Guest Post: First Patent Reform, Now Trade Secret Reform?

By David S. Almeling

Last month, President Obama signed into law the America Invents Act, enacting the most significant reform to patent law in a half-century. Last week, Senators Herb Kohl and Christopher Coons introduced an amendment to the Currency Exchange Rate Oversight Reform Act (the "amendment"), which would, for the first time, provide a federal right of civil action for trade secret owners. In a press release announcing the amendment, Senator Coons stated it "would allow for a single, uniform, nationwide cause of action instead of the patchwork of state laws now in place, and would elevate trade-secret intellectual property on the same level as copyright, trademark and patent violations."

Although it's a step in the right direction, the amendment falls short. This article summarizes the amendment and explains why it's not a complete solution to the problems it seeks to solve.

Our State-Based Trade Secret Regime

Unlike trademarks, copyrights, and patents, trade secrets are not governed primarily by federal statute. Each state retains its own autonomous trade secret law. The inevitable result is that trade secret law differs from state to state. For example:

  • Forty-six states have enacted some or all of the Uniform Trade Secrets Act ("UTSA"). Those states aren't a unified bunch, though, as state legislatures made modifications to the UTSA and state courts adopted various interpretations of even the same provisions. The four states that don't follow the UTSA — Massachusetts, New Jersey, New York, and Texas — rely instead on the 1939 Restatement of Torts and other sources.
  • Some states, such as Illinois, embrace the inevitable-disclosure doctrine, under which a court can enjoin an employee from working for a new company when that employee had access to her former employer's trade secrets and has responsibilities at the new employer that make it inevitable that she would disclose those trade secrets. Other states, such as California, reject the doctrine. Many states haven't decided one way or another.
  • Most states have a statute of limitations that lasts three years (e.g., California). Other states have statutes as short as two years (e.g., Texas) and as long as five (e.g., Illinois).

With these interstate discrepancies comes a host of problems. A case's outcome may depend on the state in which suit is brought; the result in Kansas City, Missouri, may be different from the result across the river in Kansas City, Kansas. Another problem is the additional burden on plaintiffs and defendants, who must research which jurisdiction's laws are most favorable to their case, and on courts, which must decide between the competing laws. Such differences also create uncertainty, and thus cost, about which court will decide the dispute and what law that court will apply. Such differences impose further costs on trade secret owners who operate in multiple states, as they must protect trade secrets in a way that complies with the laws of each state.

The Amendment

The amendment would amend the federal Economic Espionage Act ("EEA"), which criminalizes certain types of trade secret misappropriation, to include a right of civil action for anyone "aggrieved by a violation of section 1832(a)." Section 1832(a) is one of the two types of conduct prohibited under the EEA, and it applies to misappropriating trade secrets related to or included in a product that is produced for or placed in interstate commerce knowing or intending that the misappropriation will injure the trade secret owner.

This new right of action would be limited to trade secret owners who provide a "sworn representation . . . that the dispute involves either substantial need for nationwide service of process or misappropriation of trade secrets from the United States to another country."

The amendment provides various forms of relief, including injunctive relief, damages, exemplary damages, and reasonable royalties. Significantly, the amendment also authorizes a court to issue a seizure order for property "used or intended to be used . . . to commit or facilitate the commission of the violation alleged in the civil action."

The amendment would not preempt any other law: "Nothing in the amendments made by this section shall be construed to modify the rule of construction under section 1838 of title 18, United States Code, or to preempt any other provision of law."

The Amendment is Limited

Among the amendment's limitations:

  • It doesn't "preempt any other provision of law." Translation: the amendment doesn't replace the current state-based regime, but instead adds a new law to the mix.
  • It applies only to one of the two categories of misappropriation prohibited by the EEA, and that category does not include many forms of misappropriation.
  • It applies only to trade secrets that are "related to or included in a product" — a subset of all trade secrets, which broadly include any information that is secret, derives economic value from that secrecy, and is the subject of reasonable measures to maintain its secrecy.
  • It applies only if the case involves either the need for nationwide service of process or the misappropriation of trade secrets from the U.S. to another country. Only a small percentage of cases fall into those categories.
  • By amending the EEA, the amendment incorporates the EEA's substantive requirements, including intent, that are in addition to the usual elements necessary to establish a prima facie case of trade secret misappropriation.

I spoke with a member of Senator Kohl's staff, who said that one purpose of the amendment is to expand the current framework of the EEA by providing a limited federal right of civil action. That is a laudable first step, but the amendment won't fix the patchwork problem because the only way to eliminate differences among states is to preempt state laws.

So if the amendment won't work, what law will? One that provides a private right of action for all types of trade secret misappropriation and that preempts inconsistent state law. One, quite simply, that replaces the current state-based trade secret regime with a federal one.

David Almeling is a counsel with O'Melveny & Myers in the firm's San Francisco office. This article does not purport to represent the views of O'Melveny or its clients.

