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?

30 thoughts on “Best Practices for Trade Secret Protection

  1. Dennis’ article and the discussion are applicable to multinationals with sufficient research, development, production and marketing capabilities.

    It seems to me that trade secret “protection” is useless for universities, small companies, start-ups, individuals and of course Pharma.

    Also, it seems to me that trade secret “protection” is of very limited duration for a company that has production facilities in high-income countries or countries with environmental legislation.

  2. “I thought the other great thing about trade secrets is that if someone misappropriates a trade secret it’s not just a tort but it’s also a crime. Just pick up the phone and call the FBI, because under the Industrial Espionage Act of 1996 the defendant can get up to 10 years in prison.”

    Hmm… last time I checked the FBI was pretty busy with counter-terrorism. But sure, why not give them a call.

  3. The above-quoted text about “using patent and trade-secret protection together in a synergistic manner results in a potent exclusivity” must be taken in consideration with the serious related danger of setting up a patent-invalidating 112 non-disclosed “best mode.”

  4. “Leave it to an examiner to rip a word completely out of context before “analyzing” it.”

    On the contrary, the word was well analyzed, as was the context. The context of patenting ideas that should be worth nothing that are being independently “invented”, aka cobbled together from blatantly fitting together prior art, is something that is worth persuing. And further that such a thing is a good thing for our government to espouse.

  5. “You’re giving legal advice again? Isn’t there some kind of PTO prohibition on that?”

    Idk Big Guy, is there some kind of office restriction on telling someone they should file a patent for an idea? Hmmm, I doubt it. In fact, I’m pretty sure it is looked quite well upon.

    I have to say, at 50$ a pop just about any idea that you can’t 102 by yourself is worth filing if you think it is valuable. I’m surprised there aren’t more filings of provs than there are actually.

  6. For the query about jurisdictions having a “working” requirement for trade secrets, there is a “continuous use” requirement in some states. This requirement was in the Restatement (First) of Torts s 757 that guided (and still does to a large extent) trade secret common law before the Uniform Trade Secrets Act began making its way through the states (and the UTSA has only made it into 46 states so far – NY, NJ, Mass, and TX still do not have a version of the UTSA).

    However, even in states that follow 757, it is not clear that continuous use is actually enforced. However, in Ohio the continuous use requirement was apparently enforced before that state passed a UTSA statute. See State ex rel. Besser v Ohio State Univ., 732 N.E.2d 373, 378-79 (Ohio 2000). So the continuous use requirement may be valid in the right circumstances.

    Additionally, in some jurisdictions, a trade secret owner must “derive independent economic value, actual or potential” from the trade secret. See, e.g., Central States Indus. Supply v. McCullough, 279 F. Supp. 2d 1005, 1039 (N.D. Iowa 2003). This suggests that it is a possibility that a company having a trade secret locked away in a filing cabinet may not be receive trade secret protection if that company cannot prove that any economic value is derived from that secret (e.g. negative know-how).

    In most, but not all, jurisdictions, the existance of a trade secret is a question of fact. So the answer is likely to be fact specific no matter where you are.

    One of the challenges for trade secrets is that there is no federal civil trade secret law (just criminal). Additionally, the location of the use of a misappropriated trade secret is the law used for trade secret claims – not the law of the trade secret owner’s location. So there is a danger that a trade secret owner may conduct business in a state with strong trade secret protection, but the misappropriation occurs in a state with weak trade secret protection. In that case, the trade secret owner may have limited or no remedies for the misappropriation.

  7. “A few years ago I saw a whole panel at an AIPLA convention get this law wrong”

    LOL,

    We are seeing more and more “panels” of supposed patent law “experts” getting things wrong these days.

    Reminds me of a quote a prickly co-worker used to use sometimes “An ‘ex’is a has-been, and a ‘spert’ is a drip under pressure.”

    While slightly annoying at the time, I can’t seem to forget those words every time I see a self-proclaimed “patent expert.”

