Trade Secrets – A Viable Alternative to Patents

All three branches of the U.S. government have attacked the patent system in the past year. Congress is considering amending patent law to curtail litigation by nonpracticing entities, or “patent trolls,” as they’re pejoratively known, even though their impact on the patent system is open to debate. President Barack Obama compared patent trolls to extortionists. And the U.S. Supreme Court ruled against patent owners in five cases in the past term, overturning five of the six decisions from the U.S. Court of Appeals for the Federal Circuit involving questions of patent law. Accordingly, inventors should consider alternatives to patent law to protect their valuable intellectual property, including most importantly the use of trade secrets.

While trade secrets cannot fully replace patent protection in all respects, they do offer a viable alternative to patents for protecting intellectual property in some cases. In addition, while the value of patents in protecting IP has been under attack this year, trade secret protection has been on the rise with, for example, the California appellate court decision in Altavion, Inc. v. Konica Minolta Systems Laboratory, 226 Cal.App.4th 26. 171 Cal.Rptr.3d 714 (1st Dist. 2014) that broadened the definition of what information can qualify as a trade secret. Moreover, there is a real possibility that Congress will finally pass a civil trade secrets protection law, which will mean that trade secrets will not be considered patent’s ugly step sister any longer.

Unlike patents, state law governs the protection of trade secrets. Almost every state has adopted a variation of the Uniform Trade Secrets Act (UTSA) that generally provides protection to any formula, pattern, device or compilation of information and provides a competitive advantage. The “sine qua non “of a trade secret is that the information is secret. The owner must also take reasonable steps to maintain the secrecy. However, trade secret protection does not protect the independent development of the secret.

Prior to recent weakening of patent rights, the two most important advantages of trade secret protection as compared to patent protection were that trade secrets could theoretically be protected forever and the relative low cost in obtaining trade secret protection. Similar considerations apply with respect to licensing. Trade secrets, unlike patents can be licensed forever. The right to obtain patent royalties ends upon the expiration of a patent. Brulotte v. Thys Co., 379 U.S. 29 (1964).

Now, however, recent Supreme Court decisions that have narrowed the scope of patent protection have, at the very least, highlighted some of the other advantages of trade secret protection. For example, the patent at-issue in Alice Corp. Ltd. V. CLS Bank Intern. 134 S.Ct 2347, which describes the method for mitigating settlement risk and which the Supreme Court held to be invalid because it was simply an abstract idea implemented by a computer, could still have been protected as a trade secret had the inventor kept the method secret and not published it in the patent application. Because the Court found that it was not patentable subject matter, anyone is free to use the invention. The inventor would have better off in keeping the commercially valuable information secret if patent protection was uncertain.

Trade secret protection can extend to virtually any type of information that is secret and provides an actual or potential economic advantage over others. Indeed, this can include negative know-how (what doesn’t work) can be protected as a trade secret but not as a patent. This type of information can be particularly valuable since knowing what doesn’t work can save a company substantial research and development costs that can then be put to use in a potentially more lucrative manner.

Another important potential advantage of trade secrets is that in many instances it can be much easier to establish liability for trade secret theft than to establish patent infringement. To establish literal infringement, the accused product must include each and every element of a single claim in order to literally infringe that claim. Otherwise the claim of infringement must rest on the doctrine of equivalents which since the Supreme Court decision in Warner-Jenkinson Co. v. Hilton Davis Chemical Co., 520 U.S. 17 (1997) has become very limited. In addition, the Supreme Court recently narrowed the scope of contributory infringement in Limelight Networks Inc. v. Akamai Technologies Inc., 134 S.Ct. 2111 (2014) in which it reversed the Federal Circuit holding that a defendant is not liable for inducing infringement under 35 U.S.C. § 271(b) when no party has directly infringed under Section 271(a) or any other statutory provision.

In comparison, a finding of trade secret misappropriation does not require a showing that all the elements have been copied. Instead, it can rest on access and substantial similarity. Thus, where the defendant cannot rebut these elements by establishing independent development of the infringing product, then the defendant is likely to be found liable for trade secret misappropriation.

Another important trade secret advantage is the limitations that have been placed on the recovery of patent damages. In particular, the plaintiff in a patent case must show actual damages and there is no recovery for unjust enrichment. 35 U.S.C. § 284. In contrast, damages for trade secret misappropriation can include both the actual loss caused by the misappropriation and the unjust enrichment caused by misappropriation that is not taken account in computing actual losses. UTSA § 3(a). The availability of unjust enrichment as a remedy may lead to a substantial award.

Other potential advantages for trade secret protection are the lower bar to recover increased damages for willful and deliberate misappropriation as compared to willful and deliberate infringement in a patent suit and the relative ease that a victim of trade secret misappropriation may be entitled to an injunction as compared to owner of a patent after the Supreme Court’s decision in eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), which overturned the presumption of granting automatic injunctions upon a finding of patent infringement. In contrast, because once trade secrets are disclosed they are lost forever, an injunction to prevent trade secret misappropriation and use can be issued to prevent both “actual” or “threatened” misappropriation and use.

Perhaps, up until now, the greatest potential downside for protecting information as a trade secret was the lack of a federal civil trade secret law. The Economic Espionage Act, which provides criminal liability for trade secret misappropriation, currently only authorizes civil actions by the Attorney General but not private parties. Accordingly, unless diversity jurisdiction exists or there is some other basis for jurisdiction there is no basis to bring a civil trade secret action in a federal court. Instead plaintiffs are left to assert trade secret claims in state court under various state statutory adoptions of the UTSA. Because there are inconsistencies and differences among the states concerning their specific adoption of the UTSA and state court’s interpretation of critical components, companies may be faced with differing and conflicting standards when attempting to protect their trade secrets.

While Congress has for many years considered the possibility of creating a civil cause of action for private litigants in federal court for trade secret misappropriation, the bills never went very far. However, there are currently civil trade secret bills pending in both the Senate and the House that may or may not be acted upon during this lame duck session. Regardless, the chances for enacting a civil counterpart to the EEA in the next session of Congress remain strong.

While trade secrets cannot replace patents in all instances, they do offer a number of advantages over patents, especially where the inventions are easily kept secret and are incapable of easy reverse engineering. Accordingly, companies should seriously consider the use of trade secrets in their overall intellectual property protection program. In addition, the passage by Congress of a civil trade secrets bill would provide considerable momentum to the use of trade secrets as an alternative to patent protection.