The Defend Trade Secrets Act and Inevitable Disclosure

When Can a Company That Hires its Competitor’s Former Employee Be Sued in Federal Court?

Guest post by Maxwell Goss.  Dr. Goss is a business litigator with Rossman Saxe, P.C. in Troy, Michigan. His practice focuses on non-compete, trade secret, intellectual property, and shareholder law and litigation.

The Defend Trade Secrets Act (DTSA) was enacted a year ago, on May 11, 2016. One of the most sweeping changes in intellectual property law in recent years, the statute creates a private cause of action for trade secret misappropriation under federal law.

For trade secret owners, the advantages of the DTSA include access to nationwide discovery and enhanced remedies such as ex parte seizure of property to prevent propagation of stolen trade secrets. For those accused of trade secret theft, the DTSA provides substantial protections including strict limitations on the injunctive relief available and entitlement to a hearing no later than seven days after a property seizure.

An open question has been the status of the controversial “inevitable disclosure” doctrine under the DTSA. Under state law in some jurisdictions, courts will enjoin a company’s former employee from working for a competitor if the company establishes that the employee would “inevitably” use its trade secrets in his or her new position. Trade secret owners like the doctrine of inevitable disclosure because actual misappropriation can be hard to prove. At the same time, the doctrine has been criticized as effectively allowing courts to impose a non-compete on someone who never signed a non-compete agreement.

How does inevitable disclosure fare under the DTSA? The statute provides that an injunction to prevent misappropriation may not “prevent a person from entering into an employment relationship,” and that any conditions placed on a person’s employment in an injunction must be based on “evidence of threatened misappropriation and not merely on the information the person knows.” In light of this language, some have concluded that the inevitable disclosure doctrine is a dead letter under the DTSA.

But a recent court opinion indicates otherwise. Interestingly, the opinion was issued on May 11, 2017, the one-year anniversary of the DTSA, by the United States District Court for the Northern District of Illinois, a federal court in the Seventh Circuit, where inevitable disclosure was first definitively recognized. In Molon Motor and Coil Corp. v. Nidec Motor Corp., the plaintiff, a maker of bespoke motors and gearmotors, sued a competitor after an employee who had allegedly downloaded the plaintiff’s designs and technical data went to work for the competitor.

The defendant moved to dismiss the case, arguing (among other things) that the DTSA did not apply because the alleged acts at issue occurred before the DTSA was enacted in May 2016. The court rejected this argument. Noting that the “key question is whether the inference of inevitable disclosure reasonably extends to continued use beyond the Act’s effective date,” the Court reasoned:

At least on the limited record—the Third Amended Complaint—the alleged trade secrets are not of the nature that would necessarily go stale in the course of a couple of years. A motor design, and the quality control data associated with it, plausibly would retain its trade secret value well into the future. If it is plausible that some of the alleged trade secrets maintain their value today, then it is also plausible that Nidec would be continuing to use them. Of course, further discovery could upend any or all of this, but at this stage, continued use beyond the May 2016 effective date is plausible.

In short, even though the plaintiff company’s former employee had allegedly downloaded the files and gone to work for the competitor before the DTSA went into effect, the court found it plausible that there was a “continuing use” of the information by the competitor after the statute went into effect. Based on this finding, the court allowed the plaintiff to go forward on its DTSA claim.

How does this ruling square with the DTSA, which requires that an injunction be based on “evidence of threatened misappropriation and not merely on the information the person knows”? Though the Molon opinion does not connect the dots, the answer, in part, seems to be that the opinion was addressing a motion to dismiss, not a motion for injunction. A court may not be able to enjoin someone based on inevitable disclosure under the DTSA, but this does not mean a plaintiff may not sue someone based on inevitable disclosure under the DTSA. That is, even where injunctive relief may not be available as an initial matter, a trade secret owner might nevertheless file a claim and move forward with discovery—which could ultimately turn up the evidence necessary to fully substantiate a claim.

Molon represents a significant development in the body of law unfolding under the DTSA. In jurisdictions where inevitable disclosure is recognized, the ruling could help trade secret owners get a case off the ground even where information obtainable in a pre-suit investigation is necessarily limited. On the other hand, defendants will be quick to point out that Molon does not alter the specific allegations needed to plead a trade secret claim premised on an inevitable disclosure theory. Moreover, where an injunction is sought, it should be emphasized that any conditions placed on employment under the statute must be based on evidence of threatened misappropriation and not merely information the person knows.

