Trade Secret Subject Matter Eligibility

By Dennis Crouch

While the U.S. Supreme Court contemplates its most recent case on patent subject matter eligibility, a California appellate court has just decided a case on trade secret subject matter eligibility – finding that ideas are protectable under California trade secret laws, but that the protectable information must be sufficiently specific and secret. Altavion, Inc. v. Konica Minolta Systems Laboratory Inc., — Cal.Rptr.3d —-, 2014 WL 1846104 (Cal.App. 1 Dist. 2014). Oddly, KMSL’s MoFo attorneys argued (without citation to precedent) that “[g]eneralized ideas and inventions are protectable by patents and thus cannot be trade secrets.” That argument was soundly rejected by the Altavion court, who held instead that a trade secret can include “any unpatented idea which may be used for industrial and commercial purposes.” Quoting Sinclair v. Aquarius Electronics, Inc., 42 Cal.App.3d 216 (1974). This follows the general and longstanding principle that an inventor may choose to keep her idea as a trade secret rather than file for patent protection. “[I]f a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law.” In particular, the court here upheld the trade secret rights to “design concepts” such as process flows and conceptual methods that were not tied to any particular product or software.

In trade secret law, subject matter eligibility often begins with the notion it can be “any information” that confers some economic benefit on its holder by virtue of being kept secret and is the subject of reasonable efforts to maintain secrecy. One limit on the scope of trade secret rights is that the secret must be described “with sufficient particularity to separate it from matters of general knowledge in the trade or of special knowledge of those persons who are skilled in the trade, and to permit [an accused infringer] to ascertain at least the boundaries within which the secret lies.” Diodes, Inc. v. Franzen 260 Cal.App.2d 244 (1968).

Of the various forms of alleged trade secret misappropriation, two scenarios are likely most common. The first involves former employees who join competitor firms and share secret information with their new employers. The second involves secret information shared with partner firms or potential affiliates who then abuse their relationship to unduly profit from the information. A common theme with both of these scenarios is a preexisting relationship between the trade secret holder and the alleged wrongdoer. That relationship is often bound by a contract that speaks specifically to rights and duties associated with secret information. Thus, in these cases, the same action that appears as trade secret misappropriation is often a breach of contract as well. Regarding this contract-law phenomenon, the court here started its decision with a quote of Mark Lemley’s 2008 article on trade secret law:

Trade secret protection promotes the sharing of knowledge, and the efficient operation of industry by permitting the individual inventor to reap the rewards of his labor by contracting with a company large enough to develop and exploit it. Trade secret law allows the inventor to disclose an idea in confidential commercial negotiations certain that the other side will not appropriate it without compensation. The holder of the secret, may disclose information he would otherwise have been unwilling to share, and this permits business negotiations that can lead to commercialization of the invention or sale of the idea, serving both the disclosure and incentive functions of intellectual property law.

Lemley, The Surprising Virtues of Treating Trade Secrets as IP Rights, 61 Stan. L.Rev. 311 (quotations and citations omitted).

The story of this case began with Altavion’s idea for “digital stamping technology” involving bar-codes that include encrypted information about the contents of the underlying document being stamped. Altavion disclosed the idea to KMSL – Konica Minolta’s research subsidiary – as part of a failed negotiation between the companies. That negotiation was, however, governed by a non-disclosure agreement agreed-to by KMSL. Later, Altavion learned that KMSL had filed twenty four separate patent applications on digital stamping technology stemming from the Altavion idea. Altavion, on the other hand, had decided to keep its idea as a trade secret.

Following a bench trial, the district court found that KMSL had misappropriated the Altavision trade secret and awarded $1.5 million in damages and $3.2 million in attorney fees. The trial court found that KMSL “had no idea, interest or information about DST … or use of bar codes prior to their dealings with [Altavion].” On appeal, that decision has now been affirmed.

In its appeal, KMSL argues that the lower court’s protection of digital stamping technology as a trade secret was improper and that, instead, the lower court should have focused on the particular and specific algorithms and software concepts that Altavion had created. The court agreed with this, in-part, but responded by dividing the claimed information into three tiers grouped according to both their specificity and secrecy.

