NEW YORK COUNTY LAWYERS’ ASSOCIATIONNEW YORK COUNTY LAWYERS’ ASSOCIATIONCONTINUING LEGAL EDUCATION INSTITUTECONTINUING LEGAL EDUCATION INSTITUTE

Bridge-the Gap 2Bridge-the Gap 2NEW YORKNEW YORK

August 10, 2007August 10, 2007

Trade Secret FundamentalsKarl F. Jorda

David Rines Professor of IP Law & Industrial InnovationDirector, Kenneth J. Germeshausen Center for the Law of Innovation & Entrepreneurship

Franklin Pierce Law CenterTwo White Street, Concord, NH 03301

Trade Secret FundamentalsTrade Secret Fundamentals(Trade Secrets and the Patent/Trade Secret Interface(Trade Secrets and the Patent/Trade Secret Interface

OverviewOverview

I. Introduction

II. Integration of IPRs

III. Trade Secret LawA. History of Trade SecretsB. Definitions of Trade SecretsC. Definition of Know-HowD. Characterization of Trade SecretsE. Safeguarding Trade SecretsF. Misappropriation of Trade Secrets

IV. Important of Trade Secrets

V. Patent/Trade Secret Complimentariness

VI. Best Mode Requirement

VII. Exemplary Trade Secret Cases

VIII. Conclusion

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I.I. IntroductionIntroduction

Live in “Golden Age” for IPRsPatent filings and issuances are skyrocketingTalk of patent “revolution,” “explosion,” “frenzy”

“Anything under the sun that is made by man” is patentableCourts, Congress, Justice Department — pro IPRsCorporations built on patented technologiesMotto: Innovate or perish

Value of IPRs for securing exclusive positions — simply invaluableRoyalties for licensing IPRs in 2002: $150 billionOver $1 billion for some companiesUniversities jumped on bandwagonGetting patents, concluding licenses, collection royalties

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II. II. Integration Strategy of IPRSIntegration Strategy of IPRS

From former fragmentation by specialties, IPRs are now a “seamless web,” due to progress in technology and commerce, per Professor Jay Dratler.

Professor Dratler was the first one to “tie all the fields of IP together.” “Integrative treatment.” (Intellectual Property Law: Commercial, Creative, and Industrial – 1991)

In 1997 the authors of “Intellectual Property in the New Technological Age” (Professors Merges, Merrell, Lemly & Jorde) also• avoid the fragmented coverage• approach IP as a unified whole; and• concentrate on the interaction between different types 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 for dual or multiple protection. Not taking advantage of the overlap misses opportunities or, worse, amounts to malpractice.

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II. II. Integration of IPRsIntegration of IPRs (continued) (continued)

Especially for high-tech products, trademarks and copyrights can supplement patents, trade secrets

and mask works for the products’ technological content.

One IP category, often patents, may be the center of gravity and more important than others.

Other IPR 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 invalidand thus provide synergy and optimize legal protection.

The most important IP management and licensing policy and strategy isexploiting the overlap between patents and trade secrets.

Illustrative examples are:• GE’s industrial diamond process technology• Wyeth’s Premarin process• Pizza Hut decision

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IP Integration ConceptsIP Integration Concepts

EXPLOIT THE OVERLAPDEVELOP FALL BACK POSITION

CREATE A WEB OF RIGHTSBUILD AN IP ESTATE

BUILD A WALLBUILD A RINGFENCE (INDIA)

OVERPROTECTLAY A MINEFIELD

for

SYNERGISTIC EFFECTvia

DUAL OR MULTIPLE PROTECTION

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INTELLECTUAL PROPERTY (IP)INTELLECTUAL PROPERTY (IP)&&

IP RIGHTS (IPR)IP RIGHTS (IPR)

IP IPR

Invention Patent, Trade SecretKnow-how, Invention Trade Secret

Brandname Trademark Work of Authorship Copyright

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Trade Secrets

TechnicalInformation

BusinessInformation

Readily Ascertainable

Personal Skill Generally Known

No Utility Not Novel

Patents

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INTELLECTUAL PROPERTY (IP)INTELLECTUAL PROPERTY (IP)&&

INTELLECTUAL PROPERTY RIGHT (IPR)INTELLECTUAL PROPERTY RIGHT (IPR)

IP IPRInvention Patent, Trade SecretKnow-how, Invention Trade SecretBrandname TrademarkWork of Authorship Copyright

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HISTORY OF TRADE SECRETSHISTORY OF TRADE SECRETS

• "Trade Secret law is the oldest form of intellectual property protection, " according to Perritt. (Cave people?!)

• 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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DEFINITION OF “TRADE SECRETDEFINITION 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))

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TRADE SECRETSTRADE SECRETS

The Restatement of Torts adopted and the courts relied on the following criteria for determining whether a trade secret exists:

(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.

