right which may be lost through deliberate or inadvertent actions of employees, is of paramount concern.
Where the employee .is concerned in a trade secret action, the
plaintiff must show: (1) a secret exists, the value of which would be
impaired by disclosure or use by defendant; (2) defendant knew or should
26
have known that he received the secret in confidence; and (3) an actual
improper use or disclosure by defendant is threatened.
With regard to
the third element, the plaintiff must show a substantial risk of improper
use or disclosure.
Otherwise the innocently departing employee is po-
tentially as dangerous as anyone.
Mi1grim, Trade Secrets
§
7.07 (l)(d),
at 7-51.
If an authorized use or disclosure has already occurred, then this
element becomes inconsequential.
the threat is substantial.
Currently, the court must decide whether
Divergent rulings in two factually similar
cases illustrate the subjective nature of this determination.
In the
first case, an engineer who left one firm which produced industrial
mixing equipment, to join a second, which produced similar equipment,
was preliminarily enjoined from inter alia:
directly or indirectly accepting employment from any other
person or concern in any work, activity, or capacity
involving mixing equipment, including, but not limited to,
the designing, engineering production or sale of mixing
equipment.
While the defendant had breached a covenant not to compete, the validity
of which was questionable, plaintiff was unable to show any instance
where the engineer had used or disclosed his employer ' s secret in his
new position.
The court, however, felt it was sufficient that:
the mere rendition of service along the lines of his
training wou,l d almost necessarily impart some knowledge to
some degree.
Mixing Equipment Co. v. Philadelphia Gear, Inc., 167 U.S.P.Q. 20, 23
(E.D. Pa. 1970).
In th", second case, 'and in a similar situation, an
Ohio trial court reached an opposite result in what has become known as
The Space Suit Case.
B.F. Goodrich Co., v. Wohlgemuth, 137 U.S.P.Q.
389 (Ohio Ct. C.P.); rev'd, 24 Ohio Op.2d 290; 117 Ohio App. 493, 192
27
N.E.2d 99 (1963).
In this case the Space Suit Department of Goodrich
had its early beginnings in 1934 when they produced a high altitude suit
for Wiley Post in his celebrated flights.
Wohlgemuth, following graduation from an engineering school came
to work for B.F. Goodrich, and by 1962 had risen to manager of the Space
Suit Department.
Latex Corporation had only experimental models of these
type of suits, but competed with Goodrich on every NASA contract.
Latex
was awarded a research contract by NASA to develop a full pressure space
suit for use in the Apollo project.
In November, 1962, Latex contacted
Wohlgemuth and shortly, thereafter hired him.
management of its Space Suit Department .
Among his duties was
Upon leaving, he stated that
he intended to use all previously acquired knowledge, despite having
signed a covenant not to use or disclose his employer ' s secrets.
Goodrich filed suit to restrain him from divulging any trade secrets in
the space suit field.
The trial court granted a temporary injunction,
but at conclusion of the trial dissolved the temporary injunction and
refused to issue a permanent one.
On appeal the trial court was reversed
only to the extent that the engineer was enjoined from revealing 4is
ex-employer ' s trade secrets; he was not, however, prohibited from working
in the area of his expertise where , presumably·, he would necessarily
disc l ose some of the knowledge gained in his previous position •.
There were several unique aspects of the case, including the fact
that only the employee was sued and not the company hiring him away.
The covenant did not involve any restrictive noncompetitive aspects,
only the. promise not to reveal any trade secrets.
The dive.rgent results · in these two cases show ona other important
feature of never being sure:!:f ·the trade secret will ·be protected, and
28
that is the equally undesirable feature of being put in economic bondage
as to a skill, depending on how the ball bounces.
The economic and
social biases inherent in the present methods of protecting trade secrets
might be forgiven as far as the employee contracting his services, pro, viding the system provided predictable results on which he could base his
decision.
These two cases illustrate clearly the difficulty in trade secret
protection using privity, fiducisry, or confidential relationships alone.
The medium of the secret becomes important and this reinforces the need
for considerations as a property right of some description.
For the present, however, a protection of trade secrets when passed
on in secrecy is risky .