The least specific and least secret level of information is Altavion’s general idea for a barcode allowing for self-authentication of documents with identification of alterations. This level of information is not a protectable trade secret because the general idea was disclosed to other companies without the benefit of an NDA. At the other extreme, the most specific and secret level of information is Altavion’s algorithms and source code that execute Altavion’s DST. Such information is unquestionably protectable by trade secret law, but it could not form the basis for Altavion’s misappropriation claim because Altavion did not share its algorithms and source codes with KMSL.

The middle tier of information is comprised of the design concepts that underlie Altavion’s DST, many of which might be evident to a software end user. There is no evidence such information was disclosed to anyone other than KMSL, pursuant to an NDA, and, thus, misappropriation of these secret design concepts (separately and in combination) provide a basis for Altavion’s claim.

Here, the court finds “design concepts” – similar to what are found in patent drawings – to be protectable trade secrets.

Read the court decision here: Altavion

For further background on this topic, readers may want to read: Andrew Schwartz, THE CORPORATE PREFERENCE FOR TRADE SECRET, 74 Ohio St. L.J. 623 (2013) (arguing that, where protectable, corporations should prefer trade secret protection over patent protection)

25 thoughts on “Trade Secret Subject Matter Eligibility

  1. Thanks for reporting on this case, Dennis. I think trade secret law is really important, but often neglected among IP blogging types because it doesn’t raise the ire of “trolls” or create mass lawsuits.

    This is actually a very useful case as a teaching tool because, although I don’t think it changes the law all that much, it provides a good summary of some core concepts of trade secret eligibility, the importance of clear identification, etc.

  2. The court demonstrated that the majority of KSML’s patents and applications disclosed (and claimed) inventions made by Altavion engineers.

    The new 256 states that if, “through error,” an inventor is not named, the inventorship might be corrected. I assume that intentional omission is not curable — which appears to be the case here. This means that all or or most of the KSML are invalid because the named inventors did not make the invention Without the correction, the patents are invalid under § §282/102(f).

    But consider that §102(f) has been repealed. In the future, where the inventorship cannot be corrected because of deliberate misappropriation, the patents will not be invalid. Is this the correct result? Is the misappropriator to be rewarded for his deliberate theft?

    1. I assume that intentional omission is not curable — which appears to be the case here.

      Be wary – very wary – of double assumptions.

    2. And finally, be aware that an oath is still required. Knowingly making a false oath is still Fraud on the Office.

      I have covered these things with you many many many times now Ned.

  3. In a recent debate regarding ownership of inventions, I made this very point that while the employee might own the right to file a patent application, the employer has a right to keep the invention secret and confidential. Thus if the employee files on an invention that the employer wishes to keep secret, I think the employer has a right of action against the employee for the disclosure, an possible a cause of action for assignment of the patent rights as a partial remedy as well.

    I fully endorse the thinking and holding here of the California court. The filing of patent applications by the recipient is not a right if it involves disclosing an idea that was the subject of a confidential disclosure.

    And, just as I suggested in the case of the employee’s patent, the discloser of the idea should also have an equitable remedy against the company for assignment of all the patent applications and patents the company obtained in violation of its duties.

      1. anon, consider that the KSML patents all disclose and claim methods that are at a minimum minor variations of the prior inventions of Altavion, do you think Altavion would be successful in a 256 action to have the inventorship of the KSML patents and applications to name Altavion inventors as co-inventors?

        1. Ned,

          As in the earlier discussions in which you had assumed facts not in evidence, there are many things that flavor any direction that should be followed, including actual words of any employment agreement.

          You are doing that “over” thing again.

        2. To your immediate question, how minor are you thinking?

          A level of minor that would fail to be above an obvious improvement?
          More than that?

          Clearly, this can easily become a quagmire based on many other conditions.

          For example, let’s say the employment agreement does not cover the actual inventor’s work.

          In that case, that work cannot be legally corralled even by a separate Trade Secret agreement – to the extent that the Trade Secret covers more than the invention, then yes, that extent is covered by the Trade Secret agreement – but that only may (or may not) give rise to a faulty trade secret and would not affect the inventor’s patent rights.

          As to any question of co-inventorship, the EXISTING rules of co-inventorship apply REGARDLESS of the existence or lack of existence of Trade Secret agreements (in other words, it merely appears that are kicking up dust).

