August 05, 2019 Feature

So You Want to Take a Trade Secret to a Patent Fight? Managing the Conflicts between Patents and Trade Secret Rights

Steven R. Daniels and Sharae’ L. Williams

©2019. Published in Landslide, Vol. 11, No. 6, July/August 2019, by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association or the copyright holder.

For people who still remember when photographs were recorded on film, it may be useful to think of patents and trade secrets as photographic negatives of each other. For everyone else, it may be enough to note that patents and trade secrets are mutually exclusive, in part because of the manner in which these two forms of intellectual property (IP) are created. And this mutual exclusivity informs both the form in which intellectual property is most effectively held and the manner in which it can be asserted for commercial advantage.

In return for the right to exclude others from making, using, selling, or offering to sell products or methods embodying one’s invention for a prescribed period, the government requires an inventor to disclose his or her invention in a patent.1 Although the requirement that one disclose the best mode of practicing an invention has essentially been eliminated by the America Invents Act, an inventor is nonetheless required to provide a disclosure that enables another to practice the invention once the patent expires.2 Once the patent right has been granted, it conveys the right to exclude where an infringer reverse engineers the invention from the inventor’s commercial embodiment and even where an infringer independently develops an infringing article or method with no knowledge of the patent at all.3 Finally, the patent right exists even if the inventor cannot demonstrate the commercial value of the invention.

A trade secret, by contrast, exists because it is secret and the owner of the trade secret can show that he or she has taken steps to maintain its secrecy.4 Disclosure of the trade secret—including, critically for this article, in a patent—destroys its value.5 Moreover, independent development and even intentional reverse engineering of a product or method cannot give rise to the right to assert trade secret misappropriation.6 Finally, the owner of a trade secret must demonstrate that the trade secret “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.”7 In other words, the owner of a trade secret must show it has value because it is a secret.

Familiar examples of trade secrets are the formula for Coca-Cola, locked for decades in a safe in Atlanta,8 or the process of extracting conjugated estrogens from the urine of pregnant mares for use in the drug Premarin, so closely guarded that it had to be stolen to be replicated.9 But I prefer to think of my grandmother’s recipe book. For years, the cooks in my family dreamed of the day my grandmother would share her recipes with us so that we might have a chance at replicating her many delicious dishes. I still remember the day it happened: a large, yellowed, handwritten tome arrived by mail and was immediately pried open for the wonderful secrets it surely contained. As we read, however, excitement turned to dismay and finally to amusement. The recipes were filled with such instructions as “use this much salt,” “cook until done,” and “mix until ready.” Even with those recipes we could follow, the finished product fell short of the original with such regularity that we became convinced my grandmother had left out some critical, but not obvious, ingredient or step that somehow miraculously turned a pedestrian dish into a masterpiece. Admittedly, some of this may have been the power of hindsight and nostalgia, but I remain convinced that my grandmother took her trade secrets with her into the beyond, leaving a recipe book that was as much a reflection of who she really was as any of the “real” recipes could have been.

The Choice: Patent, or Trade Secret, or Both

Because patents and trade secrets are to a large extent mutually exclusive, wise businesses strategize the form in which they choose to protect their intellectual property. The qualities of patents and trade secrets suit each of them for different situations. For the broadest spectrum of protection, however, it is frequently desirable to patent certain aspects of a technology while retaining trade secret status for other aspects. Needless to say, however, if the goal is to obtain both patent and trade secret protection for the same technology, the pursuit of one form of protection must be carefully done so as not to destroy the other.

The following questions will provide guidance in choosing between patent or trade secret protection for a technology.

Can the IP Be Easily Reverse Engineered or Copied?

Because there can be no liability under trade secret law for reverse engineering a product or simply copying it based on information contained in the product itself that is readily apparent to the consumer, a threshold inquiry in deciding between patent or trade secret protection must be whether the mere act of selling or publicly using the product would disclose all that is necessary to copy it. If it would, then patent protection is likely the only option for protecting the idea. As will be discussed in more detail below, however, this is often a subtler analysis than this discussion reflects. In the case of a chemical compound, for example, modern analytical techniques can discover the composition and often even the structure of the compound, but the manner in which it is synthesized or extracted may be completely opaque, as in the example of the conjugated estrogens described above.

Are Mechanism and Infrastructure in Place to Ensure Confidentiality?