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TRADE SECRETTRADE SECRET

ECONOMIC ESPIONAGE ACT (EEA) DEFINITIONThe 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.

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TRIPS DEFINITIONTRIPS 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-HOWDEFINITION 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. (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 SECRETSCHARACTERISTICS 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.• 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.

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SAFEGUARDING TRADE SECRETSSAFEGUARDING TRADE SECRETS

1. Memorialize the trade secret policy in writing2. Inform employees of trade secrets3. Have employees sign Employment Agreements with confidentiality

obligations4. Conduct exit interviews5. Restrict access to trade secrets (on need-to-know basis)6. Lock gates and cabinets7. Label trade secret documents8. Restrict public accessibility9. Screen speeches and publications10. Use contracts in dealing with third parties

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MISAPPROPRIATION OF TRADE SECRETSMISAPPROPRIATION OF TRADE SECRETS

1. Acquisition by improper means2. Acquisition by accident or mistake3. Use of or disclosure of a trade secret

a) Acquired improperlyb) 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.

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Trade Secrets are not “Secrets”Trade Secrets are not “Secrets”

It is supposedly reprehensible to keep inventions secret — flies in face of patent system — disclosure for benefit of public.The following reasons dispute this

• Dunlop Holdings v. Ram Gold (7th Cir. ’75): Public receives benefits: •• no suppression in economic sense •• likelihood of reverse engineering •• inventor has no duty to patent — can contribute by non-informing public use• probability of independent discovery — good defense• lots of people “in the know”: employees, suppliers, governmental agencies, licensees• dissipation, leakage — employee mobility — average life 3-5 years• trade secrets are “wasting Assets”• competitors usually know within a year what trade secrets aare behind a new product or development

• Kewanee Oil v. Bicron ( US ’74)

“Patent Law acts as a barrier, trade secret law functions as a sieve” — permits leakage

• Trade secret owners all too often founder on stringent affirmative secrecy measuresThus trade secrets are secret in a limited sense — the term “trade secret” is a narrow, constricted term of art.

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Importance of Trade SecretsImportance 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: “For get patents, trademarks and copyrights…trade secrets could be your company’s most important and valuable assets.”

Trade secret misappropriation cost Walt Disney $240 million and Cargill $300 million.

88% of responses in an IPO Survey indicate trade secrets to be the really important intellectual assets because patents have limits: patentability requirements, publication, invent-around feasibility.

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Importance of Trade Secrets (continued)Importance of Trade Secrets (continued)

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).

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Patent/Trade Secret ComplementarinessPatent/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 know-how cannot and need not be included in patent applications — grist for 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.”

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COMPLEMENTARINESS OF PATENTS AND TRADE COMPLEMENTARINESS OF PATENTS AND TRADE SECRETS (cont’d)SECRETS (cont’d)

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.

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Patent/Trade Complementariness (cont’d)Patent/Trade Complementariness (cont’d)Best Operational PracticeBest Operational PracticePatents and trade secrets dovetail — exploit overlap and obtain dual protection, as

follows:• 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.

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The Patent/Trade Secret InterfaceThe Patent/Trade Secret Interface

As a practical matter, icenses 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 “®elated 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).

“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).

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The Patent/Trade Secret Interface (continued)The Patent/Trade Secret Interface (continued)

“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, Perkins, Smith & 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).

Failed Brazilian tactic — translate foreign patentsCiba-Geigy examples: Eastman-Kodak and DuPont licenses

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The Best Mode RequirementThe 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 (continuedThe Best Mode Requirement (continued))

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).

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.

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Exemplary Trade Secret CasesExemplary Trade Secret Cases

1. GE’s exclusive industrial diamond process technology• Holds patents (some expired) and trade secrets• Refused to grant licenses• Fast-trace GE scientists stole trade secrets for Far Eastern interests for

million dollar payments• In the end got caught, tired, jailed

2. Wyeth’s exclusive Premarin manufacturing process• Has market exclusivity since 9142• Patents expired decades ago• Closely guards its trade secrets• Natural Biologies stole these trade secrets• Wyeth sued, got sweeping injunction

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Exemplary Trade Secret Cases (continued)Exemplary Trade Secret Cases (continued)

3. Pizza Hut case

• Piza 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 decision:

1. Patents are invalid on on-sale bar grounds (on Summary Judgment)

2. Trade secrets are enforceable and Pizza Hut had to pay $10.9 million (after trial)

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VIII.VIII. Conclusion Conclusion

To summarize, in conclusion it bears reiteration that patents and trade secrets are viable alternative modes of protection in the IP field.

It is patents and (nor “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 fr a happy marriage with patents in a dominant role, protecting patentable inventions, and trade secrets in a subservient role, 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.

KFJ/Ruh/7.26.07