If it is necessary, it should be done with
guidelines similar to the ones set out by Vandervoot in his treatise
on protection of trade secrets.
Vandervoot, Trade Secrets; Protecting a
Very Special Property, 26 Bus. ' Law 681 at 687,688 (Jan. 1971).
These
guidelines are reproduced in the Appendix of this report at 7.0. Exhibit
B.
3.2.2
Theft of the Medium
A distinction should be made between the trade secret and an article
embodying the trade secret.
The blueprint, engineering report, production
line, start-up procedure notebook, are not the trade, secret, but rather
the medium transmitting the trade secret.
The blueprints of a new
chemical plant for production of jet fuel would contain the data that
would comprise the trade secret.
By photographing the blueprints (or
in some cases by merely studying them) the defendant is able to misappropriate ' the trade secret without taking possession of the document.
Since
the trade secret may be possessed by a number .of people simultaneously,
29
it is denominated "intellectual property" by some authorities.
Milgrim,
.Trade Secrets, II 1.01(2).
During the period of the late 1950's to the early 1960·' s two series
of litigations developed which clearly showed the problems of the medium
in the trade secret area.
A disgruntled employee in the corporate offices of the Gulf Oil
Corporation in Pittsburgh, Pennsylvania, began supplying copies of
geophysical and geological maps to confederates who made the appropriate
contacts in Houston, Texas, to exploit the information.
Beginning in
1955 and covering a period of over 14 months, this activity proceeded.
The copies of the maps were made with equipment in the Gulf offices and
on paper provided for reproduction purposes.
This was to be a distin-
guishing feature in later litigation, but not that pertinent in this
instance.
The pleadings established the jurisdictional amounts of
greater than $5,000 worth of value and all conspirators were pros'e cuted
under the National Stolen Property Act, 18 U.S.C.A.
(1952, amended 1956).
~§
2, 271, 2314
The contention that the original maps were not
transported in interstate commerce, but a photostatic copy made at the
corporate headquarters of Gulf, and; therefore, not actually the stolen
property, was dismissed by the Court.
United States v. Seagraves, 265
F.2d 876 (3d Cir. 1959) and United States v. , Lester, 282 , F.2d 750 (3d
Cir. 1960), cert. denied, 364 U.S. 937 (1961).
The interpretation of these results by those watchers of medium
piracy was that these cases held that the National Stolen Property Act
was violated where the papers transported in interstate or foreign
commerce belonged to the victimized industry.
By this time attempts
were made to amend section 2314 of the Act by adding that:
30
,Whoever transports, or discloses to another who transports,
in interstate or foreign commerce any trade secret which he
is not authorized to use on his own behalf or disclose to
others, knowing the same to have been unlawfully appropriated
or copied, stolen, converted or taken by fraud.
and adding to section 2311 the following definition:
'" Trade secret' means and includes any confidential, technical
or other confidendia1 business information, regardless of whether it is in written or other tangible form, which is not generally available to the public, and which gives one who uses
it an advantage over competitors who do not know or use it.
It includes, but is not limit'ed to secret formulas, processes,
patterns, drawings, specifications, memorandums, maps, lists,
statistics and any copies thereof, regardless by whom made."
H.R. Rep. No . ' 5211., 88th Cong., 1st Sess. (1963).
This effort was defeated when the bill died in committee and in 1965
another bill was introduced in the House of Representatives along the
same lines, making it clear that intangible trade secrets could be the
subject matter of theft.
This bill too was defeated.
H.R. Rep. No.
5578, 89th Cong., 1st Sess. (1965).
Against this legislative background, the celebrated Italian drug
theft cases came to trial in the case ' of United States v. Bottone, 365
F.2d 389 (2d Cir.), cert. denied, 385 U.S. 974 (1966).
In this case,
two disloyal employees of the Lederle Laboratories, a division of
American Cyanamid Company, located in Pearl River, N.Y. undertook to
purloin both microorganism cultures used in the manufacture of antibiotics and certain manufacturing processes considered to be highly
valuable at the production phase.
The drugs were covered by patents,
but not the know-how processes and production techniques.
The lack of
pa tent protection in certain countries made this an ideally salable
package.