What the Defend Trade Secrets Act Means for Trade Secret Defendants

Guest Post: Defend Trade Secrets Act — A Primer, an Endorsement, and a Criticism

Guest Post by David S. Almeling, a partner in the San Francisco office of O’Melveny & Myers LLP. Almeling specializes in patent and trade secret litigation.

It’s been an exciting month for trade secret law. Senators Christopher Coons (D-Delaware) and Orrin Hatch (R-Utah) introduced the Defend Trade Secrets Act, a bill that would, for the first time, provide a federal right of civil action for trade secret theft. And the Judiciary Committee held a hearing during which speakers expressed support for the DTSA, including Eli Lilly’s VP and General Patent Counsel, Douglas Norman, who stated that the DTSA “will establish the gold standard for national trade secret laws globally.”

The DTSA is a game changer. If enacted, it would constitute the most dramatic rethinking of trade secret law since 1979, when the National Conference of Commissioners on Uniform State Laws approved a model statute called the Uniform Trade Secrets Act. Since then, 48 states have adopted the UTSA in some form, replacing their common-law regimes with statutory ones.

The DTSA isn’t perfect — I’ll explain why in a moment — but it’s the best bill of its kind introduced to date, and it should be enacted.

A Primer

The DTSA authorizes a trade secret owner to bring a civil cause of action in federal court for either (1) a violation of the Economic Espionage Act, which criminalized certain types of trade secret misappropriation, or (2) a “misappropriation of a trade secret that is related to a product or service used in, or intended for use in, interstate or foreign commerce.” The DTSA’s definition of misappropriation tracks closely the UTSA’s definition.

The DTSA would also:

Grant courts the power to issue ex parte orders “for the preservation of evidence” and “for the seizure of any property used…to commit” the alleged misappropriation. This is similar to the relief available under the Lanham Act for counterfeit goods.

Allow courts to award injunctions; damages for actual loss or unjust enrichment; a reasonable royalty “in lieu of damages”; exemplary damages up to treble the amount of compensatory damages, as opposed to the UTSA, which permits courts to award only double damages; and attorneys’ fees.

Establish a five-year statute of limitations, two years longer than the UTSA’s provision.

Decline to preempt any other law.

An Endorsement

The DTSA is not the first bill in recent years to propose a federal cause of action for trade secret theft.

Other recent efforts include: Senator Coons’s prior bills in 2011 and 2012; the proposal by Rep. Zoe Lofgren, the Silicon Valley–based Democrat, to enact PRATSA (Private Right of Action Against Theft of Trade Secrets Act of 2013); and the 2013 introduction of FAIR (Future of American Innovation and Research Act) by Republican Senator Jeff Flake of Arizona. These attempts all failed, never making it out of committee.

The reasons they fell short varied; I won’t rehash them here. But the DTSA is the most comprehensive bill to date, as it addresses a broad swath of trade secret theft and encompasses a robust range of remedies.

The DTSA is better than the current system — one in which each state has its own autonomous civil trade secret law. Today, 48 states have enacted some form of the UTSA, with New Jersey (in 2012) and Texas (in 2013) being the latest adherents. New York and Massachusetts are the only remaining holdouts.

Despite the UTSA’s widespread adoption, the “U” — Uniform — hasn’t lived up to its name. State legislatures often modify the UTSA. And even if every state enacted the same UTSA, there would still be a patchwork because state courts often issue different interpretations of the same UTSA provision.

Trade secret owners, employees, and others in the knowledge economy incur the costs of this state-by-state approach. Facing different laws in different states, they are left to deal with the resulting complications that come with attempts to comply with each state’s laws. And once a dispute arises, these differences also impose costs on courts and litigants, who wage needless battles over forum shopping and choice of law. A federal statute would eliminate these differences and achieve other benefits, such as easing nationwide service of process and discovery.

This isn’t the first time I’ve endorsed some form of a federal trade secret statute. I did so in a 30-page law review article in 2009 and in a five-page Law 360 article in 2013.