  8. In response to the Query: it will be difficult to prove that a “secret” product, device, or process “sitting on a shelf” is a “trade secret”, because proof of a “trade secret” requires proof of “use in the business” of the trade secret owner and “competitive advantage” to the owner.

  9. Way too many patent attorneys regularly confuse the statutory “on sale” bar prior art issue with the commercial use equitable estoppel doctrine of the famous Judge Learned Hand Metalizing Engineering case, et sec. Metalizing Engineering developed or clarified a doctrine of NON-statutory equitable estoppel against getting a patent yourself after you commercially use the secret process to make a commercial product for more than the same time period as a real bar(then 2 years, now 1 year). See the CAFC blessing of that equitable estoppel in, e.g., Gore v. Garlock. Gore v. Garlock and other CAFC cases hold that such secret process use for making commercial products [not back-engineerable] is NOT statutory prior art, and also is NOT an estoppel to anyone else. [A few years ago I saw a whole panel at an AIPLA convention get this law wrong in response to a floor question from a foriegn patent agent.]
    Which is why in 1999 Congress put a “business method prior user” personal defense into patent law. To defend against later inventors getting a patent on business method software they had been using but not publicly disclosing [and in many cases simply did not even think was patentable before the CAFC State Stree Bank panel decision].

  10. The other thing that many don’t seem to grasp is that trade secret protection smacks of “proprietary interfaces” something that the open architecture community doesn’t seem to like so much. You can’t have it both ways, you can be “open” and also have trade secret protection, which is probably why companies such as Red Hat have a nice patent portfolio.

  11. Trade Secret as an “alternative” to patent protection? I think trade secret “protection” is called a “decision not to file.” The problem is, once you go down that road, you don’t come back. By the time your group of “senior in-house patent counsel” for company A realize that the technology that they decided to “protect” by not filing was really valuable after all, a year has gone by, and guess what, the technology is now dedicated to the public domain.

    Which is another shortcoming of trade secret “protection” (e.g. the decision not to file) vis a vis former employees. While trade secret appropriation may have some teeth, it is difficult to prove unless it is “embodied” exactly as defined by the holder, company A. The problem comes when that former employee who now works for company B, begins to design similar technology that, while not exactly coming within the scope of the trade secret, would fall nicely within the scope of a patent that he would be compelled to assign to company A before he left for company B.

    Its funny that these kind of posts smack of a certain naive arrogance, that would have everyone believe that the decisions to file a patent vs. not file a patent and instead resort to “trade secret” “protection” is something brand new.

    Better minds than ours have already wrestled with most of these problems before. People ignore the lessons of the past at their own risk.

  12. If you want purely defensive protection against someone else getting a valid patent on your idea while also de facto maintaining it as a trade secret [but without any enforcable legal protection] file only in some small country (with a fast application-laying-open systen) where no one will ever think to look, not listed in Derwent. Or, just publish the information in an obscure publication not on the internet in some obscure language somewhere.

  13. Any reason (especially in quick-advancing technologies where the market, i.e. other smart folks, are likely to come up w/the same invention) to not file apps (even a/starting with a provisional) that you keep unpublished?

    If anyone tries to whack you with the same invention they independently came up with (at which time the invention becomes public anyway), you have your app published to whack them back.

    I’m sure cos have been doing this for years, right?

  14. very difficult to protect an “idea” using trade secrets. the toothpaste usually gets out of the tube one way or the other.

  15. “Only a patent attorney regards this as a ‘problem’. The rest of the world regards it as a blessing.”

    Leave it to an examiner to rip a word completely out of context before “analyzing” it.

    “Should have filed a provisional. 50$ …”

    You’re giving legal advice again? Isn’t there some kind of PTO prohibition on that?

  16. “Independent invention is a real problem in a world where there are lots of other smart people faced with the same problems and the same baseline technology as your inventors.”

    Only a patent attorney regards this as a “problem”. The rest of the world regards it as a blessing.

    “Can someone give an answer? We are in California.”

    Should have filed a provisional. 50$ …

  17. Don’t forget the D.L. Auld and Dippin’ Dots cases (“forefeiture doctrine” and “secret process” 103 art). Good luck backtracking on the trade secret trail.