Either knowingly or as part of the espionage scheme, Fox and
31
Cance1arich, two employees, took the documents containing the
manufacturing procedures and copied them outside of the Leder1e facilities, returning the originals to the company files.
In the majority
opinion by Judge Friendly the Seagraves .and Lester cases were distinguished as being a circumstance where the copies were made in company
facilities and were the property of the company.
take, Friendly noted that
§
In a judicial double
2314 would presumably not extend to the
case where a carefully guarded secret formula was memorized, carried
away in the recesses of a -thievish mind and placed in writing only
after a boundary had been crossed.
But as to the physical form being
transported elsewhere for copying, this would be immaterial to the
meaning under the statute.
This "thievish mind" dictum may yet be
valuable in the estimation of some commentators to prod Congress into
reforming the National Stolen Property Act along the lines proposed in
1963 and 1965.
There are remedies for the theft of the actual content of proprietary technology contained within the medium, and most are statutory.
Yet, the causes of action continue to avoid the recognition "in esse"
of the know-how property rights of the trade secret spectrum.
Both in
the federal forum and in interstate commerce, the remedies are available,
and the states have fashioned some of their own.
In the wonderful world of computer programs, patentability looks
totally confused at this point, but people have served jail sentences
for their efforts in stealing them.
In a recent Texas case, a · man
served a five-year sentence in the penitentiary for his amateurish
efforts.
To the ,Patent Office it was an unpatentable mental process.
To an electronics company with a geophysical division, the programs
32
were worth millions of dollars in the service of their petroleum
clientele.
The case of Hancock v. State, 402 S.W. 2d 906; Hancock v.
Decker, 379 F.2d 552 (5th Cir. 1967) clearly illustrates the problem
with computer software technology and the gaps existing as to property
or process identification and protection.
The defendant was convicted
using a property definition found in Title 17, Chapter 8 of the Penal
Code, entitled Theft in General, · in Art. 1418, Vernon's Ann.P.C ,
Property
here was defined as all writings of every description, provided such property possesses any ascertainable value.
The case is also instructive as
to the type of questions that arise in expert testimony regarding the
value, use, and classification of computer programs in the market place.
4.0
The Know-How Dilemma
Again and again the know-how aspects of the trade secret area appear
in both legal and technical literature and treatises.
The author of this
survey has no doubt of the existence of this distinctly valuable commodity in the business and industrial areas.
In one instance of personal
experience, extreme precautions were taken against leaving barrels of
spent catalyst in view on a loading dock of a · plant site , since observation from a field nearby (and owned by a competitor, according to the
recorded deeds in the County Courthouse) with powerful telescopes might
identify any dust or granules and reveal whether a catalyst was being
used which was a subject of a patent infringement suit as well as a
trade secret litigation.
A personal conversation with an international representative of a
well-known high technology petroleum company involved in significant
turn-key plant design and construction in European and Asian countries
affirmed that know-how is the most sought after item.
33
The licensing in
the patent
ar~a
is a perfunctory gesture to achieve a package deal in
lump Bum payment, in the Iron Curtain countries, and in gold in many
instances.
Rumanian
To quote: "The Russian representative conferred with the
representativ~
and they were of the opinion that the deal was
all right if the start-up procedures were part of the package.
Is to
make the damned thing work was the Russian's summary of the request."
When the Kuwait National Petroleum Company commissioned the Fluor
Corporation to build a fully automated refinery, one of the most critical
aspects of the operating procedures was with respect to the start-up
procedures of the computers, restart procedures, and present position
monitoring of set points.
This task was farmed out to the well-known
consulting firm of Bonner and Moore in Houston, Texas.
The numerous
volumes were a masterpiece of technical writing and are definitely considered to have proprietary worth.
The impact of the law of trade secrets with respect to the knowhow area can be most vividly illustrated by the results of a visit
of the staff of the New Yorker magazine with the Avedis Zildjian family
in Quincy, Massachusetts.
This family possessed a jealously guarded
secret formula for making cymbals of a unique quality which had been
handed down since 1623.