I’m not alone in my support of a federal trade secret statute generally and the DTSA specifically. Senator Coons’s April 29, 2014 press release notes that the DTSA has the backing of the National Association of Manufacturers, the U.S. Chamber of Commerce, and dozens of companies, including 3M, GE, Microsoft, and P&G. The AIPLA’s Trade Secret Law Committee recently voted to endorse the DTSA (disclaimer: I was one of the voting members). And other organizations, including the ABA’s IP Section and the Commission on the Theft of American Intellectual Property, announced support for some form of a federal trade secrets act in 2013.

A Criticism

Where the DTSA stumbles is in its promise not to “preempt any other provision of law.” This causes two problems.

First, the need for the DTSA stems in part from state-by-state variations in trade secret laws and the transactional and substantive problems that such variations impose. The DTSA leaves those variations in place. Worse, the DTSA adds another law to the already cluttered landscape of 48 UTSA states (with their variations), two non-UTSA states, the federal Economic Espionage Act, and a federal common trade secret law.

Second, the DTSA opens a backdoor to common-law and other causes of action that are precluded in most states. The UTSA “displaces tort, restitutionary, and other laws…providing civil remedies for misappropriation of a trade secret.” The DTSA doesn’t displace anything.

Under the DTSA, trade secret plaintiffs would have the option of pursuing their claim in state or federal court and, if they choose federal court, the additional option of asserting duplicative causes of actions that aren’t available in state courts.

Why I Still Endorse the DTSA

Trade secrets are the only major type of intellectual property (i.e., copyrights, patents, trademarks, and trade secrets) not governed primarily by a federal statute. Copyrights and patents got theirs in the 1700s. Trademark got its in the 1800s. Now that we’re firmly in the information age, it’s time for trade secrets to join their peers.

True, the DTSA is only a partial step toward uniformity, as it leaves the current state-law regime in place and doesn’t preempt overlapping causes of action. But in the absence of a complete transition from a state-based trade secret regime to a federal one, the DTSA is an important step in the right direction.

This post by David S. Almeling does not purport to represent the views of O’Melveny or its clients.

A Risk of Moonlighting

by Dennis Crouch

Despite California’s policies limiting non-compete agreements, the law still lays an implicit powerful fiduciary duty on employees. The (proposed) Restatement (Third) of Employment Law indicates that competition by current managerial employees violates the duty of loyalty but that a manager has the right to “prepare to compete.”  One question that arises from the facts of the case below is whether an employee who obtains patents on-the-side in preparation to compete is somehow violating his fiduciary duty.

Robert Kulakowski v. Verimatrix, Inc. (Cal. Appellate Ct. 2014) Decision Text

Back in 2000, Kulakowski helped to found Verimatrix – acting as the company’s chief technology officer (CTO) and directing product development. The company makes video encryption security systems known as Conditional Access Systems or CAS.

In his last year with the company, Kulakowski began working on side projects. As part of that process, he was able to modify his IP and non-compete agreement with Verimatrix to clarify that he did not need to disclose to Verimatrix any inventions “conceived, reduced to practiced or developed by [Kulakowski] in [his] own time; without using the Company’s equipment, facilities, or trade secret information; and which is not the result of work performed by me for the Company.”  Meanwhile, Kulakowski founded a new company (Secure TV) in May 2010 also operating in the CAS market but then expressly denied to his Verimatrix boss that the new company was in the CAS market.  In September 2010 Kulakowski left Verimatrix and then filed a patent application known as Dynamic Obfuscation Processing.

This case arose when Kulakowski filed a declaratory judgment action in California state court asking for a ruling that Verimatrix held no right to title or interest in the new patents.

Following a bench trial, the lower court ruled in favor of Verimatrix — holding (1) that declaratory relief is not called for at this time because the patent applications are pending and may still be amended; and, alternatively, (2) that Kulakowski’s claim for equitable relief should fail because of his unclean hands based upon his breach of fiduciary and contractual duties owed to the company while he was still employed.

Seeing some of the logic of the lower court, Kulakowski accepted that the DJ action was not ripe appeal. However, he appealed the unclean portion of the opinion — arguing particularly that the lower court’s DJ decision was effectively jurisdictional with the consequence that the court lacked jurisdiction to then decide the unclean hands defense.  That conclusion follows from the notion that a court who lacks subject matter jurisdiction has no power to make any findings on the merits of a proceeding.