Perhaps the greatest barrier to opting for trade secret protection versus patent protection is the cost and complexity of ensuring confidentiality in a world with ubiquitous mobile communications technology and an increasingly mobile, often contract or “gig” based, workforce. In this context, adequate confidentiality measures can be expensive to establish and require constant vigilance to maintain. Although perfection is not required, the case law indicates that courts are not forgiving of lapses in protecting confidential information. A recent case provides an instructive example.

In Yellowfin Yachts, Inc. v. Barker Boatworks, LLC, plaintiff Yellowfin sued its former employee for misappropriation of, among other things, information regarding Yellowfin’s customers.10 Fewer than 5 percent of the company’s employees had access to the customer information, which required a username and password for access and was not provided to third parties. Nonetheless, the court found Yellowfin’s attempts to protect the information inadequate because it allowed Barker to keep the information on his cell phone and his personal laptop and did not instruct him to return or destroy the information when he left the company. The court held that, through these lapses, Yellowfin “effectively abandoned all oversight in the security of” its customer information.11

Is There a Need to Collaborate with or License to Others?

If the technology is likely to be used in collaborative activities, such as joint ventures, subcontracting relationships, or licensing to others, the confidentiality of trade secrets may be difficult to preserve. While it is certainly possible to take steps to ensure that collaborators are subject to nondisclosure agreements and/or have tightly restricted access to the trade secret information, the unavoidable truth is that as the population with access to the information grows and/or achieves a more tenuous corporate connection to the owner of the trade secrets, the difficulty of maintaining confidentiality and preventing unauthorized disclosure increases dramatically. In this case, patenting the most vulnerable aspects of the technology may be the only way to ensure it is protected. Once patented, well-crafted licenses can restrict the use of the invention and provide an unambiguous mechanism for deterring copying.

What Is the Life Cycle of the Relevant Product?

With respect to technologies that have relatively short life cycles and that evolve rapidly, the time required to prosecute a patent and secure its issuance can greatly diminish the value of patent protection. Also, in such situations, 20 years of protection may have little value. On the other end of the spectrum, products with very long life cycles and few disruptive changes can warrant protection that is longer than the 20 years that patents provide. In both of these cases, maintaining the trade secret status of the technology is a more practical way of preserving its value than patenting it.

Does the Invention Include Unpatentable Subject Matter?

Arguably, the greatest recent shift in IP law is the rise of patentability challenges to patents under 35 U.S.C. § 101. There is little room to debate that the case law following the U.S. Supreme Court’s decision in Alice Corp. Pty. Ltd. v. CLS Bank International12 has devastated method patents and particularly those related to software inventions.13 Even with the recent guidance on patentability from the U.S. Patent and Trademark Office (USPTO), it can be difficult to justify spending the money required to secure a viable patent on these sorts of inventions.14 As such, a prudent IP owner will carefully evaluate whether such innovations may best be protected as trade secrets. While many software inventions—particularly those that relate to the user experience—may be vulnerable to reverse engineering or copying, there often are aspects of the implementation that are unique to a product and difficult to replicate. If so, the innovation may be a candidate for trade secret protection, and the resources required to obtain a patent may be better deployed elsewhere.

Are Patents Necessary to Secure Investment or for Marketing?

For startup companies or companies seeking to raise new capital, patents can be a potent signal of near- and long-term value. Patenting a product (or simply being able to say that a patent is pending) also may add a sense of value and gravity from the perspective of consumers. Under these circumstances, the aggressive pursuit of patents is warranted. Sometimes, the fact of a patent frequently holds more value than its likely viability or use in the future, so a careful company may choose to obtain patents but also to hold certain critical technology in trade secret status. However, care must be taken to ensure that the conflicts between patent and trade secret protection do not result in the destruction of one form of intellectual property by the other. This is the subject of the following section.

Managing the Risks of Maintaining Both Trade Secrets and Patent Protection

The broadest protection for an important product may well require patenting aspects of it while retaining other information related to it as trade secrets. As noted above, however, the nature of patents means that the patent disclosure destroys any trade secrets within it. On the other hand, withholding information that is essential to practicing the invention can render the disclosure not enabling. A relatively straightforward example of a fruitful segregation of trade secret information from patentable subject matter can be found in the conjugated estrogens noted above. While the manner in which these compounds could be extracted was a valuable and essentially impenetrable trade secret, patenting the compounds themselves, or combinations of the compounds with other things, as well as methods for using them in treatment could all be (and have been) patented without disclosing the extraction method.