The magazine said:
The Zildjians attribute their pre-eminence in the craft of
cymbal making to a metal-casting formula discovered in 1623
by Avedis Zildjian, an alchemist living in Constantinople,
and that has been kept a family secret every since, ••.
passed along only to male descendants of the line---orally,
since it has never been written down. The formula 1s now
securely locked in the heads of the present Vulcan of the
clan, a latter-day Avedis Zildjian and his two sons ••• who
whith the aid of twenty employees, turn out ••• hand-tooled
cymbals ••• Security is tight at the Zildjian works.
The door to their casting room is marked "No Admittance",
"Positively No Admittance," and "Authorized Personnel Only."
34
While there are employees, it is the men in the family, as one
of the sons put it, who "are bound by tradition to mix the
formula personally." A cousin who thought he had the formula
could not put it together since its secret consists both of
the mixture of copper, tin and silver and of .t he picling of
the raw discs in a vat containing a "classified" solution of
herbs, oils, and chemicals. These trade . secrets result in a
unique musical instrument.
The New Yorker, Dec. 6, 1958, p. 135
4.1
Know-How as a Unique Property Right
Beginning with Holmes' cavalier comments in Masland through Kewanee
there · is language sounding in property rights worth protecting, but beyond
the Restatements and viewpoints of commentators there is no clear-cut
judicial or statutory language of a federal nature to prove it.
Remedies
are available from state statutes to the National Stolen Property Act to
punish the wrongdoer, but there is still abundant evidence that the cause
of action is being dragged kicking and screaming into sounding in breach
of confidentiality or fiduciary duties.
Before know-how itself can be
elevated to any sort of property status, some clarification of this
situation needs to be considered.
According to Callman, Unfair Competition
and Trademarks 857 (2d ed. 1950) a trade secret can be the result of a
trust; it is assignable, taxable, and . will pass to a trustee in bankruptcy.
It is, if reduced to writing, subject to levy and sale under a
common law writ of execution.
It may be transferred for valuable con-
sideration or by gift; such transfer, however, need not be in writing,
and may be founded upon an implied, as well as an express promise.
trade secret may also be transferred by mortgage.
A
The know-how of the
Zildjian family must· surely sound like a property right to them as they
formally pass the baton from generation to generation of cymbal makers.
35
In a recent case concerning the never-ending and always puzzling
aspects of obtaining protection for computer software, the Supreme Court
handed down a decision which would seem to some to assure patent protection for software and to also preclude it.
441 F.2d 682 (1971), 405 U.S. 915 (1972).
Gottschalk v. Benson,
In this situation the claimed
inventions related to conversion techniques of (BCD) binary coded decimal
into binary number signals for computer main-frame processing.
According
. to Roger Mi1grim, author of Trade Secrets in an article in the Jurimetrics
Journal, the Supreme Court has said, "if you have computer software, and
the necessary carfare, we suggest you see the legislative branch."
Mi1grim, §oftware, Carfare and Benson, Jurimetrics Journal 240 (Summer
1973).
Mi1grim suggests that the best available protection for software
might be a combination of trade secret protection and common law copyright, not a continued assault on the patent area.
This may be a good
approach , since common law copyright protects an author ' s (or his
employer ' s) unpublished works, it often goes hand in hand with secret
protection which covers matters not generally available in a particular
trade or industry .
The weakness with only this approach. is that docu-
mentation required in process operations would have to be published for
use, and these items are frequently an integral part of any industrial
negotiation.
Computer software is a unique product of this century and is a
highly developed form of know-how.
Trade secret protection, coupled
with common law or other statutory means might be the best hope of protecting a significant · national investment in technology, but it is
submitted that recognition of know-how as a unique property right may be
an underlying requirement.
36
4.2
Know-How Technology and the Patent License
In past years, the situation often arose in which know-how patents
and trademarks, all pertaining to one product, were licensed in a package,
with the requirement that the licensee take all or none.
tions today, the result can be the opposite.
In many situa-
The licensee will not agree
to the patent license, absent the availability of the know-how capability
thrown in as part of the deal.
·Know-how licensing either separately or
in a patent licensing package appears to be one of the fastest growing
sources of commercial revenue; it is probably growing faster than patent
licensing.
A recent survey conducted by the National Industrial Conference
Board, Inc., indicates that 85% of licensing companies increased their
foreign revenues during the period 1962-1967.
