New Trade Secret Law: More to Consider in Patent Trade-Off

Bloomberg BNA’s Patent Trademark & Copyright Law Daily™is the IP industry’s premier news service, offering objective, timely,and reliable daily news coverage and commentary from leading IP law...

By Tony Dutra

May 31 — Inventors may have another reason to move away from patenting with the passage of the Defend Trade Secrets Act, which creates a new avenue for protecting inventions not in the public eye, practitioners told Bloomberg BNA. But that's a limited group.

The DTSA, signed into law by President Barack Obama May 11, established a federal, civil private right of action for trade secret theft. The administration said the law would provide a “more uniform, reliable and predictable way” for businesses to protect their trade secrets. The new law means businesses can now choose to sue for trade secret theft — and seek remedies — in either federal or state court.

Bruce J. Rose of Alston & Bird LLP, Charlotte, N.C., predicted a shift to a greater reliance on trade secrets, “particularly if trade secret protection becomes viewed to be more consistent than it currently is.”

What's unclear is how much of an impetus the new law will give companies to forego patenting on some inventions, simply relying on their competitors' inability to copy their creations. Traditionally, inventors have used patents to protect innovations that, by their nature, can't be kept secret or hidden. Now—especially for behind-the-scenes inventions that are less readily copied—inventors could skip patenting, gambling that the trade secret law will help them in the unlikely event their invention is stolen.

The value of trade secret protection has increased with addition of a federal venue for addressing private claims, while at the same time many patents have lost value under U.S. Supreme Court decisions since 2006 and enactment of the America Invents Act of 2011 (AIA).

However, Robert B. Milligan of Seyfarth Shaw LLP, Los Angeles, said the DTSA won't significantly alter the landscape for deciding whether to go with patents or trade secrets.

“If the invention cannot be practiced without revealing confidential information, the inventor should seek patent protection,” Milligan said. “If the innovation will remain commercially viable well beyond the patent term, trade secret protection may be the better choice.”

Closer Look at Trade Secrets, But Economics Rule

Nevertheless, Milligan said, industries that previously relied on patenting will at least look more closely at the trade secret option now.

Stephen Y. Chow of Burns & Levinson LLP, Boston, agreed, but said it will come down to businesses simply weighing whether the benefits of patents are worth the costs. The Supreme Court and the AIA have, in effect, made it more expensive to enforce patents, he said. But firms will still benefit from patenting those products with “margins justifying patent expenditures, including enforcement,” he said. “Patents remain crucial for pharmaceuticals,” he said, citing the clearest example.

Brand name drugs with market exclusivity need high profit margins to recoup research and development expenses; the added patent enforcement costs are minor in comparison.

Strengths/Weaknesses in IP Protection.

The AIA's post-grant opposition proceedings gave alleged infringers a less costly way to invalidate a patent by going to the Patent Trial and Appeal Board, rather than court.

But it costs more for patent owners to defend their patents at the PTAB, where the presumption that their patents are valid doesn't apply as it does in court — adding $350,000 to $500,000 in “enforcement cost,” said Chow. That tends to discourage a small, innovative firm “that doesn’t have eight figures in annual revenues” from their patents from defending them at the PTAB, he said.

In the past, startups may have sold patents to financial investors who would then enforce them. But the attack on those investors as “patent trolls” has limited those opportunities, giving small companies a strong reason to consider trade secrets instead, Chow said.

Differences in Life Sciences Patents

Rose and his colleague in Alston & Bird's Los Angeles office, Jonathan M. Gordon, said that big pharmaceutical firms will have to consider costs as well. They agreed with Chow for the most part that drugs on the market would be easily copied without patent protection, but said trade secrets could offer protection for pharmaceuticals in areas where information need not be publicly disclosed.

Trade secret protection for drug applications “would be quite limited given the strict disclosure and testing requirements of government agencies such as the FDA,” Rose and Gordon said in an e-mail. “However, manufacturing processes employed by drug makers could well have trade secret status.”

Rose particularly cited protections for pharmaceutical intermediaries, where reactions occur “in the path to the final product,” but where it is “very difficult to reverse-engineer such intermediaries based on the chemical make-up of the final product.”