 

The Narrows: Winning by Arguing Both Trade Secret Misappropriations and Patent Infringement

Atlantic Research Marketing Systems (ARMS) v. Troy Industries (Fed. Cir. 2011)

By Dennis Crouch

This appeal stems from a 2007 patent infringement and business tort lawsuit filed by ARMS against its former employee and current competitor (Mr. Troy). ARMS' reissue patent claims a firearm hand-guard with an attachment point at the firearm's barrel nut. The original patent application included both the barrel nut attachment and a sleeve support as claim limitations. However, the reissue patent does not require the sleeve support. That change is important for the case because TROY's competing hand-guard uses the barrel nut as the single attachment point.

On summary judgment the district court ruled the patent invalid for failing the written description requirement of 35 U.S.C. § 112 p1.

Written Description Requirement: Section 112 p1 of the Patent Act requires that a patent specification include "a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same." In Ariad, the Federal Circuit reaffirmed that this provision creates the separate and distinct requirements of written description and enablement. The test for written description considers whether, after reading the original specification, one of skill in the art would understand that the inventor was in possession of the claimed invention. Most written description cases arise in situations like this where the patentee has amended its claims well after the application filing date.

Although not cited here, this case is similar to the Federal Circuit's Gentry Gallery decision where an element in the original claims was omitted in a broader-amended claim. In Gentry Gallery, the original application was directed to a pair of recliners with controls located on a console. The amended claims removed any restriction on the console location. The Federal Circuit held those broader claims invalid because "the patent disclosure did not support claims in which location of recliner controls was other than on the console."

On appeal here, the Federal Circuit agreed that the broader claims are invalid under the written description requirement because it the specification does not provide any evidence that the inventor invented a hand-guard that uses the barrel nut as the one and only attachment point.

[I]t is undisputed that the written description for the '465 patent does not disclose to a person of ordinary skill in the art an invention where the yoke/barrel nut attachment point provides complete support for the handguard accessory. Claims 31-36, however, clearly cover such a design. Put differently, claims 31-36 [as amended] exceed in scope the subject matter that [the inventor] chose to disclose to the public in the written description. Therefore, we hold that the district court properly granted summary judgment invalidating claims 31-36 for failing to satisfy the written description requirement of 35 U.S.C. § 112. Mr. Swan used the reissue process to impermissibly obtain claims unsupported by the written description.

ARMS had also sued TROY for trade secret violation and argued in court that ARMS version of the barrel-nut-only attachment was a trade secret stolen by TROY. That testimony bolstered the court's conclusion that the asserted claims lacked the written description support to cover a barrel-nut-only attachment.

[ARMS] cannot now "have it both ways" by reaching back and relying on the disclosures in the '245 patent to claim an invention he was purposely shielding from the public.

Trade Secret Violation: Although TROY won the patent dispute, the jury found troy liable for trade secret misappropriation and breach of a fiduciary duty to his former employee. The award was $1.8 million in damages under Massachusetts Trade Secret Law. (Massachusetts has not adopted the UTSA). As noted above, the alleged trade secret is the method of attaching the hand-guard to a firearm using only the barrel nut. The jury was instructed that any protectable trade secret must go beyond what was disclosed in the '245 patent. Based upon that instruction, the Federal Circuit affirmed – finding no clear error.

This strategy worked perfectly for ARMS who would likely be satisfied winning either patent infringement or trade secret misappropriations. Although the court clearly sympathized with TROY's position, it noted that the legal positions taken by the two parties meant that ARMS was likely to win one of its claims.

Troy's argument illustrates the inherent tension Atlantic Research created by contending that Troy misappropriated trade secrets, while simultaneously asserting that the products Troy developed with the misappropriated trade secrets infringed its patent. In response, Troy contended that Atlantic Research's patent disclosed the trade secret, but also contended that the patent asserted against it was invalid for failing to disclose a written description of a handguard that attaches solely at the barrel nut. These conflicting positions left little room for either party to prevail on both claims.

The problem: In the end, the Federal Circuit vacated the jury verdict on a "jury taint" issue. One juror brought a plumbing clamp from home during deliberations to show other jurors and the appellate panel held that the judge should have taken more dramatic steps to ensure that the clamp did not have any "prejudicial effect on the jury as a whole."

Private Federal Civil Actions for Trade Secret Infringement

by Dennis Crouch

Senator Coons (D-Del.) today proposed a pair of trade secret focused amendments to the pending Currency Exchange Rate Oversight Reform Act of 2011.

Most trade secret litigation occurs at the state level. Although Title 18 of the US Code creates a cause of action for Trade Secret Theft, that provision gives standing only to the Attorney General and not to private parties. Senator Coons' amendment would open the door to a Private Civil Action for Trade Secret Theft that would be brought in Federal Court. In his press release, Senator Coons writes:

The … amendment, introduced with Senator Herb Kohl (D-Wis.), would protect U.S. businesses from the theft of trade secrets by allowing victimized companies to sue for trade-secret theft in federal court. The legislation would allow for a single, uniform, nationwide cause of action instead of the patchwork of state laws now in place, and would elevate trade-secret intellectual property on the same level as copyright, trademark and patent violations.