Unfortunately, in most cases, the nature of trade secrets is such that it is impossible to know whether one has struck the right balance between patent and trade secret protection until the combination is tested in litigation. Importantly, the litigation process itself can open pitfalls that were not obvious before. For example, avoiding close prior art may require a more robust disclosure of what the patent covers, which, if not carefully done, can pull trade secret information within the scope of the patent.15 Similarly, prior art cited against a patent may be used by a defendant to demonstrate that the claimed trade secrets were, in fact, generally known.16 By the same token, arguments made in claim construction, particularly in demonstrating that one skilled in the art would understand a claim term to include certain subject matter, may broaden the scope of the patent sufficiently to open up arguments that the patent disclosure encompasses the trade secrets. On the other side of the ledger, if a court finds that the claimed trade secrets have not been properly protected, the date and scope of the fatal disclosure may itself rise to the level of invalidating prior art to a later filed patent. Adding to the uncertainty of this inquiry is that whether a patent has disclosed the claimed trade secrets is a question of fact to be decided by the jury.17

Some examples of recent cases where courts struggled with potentially overlapping coverage by trade secrets and patents will provide some sense of the boundaries of this inquiry.

TAOS v. Renesas

The Federal Circuit’s opinion in Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc.,18 reveals how close a question whether a patent has disclosed a trade secret can be. It also makes clear that a defendant seeking to use a patent as evidence of disclosure of a claimed trade secret must take care to map the patent disclosure to each possible combination of the claimed trade secret information. The plaintiff, Texas Advanced Optoelectronic Solutions (TAOS), and the defendant, Intersil, both developed and sold ambient light sensors used in electronic devices to adjust screen brightness in response to incident light.19 The parties confidentially shared technical and financial information during negotiations for a possible merger that ultimately fell through. Soon after, Intersil released new sensors with the technical design that TAOS alleged it had disclosed in the confidential negotiations. TAOS prevailed at trial on, among other things, a claim for misappropriation of trade secrets, over Intersil’s defense that the alleged secrets had been disclosed in a TAOS patent. Specifically, Intersil argued that the allegedly secret photodiode array structure had been disclosed in a TAOS patent the year before the merger talks began.20 The array structure comprised interleaved shielded and unshielded wells in a 1:1 ratio. Intersil argued that the 1:1 ratio and interleaving were disclosed in the TAOS patent. The court, however, found that “TAOS argued to the jury that the combination, not simply the 1:1 ratio, was the misappropriated trade secret.”21 Because Intersil had argued only that the 1:1 ratio and interleaving were separately disclosed, the court held that it had waived an argument that the combination of a 1:1 ratio and interleaving was disclosed.22 Thus, the court affirmed the jury verdict against Intersil on appeal. It is not clear that this ruling changed the ultimate outcome of the case in a material way, but the closeness of the question is striking.

ClearValue v. Pearl River

In ClearValue, Inc. v. Pearl River Polymers, Inc.,23 the Federal Circuit reached the opposite conclusion in another case involving claims to trade secret status for a combination of things that were arguably disclosed separately in a patent. Plaintiff ClearValue brought allegations of trade secret misappropriation during a confidential business relationship with defendant Pearl River, and infringement of a patent claiming the same subject matter.24 The patent covered a process of clarifying low alkalinity water using a blend of a high molecular weight quaternized polymer and an aluminum polymer. ClearValue claimed as a trade secret the fact that the combination of polymers was particularly effective at clarifying low alkalinity water and asserted that the efficacy of the combination was not disclosed in the patent. The court held that ClearValue’s description of its trade secret did not include an effectiveness component, and that the patent did describe the combination as “especially effective in low turbidity, low-alkalinity waters.”25 Thus, as with the TAOS case, the manner in which the plaintiff described the parameters of its alleged trade secret determined the outcome of the question of whether the trade secret had been previously disclosed in a patent.