About 42% of the surveyed
licensors indicated that "net" income was from 10% to 97% of the gross
returns from licensing, and from independent foreign firms increased 32%
in 1967.
In its study, the NICB cited data from the Department of
. Commerce indicating that receipts from foreign licensees generally more
than doubled in the decade ending in 1967, although the same data showed
the number of license agreements declining.
As of 1968, about 800
American companies were reporting receipts from independent licenses to
the Department of Commerce.
The Conference Board report concludes that
the total number of U;S. licensors has obviously increased since 1957.
The study further shows that virtually all (98%) of the 191 surveyed
companies licensed know-how and that 87% licensed patents or trademarks.
Vol. 53., No.3 J. Pat. Off. Soc'y 177 at 179, 180 (March, 1971).
Now
that foreign technology is becoming substantially more advanced, the
growth of licensing technology may increase even more in the know-how
area.
37
5.0 !roposals for Trade Secret Protection and Control
There have been various proposals to solve the problem, and
predictably from all three major areas involving intellectual property,
in addition to the trade secret area.
Proposals have been made to mOdify
the Lanham Act and solve the problem via Unfair Competition clauses in
the Trademark Area.
Patent revision is a perennial introduction to
Congress, the current bi-annual exercise being still locked up in the
. Judiciary Committee of the House and the Senate.
Some feelings have
been expressed that the Copyright Laws could be dusted off to handle
the problem.
5.1
None seem to quite cover the crucial problem of know-how.
Amendment to the Patent Statute
The current effort for the 93rd Congress is:
Senate •••• A Bill For The General Revision of Patent Laws,
U.S . C.
0 35 of
This bill went into the Senate Committee on
March 22, 1973, and there is no information on hearings
at the time of this report . (Sponsored by Senator Phillip
Hart of Michigan)
House •••• Same title of bill .
This bill went into the House
Judiciary Committee on April 17, 1973 and has not been
heard from since. (Sponsored by Congressman Wayne Owens
of Utah)
Beginning in 1967 there have been many articles written concerning the
proposed text of the bill because there were definite expressions concerning trade secrets and "lead time."
During the period of time from
1967 to the present, several cases have been decided which have caused
amendments, to the bills dutifully resubmitted.
38
The decision in the
Bourns case produced the most important one by Senator Hugh Scott of
Pennsylvania.
5.2
The Scott Amendment
Due to implications raised by Lear, section 301 was added to the
Patent Reform Act introduced in 90th Cong., 1st Sess. 1967 and 1968.
Section 301 provided:
This title shall not be construed to preempt or otherwise
affect in any way, contracts or other :rights or obligations,
not in the nature of patent rights, imposed by state or
federal law on particular parties with regard to inventions
or discoveries whether or not subject to this title.
Senator Hugh Scott introduced an amendment to section 301 which was
Amendment No. 579 and originally to amend
1st Sess. (1969).
~
301 of S. 2756 9lst Cong.,
It was introduced without change as Amendment No. 24
to S 301 of S. 643. 92d Cong., 1st Sess. (1971).
The language of this amendment was as follows:
This title shall not
in. any manner rights
state or federal law
prietary information
or of other nature.
be
of
of
or
construed to preempt or otherwise affect
obligations not expressly arising by
contracts, of confidential or protrade secrets, of unfair competition
Upon the initial introduction of this amendment Senator Scott stated
in 116 Congo Rec. 5321 (daily ed. April 8, 1970) that his purpose was:
To make it clear that the patent laws shall not be construed
to preempt the right of the courts under state or federal law
to decide issues with respect to enforcement or contracts
involving rights to intellectual property such as trade secrets,
technical know-how and unfair competition.
While some authorities are skeptical, and indeed, the Senator only
commented that he was trying to remove a "shadow of a doubt" cast upon
the enforceability of contracts entered into by owners of secret information, the reference to technical know-how as intellectual property is
the closest thing to this point in time to a statutory recognition of
39
of this right as being a distinct property right of a defined
characteristic.
Neither H.R. Bill 7111 nor S. Bill 1321 have retained the
language of the Scott· Amendment.
