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As patents become harder to protect, trade secrets emerge as viable option

This article appeared in the February 2015 issue of Technology Transfer Tactics. Click here for a free sample issue or click here to subscribe.

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Recent legislative and legal changes to patent protection paired with enhancements to trade secret protection have many technology transfer executives wondering if foregoing the high cost of patenting in favor of trade secret protection might be a better move in some cases. But while trade secrets may have a legitimate place in a TTO’s overall IP tool chest, keep in mind that keeping knowledge under wraps runs directly counter to a university’s educational mission, and favoring trade secret protection over patents can stymie licensing efforts, which remain a mainstay of TTO activity and revenue.

The patent environment clearly is changing and policy makers are looking to change it even more. “There’s an apparent misplaced view in Congress and maybe at some of the higher courts that patent protection is not good and trade secret protection is,” comments Charles R. Macedo, Esq., a partner at Amster Rothstein & Ebenstein LLP, New York. “That’s resulting in a cloak over innovation and development. It’s precluding the world from knowing what’s been developed.”

One major factor in a growing negative view of patents is the recent Supreme Court ruling in Alice Corp. v CLS Bank International, in which the justices determined that certain claims about a computer-implemented electronic escrow service involved abstract ideas that were ineligible for patent protection. In Alice, Macedo notes, the Court decision has been read by some to say that “some types of patents were too broad, too extreme, and wouldn’t it be better if we didn’t have them.” It resulted in putting more than 100,000 patents at risk of invalidation, he adds.

Concurrently, there’s movement in Congress to craft a national trade secret protection bill. According to Peter J. Toren, a partner at Weisbrod Mattels & Copley PLLC, Washington DC, if enacted the bill would “unify the state trade secret laws” and elevate trade secret protection to the federal level. Almost all states have adopted the Uniform Trade Secrets Act, he explains, “but there are still differences as to requirements,” plus a few critical states including New York and Massachusetts haven’t adopted the UTSA. “A unified law would remove the patchwork quality.” In addition, he says, such a measure would, from an image standpoint, recognize trade secrets on a par with copyrights, trademarks and patents and would “provide a key to the federal courts. Right now, unless there’s another basis to get into federal court”– jurisdictional diversity, for example — “the case will be in state court, where many lawyers would prefer not to practice.”

Notes John Strand, a shareholder at Wolf Greenfield & Sacks PC, Boston, “if Congress adopts a law that looks like the UTSA, but on a national scale, it could bring complete uniformity to the laws. Such uniformity would be good, as it would add more predictability to applying the law.”

On top of the legislative happenings, a recent lawsuit has also served to bolster the validity of trade secrets. In Altavion Inc. v Konica Minolta Systems Laboratory, a California appellate court broadened the definition of what information can qualify as a trade secret.

Compare and contrast

These dovetailing developments have some tech transfer executives wondering how the two options compare and contrast, and which to use for optimal IP protection.

“The general definition of a trade secret is something that is not generally known to the public, provides some benefit to the holder of the secret as a result of it not being known, and that the holder exercises reasonable care to prevent from being generally known,” notes Jim Baker, PhD, executive director of innovation and industry engagement at Michigan Technological University, Houghton. “Practical issues include maintaining the information in a secure location and limiting access to the information to only people who need to know it and are subject to appropriate non-disclosure obligations.”

Adds Wes Blakeslee, head of Blakeslee LLC, a new legal and consulting firm formed by the former head of the Johns Hopkins TTO, “to protect a trade secret, you must treat it as a trade secret. You must take measures to avoid widespread disclosure and your employees must be made aware, usually through confidentiality agreements, that your internally protected information is to be kept secret. The Coca-Cola formula may be one of the most famous trade secrets.”

Trade secrets and patents are “somewhat mutually exclusive,” Toren points out, because “if you go the patent route, once the information is published in a patent application you lose trade secret protection.” Because patent apps are published 18 months after the date of filing, he adds, “when you pursue a patent, for the first 18 months, the information is also a trade secret. But once it’s published, you lose that protection. Still, even if you file certain things in the app, the other parts that aren’t disclosed [can] remain a trade secret.”

