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)