Avoiding
Trade Secret Misappropriation
Qualifying
Information as a Trade Secret
Is a Padlock Better than a Patent? Trade Secrets vs. Patents
By Mimi C. Goller
Editor's Note: To view Wisconsin
statutory materials referenced in this article you must have and/or
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In today's extremely competitive corporate environment, know-how and
technology are key factors in the commercial success of a business, and
businesses must determine whether to protect this valuable information
under a patent or a trade secret. Making the wrong decision regarding
which type of intellectual property protection to use could cost a
company thousands or millions of dollars, and a competitive advantage.
Therefore, a business must make a detailed analysis to determine the
appropriate form of protection. This article 
reviews the various advantages and disadvantages with trade secrets
and patents, and provides some important factors to consider when
determining which form of protection to use.
Trade secrets
A trade secret is defined as any formula, pattern, device, or
compilation of information that is used in one's business that gives it
an advantage over competitors who do not know or use it.1 There are many advantages and disadvantages with
trade secret law.
Advantages. Unlike patent protection, which has a
limited term, trade secret protection can be of unlimited duration. For
example, Kentucky Fried Chicken's blend of 11 herbs and spices has been
a well-kept trade secret for more than 37 years2 and Coca-Cola's soda formula has been a valuable
trade secret during the 100 years since its original formulation.3
Then, there is cost: Trade secret information can be relatively
inexpensive. For example, there are no government fees associated with a
trade secret. In addition, there are no attorney fees for drafting and
prosecuting a trade secret, unlike for a patent application. However,
various secrecy protection measures, such as computer security measures,
employee nondisclosure agreements, employee exit interviews,
secured/encrypted electronic communications, external audits, access
restrictions, photocopying restrictions, and employee education
programs, necessary to maintain trade secret status can be costly.
Further, a trade secret does not have to meet the high patentability
standards of utility, novelty, and nonobviousness. As a result, the
subject matter protectable as a trade secret is extremely broad and can
include chemical formulas, recipes, algorithms, internal pricing,
methods of doing business, customer lists, special customer needs, codes
for determining discounts, customer credit ratings, architectural plans,
manufacturing techniques, marketing and advertising plans, product
development information, personnel information, and computer software.
Even the genetic content of seeds4 and
"negative know-how" (that is, knowledge that a certain approach to a
problem does not work) have been found legitimate trade secret subject
matter.
Additionally, trade secret misappropriation, unlike patent
infringement, now can be prosecuted under criminal statutes. A new
statute, 18 U.S.C. 1832, dubbed the Economic Espionage Act of
1996 (the Act), was signed into law on Oct. 11, 1996. The Act makes
theft of trade secret information a federal criminal offense and gives
the Department of Justice authority to prosecute trade secret theft
whether it occurs in the United States or abroad.5 The penalties under the Act are severe. Violators
of section 1832 can be imprisoned for up to 10 years and fined up to
$500,000. A corporation or other organization can be fined up to $5
million.6
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"Competition is ruthless, unprincipled, uncharitable,
unforgiving and a boon to society."
Adam Smith
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The Act punishes the individual who misappropriated the trade secret and
makes it a federal criminal offense to receive, possess, or buy the
trade secret information knowing that such information was obtained or
stolen without the trade secret owner's authorization. Criminal
forfeiture provisions allow forfeiture of any property constituting or
derived from the proceeds of Act violations.
Two basic elements are required to prove theft of a trade secret
under the Act. First, federal prosecutors must prove that the individual
accused of misappropriating the trade secret did so knowingly. Second,
the law requires proof of intent to injure the trade secret owner. This
second element has drawn sharp criticism due to the difficulty in
obtaining evidence proving an intent to cause injury; therefore, this
law may be challenging to enforce.7
In the past, trade secrets were exclusively under state jurisdiction.
Under the Act, federal courts have exclusive original jurisdiction, but
the law states that it shall not be construed to preempt or displace any
other remedies, civil or criminal, relating to the misappropriation or
theft of a trade secret.
Wisconsin has a specific statute, section 134.90,
that governs trade secret misappropriation.8
When examining an alleged violation of section 134.90, three questions
must be answered. 1) Is the material at issue a trade secret under the
definition in section 134.90(1)(c)? The definition requires that the
"information derives independent economic value, actual or potential,
from not being generally known to and not readily ascertainable by a
proper means, by others who can obtain economic value from its
disclosure or use." The definition also dictates that the information be
subject to secrecy efforts.
2) Has misappropriation of the trade secret occurred?
"Misappropriation" under section 134.90(2) includes not only
actualmisappropriation but a mere threat to misappropriate a trade
secret.
If both of the above requirements are met, the next question is: 3)
What is the proper remedy under section 134.90(3) or 134.90(4)? The
remedy can include injunctive relief and monetary damages. Further,
anyone who misappropriates a trade secret in Wisconsin may be guilty of
a Class E felony.9
Disadvantages. A trade
secret is not necessarily exclusive and may be lost through independent
discovery or reverse engineering by a third party, both of which are
legal, unless prohibited by contract. Further, mere inadvertence by the
trade secret holder may result in the loss of trade secret protection.
It is not uncommon for an overzealous employee to inadvertently disclose
confidential trade secret information at a trade show, during the
bid-making process, or at industry seminars.
Trade secret information also is frequently exploited by former
employees due to malice toward the former employer or the profitability
of corporate espionage, or both. The House of Representatives'
Subcommittee on Crime estimates that economic espionage costs U.S.
businesses up to $50 billion a year.10
Although a business may take legal action against individuals who
misappropriate trade secrets, as a practical matter the individuals
often are without sufficient assets to pay the assessed damages, and
imprisonment does not replace the company's lost competitive
advantage.