On appeal, the California appellate court rejected Kulakowski’s arguments and affirmed  the lower court ruling.  Here, the appellate court found that the lower court’s first ruling on the DJ action for practical reasons, not for jurisdictional reasons.

If a court decides for practical reasons it is not necessary or proper to grant declaratory relief, there is no jurisdictional prohibition to the court making alternate findings based on the evidence before it.

The case may be revived once the patents issue or a more concrete dispute arises at that point the court will need to address whether the unclean hands decision here has a preclusive effect.  The appellate court expressly refused to “offer any opinion on the extent to which the court’s alternative findings are binding on either party under res judicata or collateral estoppel doctrines.”

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)

Client, Firm Lose 12(b)(6) Motion to Inventor who Claims Firm Stole his Trade Secrets

Nicolo v. Patterson Belknap Webb & Tyler, LLP, is a suit brought by an inventor-patentee who claims that a Patterson attorney met with him under the guise of seeking to represent him in a suit against third-parties, while the real purpose was to obtain information for its client, Ethicon.  The judge recently denied the defendants’ 12(b)(6) motion, reasoning that Pennsylvania law protects against mere acquisition of trade secrets through improper means (subsequent use/disclosure need not be alleged, in other words).  The opinion doing so is here.

In addition to the obvious lessons, at the Emory conference I mentioned, one of the panelists asked how often large corporations take advantage of solo inventors. If the allegations here are true, this could be one such example.  “Troll” is a word that might have been applied to the inventor had he sued Ethicon, in other words.

Stay tuned.

Federal Circuit: Preliminary Injunctions More Available in Trade Secret Cases (Than in Patent Cases)

Core Labs v. Spectrum Tracer Services (Fed. Cir. 2013)

This case is about stopping former employees from becoming marketplace competitors. Two of Core Labs employees left the company and started a competing firm (Spectrum) servicing the hydraulic fracturing (fracking) industry. Core sued alleging trade secret misappropriation (under Texas Law), copyright infringement and patent infringement. During the lawsuit, Cole received the following email from a new Spectrum employee/whistleblower:

I recently have been contracting with Spectrum. . . . Not long ago I was handed some documents that have your company logos and such on them and had them ask me to recreate the same functionality in other documents and programs for them. From what I have been able to learn I believe you have been in a law suit with my company, and I am not very happy with trying to re-create someone else’s work. I have provided one of the worksheets I have been provided with and have others I can provide if they would be of any assistance. I am not sure if you gave my company permission or not to use these, but it is my intention to learn what the truth of the matter is.

The documents were in fact a copy of Core’s particular Microsoft Excel template file that it used to for its fracking services. In addition to making calculations, the file also includes some customer and price lists. And, the whistleblower had been asked to “incorporate field work functions” into the Spectrum software he was developing.

Despite this evidence, the district court rejected Core’s plea for a preliminary injunction based on the company’s failure to show irreparable harm due to ongoing infringement. On appeal, however, the Federal Circuit has reversed and ordered that the preliminary injunction be instituted.

Patent plaintiffs have been having some difficulty proving irreparable harm at the preliminary injunction stage. Here, however, the Core Labs requested the PI as a mechanism to support its Texas state law trade secret rights. Under Texas state law, a defendant’s possession of a plaintiffs’ trade secret rights is sufficient to create a presumption of irreparable harm. In general, irreparable harm tends to be easier to show in trade secret cases as compared with patent cases since information secrecy is so difficult regain once it is lost. The U.S. Supreme Court wrote on this point in a 1984 Monsanto case: “The economic value of [a trade secret] lies in the competitive advantage over others that [the trade secret holder] enjoys by virtue of its exclusive access to the data, and disclosure or use by others of the data would destroy that competitive edge.”

= = = = =

In most cases, parties must wait until to appeal until a district court makes its final decision concluding the case. However, the appellate jurisdiction statute provides for interlocutory appeals based on a district court’s grant or denial of injunctive relief. 28 U.S.C. 1292. One interesting aspect of this case is the fact that the Federal Circuit has jurisdiction (rather than the 10th Circuit Court of Appeals since the District Court is located in Oklahoma). The Federal Circuit has jurisdiction over patent cases, but the original complaint (filed in Texas in March 2011) did not include a patent claim. The Texas District court granted defendants’ motion to transfer the case to Oklahoma (10/2011). The plaintiff (Core) later added the patent infringement claim alleging infringement of U.S. Patent No. 6,659,175. Spectrum then filed an inter partes reexamination request and the district court litigation stayed pending resolution of that USPTO procedure. What is unclear to me is how (under old §1295) is how this case “arises under” the patent laws.