Cedars-Sinai v. Quest Diagnostics

Although the two preceding cases make clear that carefully defining the trade secrets at issue is critical to the inquiry as to whether the secrets were disclosed in a patent, in Cedars-Sinai Medical Center v. Quest Diagnostics, Inc., the Central District of California made clear that this definition need not be included in the complaint.26 In this case, Cedars-Sinai sued two Quest Diagnostics entities alleging that they had misappropriated trade secrets related to the treatment of irritable bowel syndrome (IBS) during discussions of Cedars-Sinai’s research conducted pursuant to a confidentiality agreement.27 In a motion to dismiss, Quest Diagnostics pointed out that Cedars-Sinai had filed a series of provisional patent applications for blood tests for IBS that had ultimately matured into an issued patent, and thus that Cedars-Sinai could not state a claim for trade secret misappropriation related to the same subject matter.28 The court declined to engage in the analysis required to determine whether the patents disclosed the claimed trade secrets and denied the motion, holding that Cedars-Sinai had stated in its complaint all of the essential elements of a trade secret misappropriation claim.29

Netlist v. SMART Storage

An important but somewhat counterintuitive fact is that trade secrets can be destroyed by the defendant’s own patents or published applications. In Netlist, Inc. v. SMART Storage Systems, Inc., plaintiff Netlist brought claims for trade secret misappropriation as well as for correction of inventorship and ownership of a patent covering related subject matter.30 The parties had entered into a nondisclosure agreement and soon thereafter a supply agreement under which defendant SMART Storage would design, manufacture, and supply products for the plaintiff. Netlist subsequently discovered that the defendant was marketing Netlist’s chipset under its own name while also using Netlist’s trademark to market it. After its cease and desist letters were ignored, Netlist filed suit.

Somewhat like the man who smoked his valuable cigars and then submitted an insurance claim for their loss in a fire, the defendant argued that the information that formed the basis for Netlist’s misappropriation claim had been disclosed in its own patent and patent application and thus could not be trade secrets. The court disagreed, holding that the plaintiff had “sufficiently allege[d] that the latter trade secrets are distinct from the information disclosed in the patent and patent applications.”31

Apparently not having exhausted its stores of chutzpah, the defendant next argued that even if the patent and patent application disclosed different information from the claimed trade secrets, the subject matter was close enough to that of the alleged trade secrets to trigger the statute of limitations, and thus the plaintiff’s trade secret claim was time-barred. The court rejected this argument as well (at least on the basis of the pleadings) because the plaintiff had identified numerous trade secrets in its complaint that it alleged “are distinct from the proprietary information disclosed in the earlier patent application,” so the claim was not time-barred.32

TMC Aerospace v. Elbit Systems

The final case example brings us back to the textbook situation of maintaining both patent rights and trade secrets in a technology by ensuring that their coverage is demonstrably different. In TMC Aerospace, Inc. v. Elbit Systems of America LLC, defendant Elbit had obtained plaintiff TMC’s specifications and designs for its deicing system for unmanned vehicles with permission to use them for a limited, defined purpose.33 When the defendant exceeded its authorization, the plaintiff sued for patent infringement and trade secret misappropriation. Predictably, the defendant argued that the plaintiff had not asserted any trade secret claims based on information that was not publicly disclosed in the patents. However, the court found that the plaintiff adequately alleged the trade secrets at issue and explained how they differed from the information disclosed in the patent.34 The plaintiff defined the trade secrets at issue as its “proprietary design drawings, manufacturing techniques, and manufacturing equipment including moulds and jigs” that cover the way to manufacture its patented deicing system. The court found this information to be distinct from the description of the deicing systems themselves in the patent. The court recognized: “It may well be . . . that the [patent] discloses certain manufacturing methods in describing the de-icing systems. . . . But this does not preclude Plaintiff’s allegations that Defendant used ‘proprietary design drawings, manufacturing techniques, and manufacturing equipment including moulds and jigs’ it acquired from [the plaintiff] beyond what was disclosed in the [patent].”35 Ironically, despite having threaded the needle between its patent and its trade secrets, the plaintiff had, according to the court, failed to allege that the use of the trade secrets was improper, as required by the governing statute.36

Conclusion

While patents and trade secrets are in many respects mutually exclusive, it is possible—and often wise—to maintain both in an IP portfolio. However, the decision to do so must be made deliberately and with careful planning to ensure that the viability of each form of intellectual property is maintained and that their coverage is sufficiently different to ensure that both can be asserted in litigation if necessary.

Endnotes

1. See, e.g., Eldred v. Ashcroft, 537 U.S. 186, 216 (2003).

2. 35 U.S.C. § 112.