The two types of protection are not, Baker emphasizes, “truly mutually exclusive, and which is better or worse depends on the specific circumstances of a particular situation.” If the discovery can be reverse engineered, he explains, trade secret protection is not available, so a patent is the only option for protection. “Otherwise,” he advises, “consider factors such as publication interests and whether the discovery can be parsed into disclosable and secret components and how best to achieve maximum public benefit from the discovery by leveraging all available tools for proprietary protection.” Unlike most intellectual property, Strand adds, there is no way to ascertain before litigation that you have a trade secret. “There is no means by which one can register a trade secret with the government, such as with a patent or copyright,” he says. “One just has to make sure to maintain the information as secret to preserve the trade secret.”

He adds: “Several factors should be evaluated when deciding between patenting or maintaining a trade secret, including the cost of patenting versus the costs of maintaining the secrecy of the technology; the risk of the trade secret being disclosed even with the best protection plan (the Internet and ease of data transfer has made the disclosure of trade secrets more likely than ever); and the licensing potential of the technology (if the technology will be licensed to many parties, increasing the risk of a disclosure, it is better to patent the technology).”

Here are some additional considerations:

  • Is your invention one of the types that are the best candidates for trade secret protection? According to Strand, these include “any invention or information that is difficult or impossible to reverse engineer to arrive at the trade secret, including software inventions if the source code is adequately protected and inventions related to chemical manufacturing where it is impossible to determine how the final chemical was manufactured.”
  • How do you establish liability for trade secret theft and determine the actual loss? That’s tough, Blakeslee warns, but it can be done. “Often there is a paper trail via an employee who leaves and takes, for example, the secret customer list,” he explains. “Rarely is there espionage; typically, trade secrets walk out with a departing employee. Normally, trade secret theft is discovered when the competitor suddenly demonstrates knowledge of the secret. If you have enough to file suit, discovery can often demonstrate that the competitor did not possess the knowledge until your former employee arrived.” Strand adds that “the courts are strict in their evaluation of trade secret misappropriation cases, placing the burden on the alleged trade secret holder to specifically identify the misappropriated trade secret and show how the trade secret was well-protected and how the alleged thief misused the trade secret.” Usually, he points out, the last element can only be determined through discovery in litigation. “As for calculating damages,” he continues, “it can be difficult. The measure of damages can differ depending on the case, but a common form of damages is ‘lost profits,’ where the trade secret owner shows that if the other side didn’t have the trade secret, it would not have made the sales and the trade secret owner would have made the sales instead. It’s a factually intensive inquiry, however, and is difficult to prove.”
  • How do you determine what constitutes “negative know-how,” and how do you make sure it carries trade secret protection? The concept simply refers to “the idea that knowing that a particular method or idea does not work can be just as valuable as knowing how something works,” Strand comments. But it’s a tricky doctrine rarely used by courts, he adds. “Although it is recognized by the UTSA,” he says, “such a trade secret is so amorphous that it’s difficult to specifically identify. Courts look for specificity when evaluating trade secret claims, so many times such claims won’t hold up.” Even if the negative know-how can be specifically identified, it’s difficult to show the accused party did not do something because of it. “If you really want to protect negative know-how,” he counsels, “well document all development efforts, including everything that didn’t work. Then make sure all of that documentation is kept as confidential as any information about how something did actually work.”

Consider your mission

There’s one additional consideration, and it may be the most difficult for tech transfer offices to reconcile. “The existence of a trade secret in a license must be approached cautiously, since a trade secret is contrary to the education and public service mission of the university,” stresses David J. Aston, a partner at Peters Verny LLP, Palo Alto, CA. “A protectable trade secret in a university would be the exception, not the rule,” Aston says. “Most universities, to my knowledge, do not have provisions in their intellectual policy addressing trade secrets.”

Most would require a secrecy agreement to allow a company to see unpublished information detailing a potential invention to be licensed, he adds, and in the language of a university license document, one might see terms such as “proprietary information” or “technical information” — both of which may well denote trade secrets. Universities “customarily treat computer software and biological materials as trade secrets in this sense,” he says. “The licenses may characterize the property being licensed as tangible or copyrighted, but apart from these categories, I think that a pure trade secret license would be quite rare in a university setting.”