= = = = =

Section 101 issue? The claims of the ‘175 patent are interesting because they look very similar to those invalidated by the Supreme Court in Mayo v. Prometheus. In the fracking process, liquid is injected into the well to create small fractures in the subsurface in order to allow better access to the valuable hydrocarbons. For environmental reasons, it is important to recover as much of the injected liquid as possible (it basically squirts back out under pressure). Thus, it is important for the process to measure amount of fluid recovered. The proposed method here is to add a “chemical tracer” to the injected liquid and then use the concentration of chemical tracer recovered as a basis for measuring the amount recovered.

1. A method for determining the extent of recovery of materials injected into a oil well comprising the steps of:

a) preparing a material to be injected into an oil well;

b) admixing therewith a chemical tracer compound at a predetermined concentration;

c) injecting the admixture into an oil well;

d) recovering from the oil well a production fluid;

e) analyzing the production fluid for the concentration of the chemical tracer present in the production fluid; and

f) calculating the amount of admixture recovered from the oil well using the concentration of the chemical tracer present in the production fluid as a basis for the calculation.

= = = = =

As per its usual, the Federal Circuit did not enter into a debate on the benefit/detriment of invention in question – here fracking.

Contractual Override of Trade Secret Law

By Dennis Crouch

Convolve and MIT v. Compaq and Seagate (Fed. Cir. 2013)

MIT has a long history with patent enforcement, including its historic link with Franklin Pierce Law Center (now UNH) and housing of the Lemelson-MIT Program. Of late, the not-for-profit institution has become quite a patent plaintiff. In addition to this case, MIT is the patent-owner-plaintiff in the Akamai and Ariad cases as well as many others. This case reaches back more than a decade when MIT and Convolve sued a group of defendants for both trade secret misappropriation and infringement of its U.S. Patent Nos. 6,314,473 and 4,916,635. In 2007, the Federal Circuit decided a prior appeal in this case on mandamus – In re Seagate Tech., LLC, 497 F.3d 1360 (Fed.Cir. 2007) (en banc) (holding that willful patent infringement at least requires showing of objective recklessness).

The present case began with a non-disclosure agreement and then failed license negotiation between Convolve and Compaq. The signal shaping technology in question is useful in computer read/write operations and Convolve agreed that Seagate (Compaq’s hard drive supplier) could be included in the conversation. No license was reached but Convolve and MIT sued two years later when the features (allegedly) showed up in Compaq/Seagate technology.

Contractual Override of Trade Secret Law: The main trade secret problem for Convolve in this case is the language of the non-disclosure agreement (NDA) that the parties signed. The agreement states that any confidential material or presentations must be particularly identified as confidential and Convolve was unable to show that it followed the procedures required by the NDA. In addition the trade secret claims regarding marketing information failed under NY law because NY trade secret law does not extend to marketing concepts. The Federal Circuit writes:

[B]arring waiver of the NDAs marking requirements (discussed below) we conclude that Seagate did not breach the NDA to the extent it may have appropriated the information disclosed. Because the disclosure of the information was not subject to the confidentiality obligations of the NDAs, moreover, barring some other basis upon which to predicate a promise of confidentiality (which we also discuss below) information relating to those ATSIs lost any trade secret status it might have had upon disclosure.

A major legal and practical point here, that should already be well understood, is that is that a contractual agreement to transfer otherwise secret information will override trade secret protections that may be in place.

Patent Infringement: The district court also dismissed the patent infringement side of the action based upon a finding of non-infringement. On appeal, the Federal Circuit vacated that decision – finding that sufficient factual dispute existed to allow the plaintiff to overcome the summary judgment motion of non-infringement for the ‘473 patent.

While a very close call, we find that Convolve presented enough evidence to preclude summary judgment on its inducement claims. Convolve did not merely demonstrate that the drives are capable of infringing, but provided evidence of specific tools, with attendant instructions, on how to use the drives in an infringing way. Unlike Fujitsu Ltd. v. Netgear, Inc., 620 F.3d 1321 (Fed. Cir. 2010), upon which the district court relied, the evidence here does not demonstrate that the infringing option in the Seagate drives was disabled by default. See Toshiba Corp., 681 F.3d at 1365 (analyzing the holding in Fujitsu). Accordingly, given the procedural posture in which the claim is presented to us, we conclude that Convolve may proceed with its inducement claims on remand.