The previous section g 301 does not
appear, nor is any of the language found in these present bills.
On
September 27, 1973, President Nixon sent a proposal to the
Congress to reform the patent system.
The name of the Act proposed
is Patent Modernization and Reform Act of 1973.
The text of this
act is not available through the normal printing services as of this
date.
In his message of transmittal (93d Congress, 1st Session,
House Document No. 93-158, September 27, 1973), Nixon outlined
several aspects of the bill.
In essence, patents would seem to be
harder to come by, but easier to maintain once obtained.
On page 4 of this transmittal document, there is this language:
Another provision would insure that the patent laws not be
constructed to replace or preempt state laws concerning
trade secrets so long as those state laws do not interfere
with the free flow of ideas in the public domain. Decisions
of the Supreme Court ·in both of these areas would also be
left undisturbed.
From this it would appear that some of the cases will have to be distinguished severely, and until the final language of this bill is
available, it is not that clear whether anything has changed.
Hearings
on this proposal might be instructive as to whether there is a renewed
effort to get the trade secret area defined or merely to get the Scott
language back in for other reasons.
The present status of the patent statutes indicates that there
is little cause for rejoicing that the reforms in this area will also
provide usable guidelines . in the trade secret area.
40
5.3
Possible Federal Statute for Trade Secret Protection
Several commentaries have put forth the idea that as far as remedies
are concerned, civil remedies should prove effective against "established"
thieves, and criminal remedies would aid in halting the activities of
the more mobile variety.
But uniform civil protection after disclosure,
while necessary, is insufficient.
Stiffer criminal statutes should also
be promulgated at the federal level.
The real problem lies not in the remedial statutes, but some
statutory declaration of the actual status of the trade secret and its
high economic value subset called know-how.
A federal statute is needed
due to the hopeless variety of statutes in each state to which a federal
district court looks in a diversity action.
The additional confusion
in the judicial decisions lends nothing to the task of sorting out equity.
The statute will not be easy to write, but if not somehow differentiated
out of the copyright, trademark, and patent areas and given something
more than common law status among its statutory peers, there are serious
problems ahead for the business entities looking for some guidelines
in the licensing areas.
5.4
State Law for Trade Secret Protection
The present state laws are divergent in their construction and
application.
Approximately the only conclusion that may be drawn is
that in Texas you have a good chance of going to 'jail if caught and
prosecuted for purloining computer programs, but Ohio feels that they
may have been preempted by federal statutory law as to scintillation
crystals.
The multinational company will find little solace in either
f
circumstance.
41
5. 5
Other Proposals in Unfair Competition Areas
Shuttling back and forth between Congressional and Administrative
burners are proposals to amend the copyright laws and proposals similar
to the McClellan Bill introduced in 1967 as an amendment to the Lanham
Act.
15 U.S.C.
§ §
Ii 43(a) (4) (1967).
1051-1127 (1946). S. 1154, 90th Cong., 1st Sess.
Such legislation is basically jurisdictional over
unfair competition actions concurrent with the state courts.
Ii 43(a) (4)
read:
(a) Any person who shall engage in any act, trade practice, or
course of conduct, in commerce, which • • • (4) results or is
likely to result in the wrongful disclosure or misappropriation
of a trade secret or other research or development or commercial
information maintained in confidence by another • • • shall be
liable in a civil action for unfair competition.
According to a brief in support of Congressional passage of this bill,
called Brief, Trademark Rep. 88 (1967) , the purpose was:
to provide a basis for a uniform federal law of unfair
competition. There has been no federal common law in
this field since the decision of the Supreme Court in
1938 in Erie R.R. Co. v . Tompkins, 304 U.S. 64 (1938) .
As a result, unfair competition affecting interstate
commerce is now governed by diverse and, at times, conflicting state rulings and approaches. In addition, the
conflict of laws problems , when an act of unfair competit ion occurs in many states , have become perplexing, if not
i nsoluble , t o the courts .
This might be useful , but still questionable as to the know-how area
without some consideration and delineation of its special properties
and requirements.
6.0
Conclusions and Forecasts
The trade secret area is worthy · of definite designation as having
distinct property rights under uniform and federal statutory protection
and guidance .