Strand agrees. “I think most TTOs at universities prefer patents,” he says. “The primary goal of such offices is to transfer usable ideas from the university to companies that can use the technology and benefit society. Trade secrets are antithetical to spreading knowledge for the public good and increasing research visibility.”

Blakeslee adds: “I doubt that universities will actively encourage keeping otherwise publishable information secret, and the nature of a university is such that any research secrets are hard to keep. You don’t have students or faculty sign confidentiality agreements, and sharing how things are done is part of the instruction process.”

That’s exactly the situation at the University of California at San Diego. “We do not claim or license trade secrets, since it would be impossible to police in an academic setting,” reports David Gibbons, PE, MBA, assistant director of physical sciences licensing in the TTO there. “Many licensees ask for it, but there is no way we could assure compliance by the labs, so we’d be opening the UC up for major liability.”

There are operational roadblocks, too, notes Christopher F. Wright, a partner at McCausland Keen & Buckman, Radnor, PA. “In most instances, faculty, staff and students are not bound by written confidentiality obligations,” he points out. “Is this lack of a written confidentiality undertaking ‘reasonable under the circumstances’ to give rise to a potential trade secret? If there is no trade secret status but the information remains confidential — for example, it’s still only in the mind of the principal investigator — is it appropriate for the university to transfer or license the confidential information on an exclusive basis to a commercial entity and thus limit the further dissemination of the knowledge?”

He continues: “When I am representing a commercial company that is seeking an exclusive license from a university to technical information that is or may become a trade secret, I counsel my client to seek written NDAs from each person who has access to the information and to directly discuss in advance with all researchers the limits on their publication rights that they are voluntarily undertaking by signing the NDAs. Thus, even if the technical information may only be confidential information in the hands of the university, it may still become a trade secret for my client after the license is signed.”

A middle ground?

With that in mind, he notes, there is, in most license agreements and sponsored research contracts, “a publications clause that says basically that there will be a hiatus for publication to make sure nothing that’s confidential gets published by accident.” That’s also an opportunity to get a provisional patent application on file. “That’s different from saying, ‘You can’t publish,’” he emphasizes. The company it’s licensed to may choose to take the information and continue to mold it and turn it into a trade secret later. The researcher gets to publish, the university gets to license, and the company gets to keep trade secrets secret.

Of course, any approach to trade secrets should start with a conversation with a lawyer. TTOs should “really work with the attorneys in their general counsel’s office or with outside attorneys who have knowledge about this area on how to proceed from a business perspective and a legal perspective,” Toren says. In addition, Wright advises, “you’ve got to look at state law. Sit down and take a look at your state’s version of the UTSA and the statutes and case law in your state to define how it’s been interpreted.”

Trade secrets are worth finding out about, and may be a useful option for TTOs in select cases. “I wouldn’t say that we necessarily plan to treat IP as a trade secret more in the future than we have in the past,” Baker comments, “but it is certainly more prevalent on our list of options as we look at commercialization strategies and proprietary protection plans.”

Aston adds, “patents are still the basic coin of the realm in the world of university licensing; however, hybrid patent-technology licenses are well known to most sophisticated tech transfer offices. Given recent court decisions eroding patent protection, I would venture to say that trade secret licensing in university licenses is on the upswing.”

Contact Macedo at 212-336-8000 or cmacedo@arelaw.com; Toren at 202-499-7912 or ptoren@wmclaw.com; Strand via MSL Group’s Caitlin Mahler at caitlin.mahler@mslgroup.com; Baker at 906-487-2228 or jrbaker@mtu.edu; Blakeslee at 410-259-5529 or at wes@wesblakeslee.com; Aston at 650-324-1677 or atdjaston@petersverny.com; Gibbons at 858-534-0175 or at dgibbons@ucsd.edu; and Wright via Crystal Garcia at 610-341-1072 or at cgarcia@mkbattorneys.com.


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