Thus, on remand, the case will continue to determine whether the ‘473 patent was actually infringed.

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).

Trade Secrets and Published Patent Applications

Tewari De-Ox Systems v. Mountain States (5th Cir. 2011)

In 2005, Tewari’s CEO (Dr. Tewari) visited Mountain Systems (MTSR) to demonstrate his “zero ppm oxygen meat-packing method” that greatly extends the shelf life of packaged meats. Prior to the demonstration, the two companies signed a non-disclosure agreement (NDA).  When MSTR allegedly began using the method without permission.

The major catch in Tewari’s breach of trade secret argument was that the bulk of the disclosed method could also be found in Tewari’s already published patent application. (The application was abandoned after receiving a final rejection on obviousness grounds).

Trade secret is derived from state law.  Under Texas law (the law of this case), a successful trade secret plaintiff must prove that (1) a trade secret existed; (2) the trade secret was “acquired through a breach of a confidential relationship or discovered by improper means;” and (3) that the trade secret was then used without authorization.

Patent Publication Eliminates Trade Secret: In a straightforward opinion, the appellate panel held once published, the information in a patent application should be considered “generally known and readily available” and therefore are no longer amenable to trade secret protection.

Tewari argued that the patent application publication should not matter in this case because the defendants obtained their information from him in a confidential transaction rather than from the public source. The appellate court, however, rejected that argument because the application was already published at the time of his disclosure.  (The court noted that the source of defendant’s trade secret knowledge may be important for trade secret analysis if the publication occurred subsequent to the fiduciary relationship.)

Although the material disclosed in the patent application is not protectable under Texas trade secret law, the court held that Tewari may have transferred protectable information that was not in the patent application — such as specific information regarding making and using the invention that was not particularly identified in the patent application.

Remanded for further consideration.

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.”


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.


  • 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?

The Trade Secret Value of Early Patent Filing

Patent.Law168The patent laws promote an early filing doctrine.  Most directly, by filing patent application documents early, an applicant can avoid problems created by pre-filing disclosures that can negate patentability.[1]  Inter alia, early filing also provides a presumptive date of invention and reduction to practice that may have important evidentiary benefits for the applicant.[2]  Some doctrines push against early filing. Notably, earlier filed applications may be more likely to have inadequate disclosure.  A rushed disclosure could result in the patent application being rejected under the utility, written description, or enablement requirements of the Patent Act.[3] Alternatively, if the application is filed prior to gaining an understanding of the eventual market, an applicant may have insufficient disclosure to support the most valuable claims potential. 

Going unrecognized is another benefit of early filing – the ability to keep secret later developed innovations and parameters.  That secret information can then be protected and exploited as trade secret information.

At the time of filing, the applicant must provide a complete description including the best mode contemplated by the inventor. However, many if not most patent applications are filed well before the associated product or method is ready for public consumption – before the inventor knows the best commercially viable mode.  Post-application developments could take any number of forms, such as particularly operative formulations; ideal antibiotic manufacturing parameters; software code that implements a novel algorithm; a more durable circuit arrangement; etc. Commonly, these tweaks and advances may take the form of a specific species of a disclosed and claimed genus.  Of course, this later-stage developments could be incredibly important to anyone wanting to practice the invention or develop some follow-on technology.

Even though product development typically continues after the patent application is filed, the law allows the patent applicant to legitimately keep any later developed information as trade secret.  Patent applications are not allowed to add ‘new matter’ to a patent application during prosecution. Likewise, the applicant has no duty to otherwise inform the patent office or the public of ongoing development. Rather, the application is set at filing and ex post developments are generally irrelevant to patentability.[4]

In a later post, I’ll explore whether this potential overlap of patent and trade secret rights is good from a policy perspective.

[1] 35 U.S.C. §102(b).  This is especially critical if filing foreign applications.

[2] See, for example, 35 U.S.C. §102(g) and §102(a).

[3] See 35 U.S.C. §101 and §112¶1.

[4] There may be some exception here when arguing secondary factors of nonobviousness.