PATENT/TRADE SECRET COMPLEMENTARINESS:
AN UNSUSPECTED SYNERGY
New York Intellectual Property Law Association
New York, NY
May 15, 2009
Karl F. Jorda
David Rines Professor of Intellectual Property Law
& Industrial Innovation
Director, Kenneth J. Germeshausen Center
for the Law of Innovation & Entrepreneurship
Franklin Pierce Law Center
Two White Street, Concord, NH 03301
Patent/Trade Secret Complementariness:
An Unsuspected Synergy
Overview
I.
II.
Introduction
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
I. Introduction
Trade secrets have been treated as the “black sheep,” “stepchild,”
“orphan” and “ugly sister” of the intellectual property (IP) system. And a
noted IP 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.
• Because of the best-mode requirement, trade secrets cannot coexist
with patents.
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I. Introduction
• 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. Integration 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.”
5
Integration 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 patent 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.
•A Brazilian Patent Commissioner telling me testily that it was preposterous to talk
up trade secrets and outright absurd to speak of patent/trade secret
complementariness.
6
Integration of IPRs
Software — the best and most cogent illustration:
Patents, copyrights and trade secrets are not incompatible
but dovetail: the patents can protect patentable inventions or
ideas, the copyrights 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.
7
Integration 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
8
Integration 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 and persuasive examples are:
• GE’s industrial diamond process technology
• Wyeth’s Premarin process
• Pizza Hut decision
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IP Integration Concepts
EXPLOIT THE OVERLAP
DEVELOP FALL BACK POSITION
CREATE A WEB OF RIGHTS
BUILD AN IP ESTATE
BUILD A WALL
BUILD A RINGFENCE (INDIA)
OVERPROTECT
LAY A MINEFIELD
for
SYNERGISTIC EFFECT
via
DUAL OR MULTIPLE PROTECTION
10
Pitney Bowes Mail Processor
“Simple Machine” with over 100 Patents
11
No Utility
No Novelty
Patent
Invention
Obviousness
Personal Skill
Generally Known
Trade Secret
Technical
Information
12
Business
Information
Readily Ascertainable
INTELLECTUAL PROPERTY (IP)
&
INTELLECTUAL PROPERTY RIGHT (IPR)
IP
Invention
Know-how, Invention
Brandname
Work of Authorship
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IPR
Patent, Trade Secret
Trade Secret
Trademark
Copyright
III. Trade Secret Law
History Of Trade Secrets
"Trade Secret law is the oldest form of intellectual property protection, " according to
Perritt. (Cave people?!)
Perritt: “Patent law was developed as a way of protecting trade secrets without
requiring them to be kept secret and thereby discouraging wider use of useful
information.”
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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Definitions 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))
15
Trade Secret Factors
The Restatement of Torts adopted and the courts relied on the following
criteria for determining whether a trade secret exists:
16
(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.
EEA Definition
ECONOMIC ESPIONAGE ACT (EEA) DEFINITION (1996)
The 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.
Computer Fraud and Abuse Act (CFAA) more frequently invoked.
International Airport Centers v. Citrin (Judge Posner)
17
TRIPS 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-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. Not a legal term of
art. (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 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. — Takedown possibility on Internet.
Reasonable 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.
20
Safeguarding Trade Secrets
Memorialize the trade secret policy in writing
Inform employees of trade secrets
Have employees sign Employment Agreements with confidentiality
obligations
Conduct exit interviews
Restrict access to trade secrets (on need-to-know basis)
Lock gates and cabinets
Label trade secret documents
Restrict public accessibility
Screen speeches and publications
Use contracts in dealing with third parties
A sin qua non requirement — most frequent pitfall
21
Misappropriation Of Trade Secrets
Acquisition by improper means
Acquisition by accident or mistake
Use of or disclosure of a trade secret
a)
b)
Acquired improperly
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.
22
IV. Importance 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.”
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.
Trade secret misappropriation cost Walt Disney $240 million, Cargill $300 million and
Toshiba $465 million.
23
Importance 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.
24
V. Patent/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 knowhow 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.”
25
PATENTS/TRADE SECRETS
CORPORATE PRACTICES
ONLY TRADE SECRETS — NO PATENTS
ONLY PATENTS — NO TRADE SECRETS
PATENTS (FOR PRODUCTS) AND TRADE SECRETS
(FOR MANUFACTURING PROCESSES)
PATENTS AND TRADE SECRETS
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Patent/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.
27
Patent/Trade Secret Complementariness
Best Operational Practice
Patents and trade secrets dovetail — exploit overlap and obtain dual protection, as
follows:
•
•
•
•
•
•
•
•
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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.
Patent/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).
“With few exceptions, patents needed to practice licensed technology should be licensed
along with the TI (technical information). The combination of TI and patents is more
valuable than either alone and thus the licensor will be able to obtain additional
compensation.” (Martin Landis).
“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).
29
Patent/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).
Interestingly, the government and universities officially don’t keep trade secrets but provide
TI and know-how and even technical assistance because they are often indispensable to
practice patented and licensed inventions.
Failed Brazilian tactic — translate foreign patents
Ciba-Geigy examples: Eastman-Kodak and DuPont licenses
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VI. The 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 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).
32
Prior 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)
33
The “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.
34
VIII. Exemplary 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
35
Exemplary 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. Conclusion
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.
See: JORDA ON TRADE SECRETS — THE INTERFACE BETWEEN PATENTS AND
TRADE SECRETS — http://blogs.piercelaw.edu/tradesecrets
See: JORDA, 2008 Foulston Siefkin Lecture, Washburn Univ. School of Law, 48
Washburn Law Journal (Fall 2008)
37