Copyright Often Only Haven for Software IP Protection

The Supreme Court has undermined to the value of trying to patent all methods for doing something— especially when the method is readily visible. The biggest blows were to methods of diagnosing medical problems—visible to all labs and doctors who perform it—and offering software applications on the Internet and private networks, visible to any user.

“To the extent court decisions and [AIA] post-grant proceedings have made it more difficult to obtain patent protection, we expect that more industries will at least consider trade secret protection,” Seyfarth Shaw's Milligan said.

Mayo Collaborative Servs. v. Prometheus Labs. Inc. in 2012 (54 PTD, 3/21/12) made most diagnostic claims ineligible for patenting, with software suffering a similar fate two years later in Alice Corp. Pty Ltd. v. CLS Bank Int'l (119 PTD, 6/20/14). The patent owners in those cases had no hopes of keeping secret what they invented. The alleged infringers in both cases could have copied the inventions without the patented disclosure.

“Any software or product that is capable of being imitated or reverse-engineered is not really going to be a trade secret,” Gordon said.

But software may enjoy more robust protection under copyright law since the decision by the U.S. Court of Appeals for the Federal Circuit in Oracle Am., Inc. v. Google Inc. (91 PTD, 5/12/14), Chow said. The court held that Oracle's Java library function call structure—not actual “code” per se—was eligible for copyright protection.

The DTSA only strengthens those copyright protections. The Java license—and other instances where application providers make users sign online licenses with terms that prohibit disassembly or other reverse engineering—binds users to those license terms under the DTSA's “duty not to disclose or use,” Chow said.

Reverse Engineering Key

Trade secret protection may also be more valuable in other cases involving software, Gordon said. “There are many algorithms and other back office software tools deployed by businesses that are treated as proprietary and are not publicly disclosed,” he said. “Google’s search algorithms are a notable example.”

For behind-the-scenes manufacturing processes, the ability to reverse-engineer can be the deciding factor between patenting and a trade secret.

Many such processes may also be ineligible for patenting under the Mayo/Alice test, Gordon noted. He advised firms with those innovations to take actions to better document and license trade secrets, as they “may now play a larger role in valuations of intellectual property assets.”

Impact of AIA

There is no question that at least one aspect of the AIA—an alleged infringer's ability to attack a patent at the PTAB without the presumption of validity that would apply as a defense in court—generally lowered patent values.

The AIA also may give inventors a reason to maintain a trade secret on a process as long as possible—and file for a patent once it becomes known, Chow said. It arguably overrules a 1946 Supreme Court decision in Metallizing Engineering Co. v. Kenyon Bearing & Auto Parts Co. that prohibited the patenting of a trade secret process for making a commercial product. Commercial exploitation of the process was equivalent to a public use and kicked off a one-year grace period for filing for a patent, it said.

But the AIA made it explicit that the invention itself has to be disclosed to the public, he said. So the only concern is whether someone else files the patent application first.

And even if someone else does, Chow noted, the AIA expanded “prior user rights”—a get-out-of-jail-free card for earlier inventors—to all technologies. So long as the trade secret holder has a way of showing prior use, it will be shielded from an infringement claim by that other inventor.

Finally, the AIA eliminated the requirement that the patent applicant describe the “best mode” for enabling the invention, Chow said. That gives inventors one more way to file patents on a visible product or device and keep secret, if possible, the “best mode” process of making it.

 

Not So Much an Option for Products

As for products and devices, patents are still valuable as long as their cost doesn't overwhelm their benefits, Chow said.

Few products retain trade-secret status—the Coca-Cola formula and the Kentucky Fried Chicken recipe being among the most famous ones that still remain. Manufacturing specifications and drawings could also qualify as trade secrets, said Gordon, as long as they “are not disclosed by putting products out in the stream of commerce.”

Otherwise, most products are still better protected by trademark, rather than, trade secret law, his colleague Rose said.

“Even if you could reverse engineer a formula for a product, for instance, you would likely be unable to market it successfully without utilizing that company’s name brand,” Rose said.

To contact the reporter on this story: Tony Dutra in Washington at adutra@bna.com

To contact the editor responsible for this story: Mike Wilczek in Washington at mwilczek@bna.com