It is predicted t hat the know-how area in the trade
secret spectrum will grow in economic importance and cannot be properly
42
regulated and protected by either the proposed and perennial revisions
to the Patent Act.
Neither the copyright nor trademark areas can be
stretched to logically cover trade secrets, even if previously proposed
legislation is at long last enacted.
The U.S. Supreme Court could declare
some guidelines in the Kewanee case and give credence to the lessening
of the effects of Lear, but this case will not be decided until a later
date.
Whether the Goldstein decision puts the Sears-Compco cases in
perspective may depend on any Supreme Court action in the Kewanee case.
A decision backing the . path taken in Goldstein would have some effects
on preemption, but would still leave the know-how area in the mists with
respect to special treatment in the trade secret area.
To solve this dilemma, it is submitted that federal legislation
is needed.
This legislation should declare the trade secret area as a
unique property area and acknowledge the know-how subset.
43
7.0
Appendix
EXHIBIT A
Courts of Appeals Patent Validity Holdings*
Circuit
1
2
3
4
5
6
7
S
9
10
D.C.
Total
After Graham
and before
Blonder-Tongue
( 3/9 )
( S/30)
( 5/19)
( 3/22)
(16/37)
(11/22)
(3S/S1)
( O/lS)
(10/59)
( 1/7 )
( 1/6 )
33.3%
26.6% .
26.4%
13.6%
43.2%
50.0%
46.9%
00.0%
16.9%
14.3%
16.6%
(96/310) 31.0%
After
Blonder-Tongue
(
(
(
(
(
(
(
(
(
(
0/3 )
O/S )
3/S )
1/6 )
4/6 )
3/5 )
7/11)
2/5 )
1/7 )
2/3 )
00.0%
00.0%
37.5%
16.6%
66.6%
60.0%
63.6%
40.0%
14.2%
66.6%
(23/62) 37.1%
Composite: February
1966 to March · 1972
( 3/12)
( S/3S)
( S/27)
( 4/2S)
(20/43)
(14/27)
(45/92)
( 2/23)
(11/66)
( 3/10)
( 1/6 )
25.0%
21.1%
29.6%
14.2%
46.5%
51.S%
4S.9%
8.07%
16.6%
30.0%
16.6%
(119/372) 31. S%
*This table was · compiled from an examination of the cases reported in
the United States Patent Quarterly. It includes all the cases reported
subsequent to the Supreme Court decision in Graham up to, and including,
December IS, 1972.
44
EXHIBIT B
Guidelines to Protect Trade Secrets when Passed on in Secrecy
Vandervoot, Trade Secrets; Protecting a Very Special Property,
26 Bus. Law 681 at 687,688 (Jan. 1971).
A. Manager--An overall managing coordinator must be identified to
control the information.
B. Legend--There must be an identification of the information in every
instance. All oral information must be reduced to writing within a
specified period of time.
C. Exceptions--What is trade secret must be not only identified but the
contract outlining the relationship between the parties must spell
out the exceptions, which are, generally.
(i) Secrets disclosed by sale of the products or services involved;
(ii) Secrets which become known generally in industry throught no
faulty of the parties;
(iii) Secrets already known independently and documented as independent information in existence prior to disclosure;
(iv) And, in some instances, secrets which find their way into the
public domain through the negligence of someone who had no
knowledge of the agreement of the parties.
D. Procedures--All visits should be conducted on a scheduled basis.
Agendas, minutes and journals should be kept. Legends should be used.
E. Antitrust considerations--The entire arrangement should be treated as
a "trade association meeting." Sometimes the property concept may be
lost in the eyes of the Department of Justice and transfers of
technology may be looked upon as joint ventures .
9. Extreme Physical Security--The automobile manufacturers, the toy
industry, the electronic companies, the miliatary contractors, the
chemical makers, the drug companies and the overly successful
companies know this problem. This is an area so secure in procedure
that I would be admitting industrial espionage if I told you what
I know. All that should be said here is that the use of computers
in access control is highly desirable, responsibility notifications
are indispensable, vendor control must be absolute and an audit must
be made once a month. When the subject of industrial espionage is
discussed this procedural item will fall into sharper focus.
45