  4. Just a caveat: applying for patent protection does not bar trade secrecy. Trade secret protection can continue until the patent application is published, or until and if the patent issues if the application is not published. To quote from a Baker Botts blog report: “Before a patent application is published, it is “kept in confidence by the Patent and Trademark Office.” 35 U.S.C. § 122(a). Consequently, as long as the patent owner has not otherwise disclosed the invention publicly, such as through academic publications, publicly disseminated marketing materials and/or sales of the product that inherently disclose the trade secret aspects of the invention, the trade secret protection should be extant before publication.”
    P.S. Even Mark Lemley’s severest critics should find a lot to like in his above-quoted-text on some of the important public benefits of trade secret IP protection.
    P.P.S. Trade secrecy protection has ironically been enhanced in the most recent patent legislation. Namely by the provisions of the AIA providing personal defensive protections against later patents of others.

    1. That Lemley felt just as strongly … were “trade secret” and “secret” replaced with “patent.”

      1. Anon, to expand on your valid point immediately above, the “dark side” of enhancing trade secrecy [instead of patenting] is that it is clearly against the public interest in general to repress the publication of new technologies of public value by keeping them trade secrets. They may not be re-invented by others for many years in some cases.
        Of course new technologies are only a small part of what can be appropriately protected by trade secrecy. Such as business information, source code, etc.
        Furthermore, most new technologies are not even protectable by trade secrecy once any product containing them is ever publicly launched, except for the relatively few products that cannot be “back engineered.”

        1. They may not be re-invented by others for many years in some cases.

          To add to the dark side of this thought – and reflecting on your well-constructed post at 1 is the additional knowledge that the Prior User Right as super-empowered by the AIA is a submarine right.

          That is to say, that the ‘right’ will only surface after some other entity goes to the trouble and expense on their dime to share their application in order to achieve a Quid Pro Quo, and only when that entity seeks to enforce their right will the PUR be disclosed – and only to the extent to defeat the (rightful) patent assertion (meaning that a degree of trade secret can still be maintained). Not only that, but your submarine PUR still prevents what is “prior art” from defeating the patent and the patent is enforceable against other competitors. And even further, your protected sales are treated as exhausting to the existing patent – creating a blanket immunity not only for your direct clients, but for any secondary market – all of which sees NO BENEFIT to the (rightful) patent holder. You (in the case of being a Large Corp) can be free to act in a flood-the-market-loss-leader maneuver to eviscerate any legitimate patent holder of their exclusive rights benefits. You can force pain on those willing to share and partake in the patent system. The only drawback is to make sure that you can earn the PUR status. And even that strategy can be protected by devious means such as “publishing” your trade secret in an obscure language in some obscure foreign land and hold that as an Ace in the hole to outright defeat a patent if that need surfaces (that is, if you cannot make the PUR status).

          I will point out that I made this public knowledge prior to the AIA passage here on these boards – as well as communicated expressly to my congressional representatives.

            1. That you even ask the question betrays your anti-patent bias.

              I think you’re little freakout here says a lot more about your well-known biases than the imaginary one you abscribe to me.

              But keep digging, freak.

          1. Let’s not get carried too away with the AIA amendments to 35 USC 273. It does NOT create any “prior art” against any patent – the defense is purely personal only to the party proving the “prior commercial use.” All others can still be sued. The prior version of this same statute applied to any business method patent yet was never ever successfully used by anyone. No one who has real prior art, like the obscure foreign prior publication you note, would ever use this 273 defense, with its much tougher proof requirements and built-in higher risk of attorney fee sanctions.

            1. paul,

              You miss the point of having that obscure prior art.

              One with a submarine-like PUR does not want a competitor’s patent to be invalid.

              That competitor’s patent still blocks other competitors. The competitor’s patent still requires that patent holder to expend time and money enforcing that patent. A submarine PUR is exceptionally beneficial by NOT serving as “prior art.” The obscure foreign reference is ONLY there as a safety valve in case the attempt at PUR fails – it need not see the light of day ever if PUR status is reached.

              Can you explain this notion of “built-in higher risk?” This is the first that I am seeing this thought expressed.

            2. A submarine PUR is exceptionally beneficial by NOT serving as “prior art.” The obscure foreign reference is ONLY there as a safety valve in case the attempt at PUR fails – it need not see the light of day ever if PUR status is reached.

              So what?

        2. PM Of course new technologies are only a small part of what can be appropriately protected by trade secrecy. Such as business information, source code, etc.

          Indeed. Pretty much every business uses proprietary methods, materials and information that are not shared with competitors. I know mine do.

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