  18. Have a question may be somehow related to Trade Secrect.

    We have a project. We presented it to a potential investor by a Business Plan. We indicated in the B/P with the notion: “copy righted and all rights reserved”. This investor bypassed us and used our project. Is there any protection to us at all?

    Can someone give an answer? We are in California.

  19. I have to agree with BigGuy, for the most comprehensive protection, trade secret law should be used along with other forms of IP protection.

    Karl Jorda, a master of trade secret law, has written extensively on the subject. Here is an abstract from his IP handbook.

    “Exploiting the overlap between intellectual property (IP) categories, especially between patents and trade secrets, is an important facet of IP management. Patents (which require full disclosure) and trade secrets (which are kept confidential) are not incompatible. On the contrary, they can complement one another: patents protect inventions and trade secrets protect collateral know-how. Using patent and trade-secret protection together in a synergistic manner results in a potent exclusivity.”
    link to ipmall.info

    For additional reading, see
    link to piercelaw.edu

  20. In my company, the monetary reward for a recognized trade secret is identical to the reward for a patent but is actually better for the inventor because it is paid relatively promptly. The reward for a patent is partially paid when the application is filed and the remainder paid when the patent is issued.

    Cost is not typically the determining factor for which type of protection is pursued. We go the trade secret route when we don’t believe we could effectively determine whether or not someone is infringing.

  21. Somehow it really bothers me to see discussions of trade secret “protection” as an “alternative” to filing a patent application. it seems to me like comparing a steamship to an automobile – yes, they are both forms of transportation, but unless you are really willing to limit your travel objectives, they are not interchangeable alternatives.

    As we all know, the “protection” offered by trade secret law is only against actual misappropriation of your particular information. It doesn’t give you an exclusive right to anything, and doesn’t stop anybody from independently developing and exploiting “your” technology. Indeed, in addition to the problem of whether you can in fact keep your new innovation secret, the trade secret “alternative” has the distinct disadvantage that a later developer of your technology can actually obtain a patent on your technology and conceivably use it against you. Independent invention is a real problem in a world where there are lots of other smart people faced with the same problems and the same baseline technology as your inventors.

    Trade secret law certainly has its place, and no doubt should be exploited to complement patent protection. But it just doesn’t make sense to me to view it as an “alternative” to patent protection.

  22. In response to Anonymous and Steve….

    In the U.S., you can keep keep an invention secret for as long as you want without being barred from obtaining a patent…but only if (1) you do not use the trade secret commercially, and (2) it does not become unpatentable for some other reason (e.g., public disclosure, invention by another, etc.).

    As for commercialization barring you from obtaining a patent (unless the patent is filed within one year), it makes no difference if the trade secret can be reverse engineered or is “obvious” from your commercialized product. If a trade secret is used commercially, for ANY reason, the one year clock starts running.

    For example, if someone at Ford invents a new method of cleaning the factory floor at night and Ford begins using that method in its factory, the one year clock starts running in the U.S. It doesn’t make any difference that this new method is not being used to make a product which Ford is selling. Nor does it matter that no one can figure out the new method by examining a Ford product. The commercial use by the inventor (or their assignee, agent, etc.) is deemed a “public use” under 102(b).

  23. “In the US, the commercialization of trade secrets will block the user from later obtaining a patent on the otherwise secret information.’

    If the secret information is not obvious, or able to be reverse engineered, from a commercialized product, does the on-sale bar apply?

  24. “many companies are taking a harder look at trade secret law as a mechanism to at least temporarily protect rights.”
    Exactly how long can you keep an invention a secret before you are barred from a patent?
    Is there any case law that quantifies “suppressed or concealed”?

    Typo in paragraph on Employee relations.

  25. I thought the other great thing about trade secrets is that if someone misappropriates a trade secret it’s not just a tort but it’s also a crime. Just pick up the phone and call the FBI, because under the Industrial Espionage Act of 1996 the defendant can get up to 10 years in prison.

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