3. Commil USA, LLC v. Cisco Sys., Inc., 135 S. Ct. 1920, 1926 (2015) (“Direct infringement is a strict-liability offense.”).

4. See, e.g., 18 U.S.C. § 1839(3) (providing that information may be protected as a trade secret if “the owner thereof has taken reasonable measures to keep such information secret”).

5. See, e.g., Water Techs. Corp. v. Calco, Ltd., 850 F.2d 660, 670 (Fed. Cir. 1988) (“Those patents issued, as has been noted, on February 19, 1980, a date before Gartner’s disclosure to Calco, so that the information ‘misappropriated’ could not possibly be a trade secret.”).

6. See, e.g., Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 155 (1989) (“The public at large remained free to discover and exploit the trade secret through reverse engineering of products in the public domain or by independent creation.”); 1 Melvin F. Jager, Trade Secrets Law § 5.10 (2019) (“The right to reverse engineer or independently develop is embodied in the current summary of trade secrets law in the Restatement (Third) of Competition. Section 43 of that Restatement states clearly that: ‘Independent discovery and analysis of publicly available products or information are not improper means of acquisition.’”).

7. 18 U.S.C. § 1839(3). This definition is essentially identical to the definition in Uniform Trade Secrets Act § 1(4)(i).

8. Vault of the Secret Formula, World of Coca-Cola, https://www.worldofcoca-cola.com/explore/explore-inside/explore-vault-secret-formula/ (last visited June 12, 2019).

9. Wyeth v. Nat. Biologics, Inc., 395 F.3d 897 (8th Cir. 2005) (affirming finding of trade secret misappropriation over the defendant’s claim of independent development).

10. 237 F. Supp. 3d 1230 (M.D. Fla. 2017).

11. Yellowfin Yachts, Inc. v. Barker Boatworks, LLC, 898 F.3d 1279, 1301 (11th Cir. 2018).

12. 134 S. Ct. 2347 (2014).

13. See, e.g., Roy Schestowitz, Software Patents Are Still Dropping Like Flies in 2018, Thanks to Alice v CLS Bank (SCOTUS, 2014) and Section 101 (USPTO), Techrights (Jan. 21, 2018), http://techrights.org/2018/01/21/ptab-and-patent-examiners-use-alice/.

14. See, e.g., Cleveland Clinic Found. v. True Health Diagnostics LLC, No. 2018-1218, 2019 WL 1452697 (Fed. Cir. Apr. 1, 2019) (nonprecedential) (declining to give deference to USPTO guidance and finding patented subject matter unpatentable).

15. On the other hand, “patent rejections based on prior art are not necessarily determinative of the fact that the claimed trade secret was generally known at the time.” SkinMedica, Inc. v. Histogen Inc., 869 F. Supp. 2d 1176, 1195 (S.D. Cal. 2012) (citing Celeritas Techs., Ltd. v. Rockwell Int’l Corp., 150 F.3d 1354, 1358 (Fed. Cir. 1998)).

16. See Celeritas, 150 F.3d at 1358 (finding that “reliance on the [patent] prosecution history . . . and the prior art submitted to the PTO is misplaced” in upholding a jury verdict of trade secret misappropriation).

17. SkinMedica, 869 F. Supp. 2d at 1194.

18. 895 F.3d 1304 (Fed. Cir. 2018).

19. Id. at 1308.

20. Id. at 1313.

21. Id. at 1314 (emphasis added).

22. Id.

23. 668 F.3d 1340 (Fed. Cir. 2012).

24. Id. at 1342.

25. Id. at 1346.

26. No. CV 17-5169-GW(FFMx), 2018 WL 2558388 (C.D. Cal. Feb. 27, 2018).

27. Id. at *1.

28. Id. at *4.

29. Id. at *5.

30. No. 13-cv-5962-YGR, 2014 WL 4380760, at *1 (N.D. Cal. Sept. 4, 2014).

31. Id. at *3.

32. Id. at *4.

33. No. CV 15-07595-AB (EX), 2016 WL 3475322, at *1 (C.D. Cal. Jan. 29, 2016).

34. Id. at *5.

35. Id.

36. Id. at *5–6.

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Steven R. Daniels is a member in the Austin, Texas, office of Dickinson Wright PLLC. He specializes in intellectual property litigation.

Sharae’ L. Williams is an associate at Dickinson Wright PLLC in Detroit, Michigan. She specializes in complex business litigation and intellectual property litigation.