Federal Trade Secret Theft under Section 1832(a) requires a host of intentional acts involving stealing, copying, or receiving trade secret information that is related to a product produced in interstate or foreign commerce. The Coons amendment would allow a private civil action with the additional requirement that the plaintiff submit a sworn affidavit that either (1) there is a substantial need for nationwide service of process or (2) the case involves misappropriation of trade secrets from the US to another country.

The amendment also provides for immediate ex parte seizure orders and the award damages for the infringement.

Senator Coons also proposed a second amendment that would allow Homeland Security to share information and suspected counterfeit product samples with intellectual property rightholders. This would loosen the current rules that restrict information that Customs & Border Patrol can share with US rightholders.

Learn more:

  • David Almeling, Four Reasons to Enact a Federal Trade Secrets Act, 19 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 769 (2009) (describing the lack of uniformity in state implementation of the Uniform Trade Secrets Act).

In re Gleave: Reference with Unknown Utility Still Anticipates

In re Gleave (Fed. Cir. 2009)

In 2008, the BPAI affirmed the examiner’s rejection of Gleave’s claims as anticipated. The claims focus on an antisense oligodeoxynucleotide designed to bind two different types of insulin-dependent growth factor binding protein (IGFBP). The prior art included a document that listed the genetic sequence of the complementary sense strands but did not identify any utility of the sequence.

On appeal, the Federal Circuit affirmed the anticipation rejection – basing its decision on the rule that anticipatory prior art does need to be functional, useful, or show actual reduction to practice. Rather, to be anticipatory, the prior art must enable the skilled artisan to make the claimed invention.

In the 1973 Wiggins case, the CCPA ruled that the “mere naming of a compound in a reference, without more, cannot constitute a[n anticipatory] description of the compound.” The Federal Circuit here distinguished Wiggins – noting that in Gleave’s case, the sequence listing was sufficient to allow a skilled artisan to “at once envision each member of this limited class.”

Notes:

Best Practices for Trade Secret Protection

I recently attended a conference of senior corporate patent counsel. Much of the discussion focused on cost savings in a tight economy. In patent prosecution, this process has been going on for years by limiting prosecution fees and filing abroad only on important cases. Part of the discussion focused on short-term mechanisms to push off cost – such as using provisional and timing PCT applications.

New Focus on Trade Secrets: One alternative suggested is increased reliance on trade secret. Trade secrets are relatively much cheaper than patents. Trade secret protection is automatic so long as sufficient steps are taken to keep the secret and the secret is economically valuable. Patent filings are dropping and many companies are taking a harder look at trade secret law as a mechanism to at least temporarily protect rights.

The public benefit of public disclosure is often touted when comparing patents with trade secrets. Patents require public disclosure with the aim of promoting the flow of ideas and information. Trade secret laws prohibit disclosure.

The private benefit of private disclosure: Anyone who has practiced trade secret law intuitively knows that patents naturally create additional information benefits that I call “private disclosure.” I note two of these benefits below: The benefit of defining rights

Value of Defining Rights: Despite serious problems with claim scope unpredictability, patents do a good job of explicitly stating the rights being claimed. Defined rights can be sold, traded, and accounted-for both externally and within the company. And, patent law facilitates a process for looking at by-product innovations to consider whether they should be pursued. These benefits flow from Coase’s work on property rights. Although trade secrets can also be well defined, trade secret law does not require explicit pre-identification nor does it provide such a mechanism. Rather, in most cases, a company’s knowledge about its own trade secret information is left nebulous and largely undefined.

Employee Relations: The patent system also creates a nice mechanism for managing employee relations. Inventors typically have a duty to assign all their work-related inventions to their employer. However, that duty is crystalized when the inventor files an oath and an assignment of rights. Often, the inventor gets a cash bonus at that point as well. Although the inventor already had a duty to assign, the actual assignment is important psychologically – to ensure that all the parties agree who owns what. Typical trade secret practice does not involve any explicit acknowledgment of the trade secret nature of particular innovations and information. Some companies attempt an end-of-employment statement that This is important because most trade-secret practice involves former employees using inside knowledge to benefit a competitor.

Best Practices for Trade Secret Law: Most companies have invention disclosure programs, but few of them link those disclosures to trade secret practice. Notably, when a company decides not to pursue patent protection, a process of assignment (and possible small bonus) should still be followed to ensure that the creator understands that the innovation belongs to the company and is not being given to the public. Likewise, companies may consider implementing broader innovation identification programs that encompass both patentable inventions and trade secret information.

Notes:

  • One query: In the US, trade secret law is state specific – although most jurisdictions follow the Uniform Trade Secret Act. Do any jurisdictions have a “working” requirement for trade secret? Take the situation where a company employee creates a new product, but the company decides not to pursue the product and it just sits in the file cabinet?
  • China: In the US, the commercialization of trade secrets will block the user from later obtaining a patent on the otherwise secret information. A Foley & Lardner report by Sharon Barner and Hal Wegner indicates that under Chinese law, there commercialized trade secrets may still be patented. Is this true in other FTF countries?