The particular industry of a business may determine whether trade
secret protection is beneficial. For instance, in the biotechnology
industry, proprietary materials often are alive, microscopic, and able
to reproduce themselves even when removed from a former employer's
facility, making trade secret protection difficult.11
The loss of trade secret protection also can be relatively easy and
quick due to advances in computer technology. For example, an employee
can download trade secret information from a company's computer onto a
diskette, transfer the information to a home computer, and then upload
it onto the Internet where it can be transmitted worldwide within
minutes. Within hours, a company can lose complete control over its
trade secret rights forever.12
Trade secret protection requires stringent secrecy protocols to
protect trade secret status. These protocols, as mentioned above, may be
quite expensive and difficult, depending upon the industry the company
is in, the company's size, and its long-term strategy or goals.
In addition, advanced technology companies, such as those in the
computer software or biotech industries, typically have high employee
mobility which endangers trade secret preservation. This is especially
troublesome since it often is difficult to determine whether an alleged
trade secret constitutes the "general knowledge, skills or experience"
of the former employee (which the employee has the right to take from
the old employer and use for the new one) or the valid "trade secret"
information of the former employer. An employee is free to use general
skills or knowledge acquired during previous employment; and, as a
general rule, courts tend to favor the employee in instances regarding
trade secret versus general employee knowledge.13
Patents
A United States patent gives an owner the right to exclude others
from making, using, or selling the invention covered by the patent.
Every invention must have utility, novelty, and nonobviousness in view
of the prior art in order to be patentable.
Advantages. Patent protection is exclusive during
the entire life of the patent, which now is 20 years from the date of
filing the patent application. If a competitor independently invents or
reverse engineers what is covered by one's patent, the patent holder
still retains exclusive rights to the invention, unlike trade secret
protection.
Further, because there are no secrecy limitations surrounding issued
patents, business transactions involving patents are easier to structure
than those involving trade secrets because trade secrets are in
increased danger of being lost through license agreements, joint
developments, and consulting arrangements if certain precautions are not
taken. Specifically, documents involving these transactions must include
language ensuring strict confidentiality, enactment of proper trade
secret protocols, and the like.
| Know-how and technology are key factors in
a business's commercial success, and protecting this valuable
information is critical. HOWEVER, using the wrong intellectual property
protection could cost you everything. |
A patent also can generate revenue through licensing or assignment to
third parties without the possibility of secrecy loss. Licensing allows
companies to generate formerly untapped revenue from other corporations,
ideally in unrelated industries that do not compete with the licensor.
Some large companies, such as Texas Instruments, license their patents
for sums approaching one billion dollars annually.
14
Patents also can block competitors, who then must design around the
patent claims, if possible. Therefore, companies can exploit and
dominate niche areas and maintain an increased market share. Patents
even can force competitors out of entire markets. In 1991 the
Eastman-Kodak Company paid $925 million to the Polaroid Company to
settle charges that it had infringed Polaroid's patent for instant
photography processes. The settlement agreement also called for
Eastman-Kodak to withdraw entirely from the instant photography
market.15
For some businesses a corporation's patents are its only line of
defense against competitors, especially for small start-up companies.
For instance, a federal jury found that Microsoft's DOS 6 and DOS 6.2
operating systems infringed on patents held by Stac Electronics Inc., a
small California company. The jury awarded Stac $120 million, which was
more than Stac's entire sales since its 1983 founding.16 Eventually, Microsoft settled the case upon
losing its appeal and agreed to pay Stac $43 million in royalties and to
buy a $40 million stake in the tiny company.
As shown, lucrative judgments are available from patent infringers.
Upon a finding of infringement, a court can assess lost profits, or at
the very least, reasonable royalties. A patent holder does not need to
prove that it lost sales due to the infringement or that it manufactured
a product made in accordance with the patent in order to receive a
substantial damage award. For instance, Honeywell Corporation received
more than $300 million from various camera manufacturers for patent
infringement even though Honeywell had never used its patented
auto-focus technology in its own products.17
If a competitor willfully infringes a patent, a court may award
treble damages, possibly increasing the jury award by thousands or
millions of dollars.18 A court also may
award attorney fees to the prevailing party in "exceptional" cases to
deter willful infringement.19
Another advantage of patent protection is notice, which places the
burden of avoiding infringement on all who have actual knowledge of the
patent. Where a potential infringer actually has knowledge of another's
patent, he or she has an affirmative duty of due care. If this duty is
neglected or ignored, trebled damages often result.
Patent owners also may invoke the aid of the U.S. Customs Service
(U.S.C.S.). If an owner of a U.S. patent believes that infringing
merchandise is being imported into the United States, the owner may
apply for a survey to assist him or her in taking appropriate action.
The survey provides the patent owner with names and addresses of
importers of merchandise that appear to infringe the issued
patent.20 Patent holders can use the survey
results to institute court proceedings or administrative proceedings at
the International Trade Commission
(I.T.C.). If the I.T.C. or a court issues an exclusion order, the
U.S.C.S. has the authority to prevent importation of infringing
products. The U.S.C.S. will enforce the exclusion order and deny entry
of imports in violation of the order and seize imports from repetitive
violators.
Disadvantages. Patent protection can be relatively
expensive, requiring fees for drafting patent drawings, government
filing fees, attorney fees for drafting the initial application and
prosecuting the application through the Patent & Trademark Office (PTO),and
assisting in the prosecution through foreign patent offices. Maintenance
fees also must be paid to the PTO at various intervals throughout the
life of the patent, which become increasingly more expensive as the
patent approaches its twentieth year.
Filing a patent application does not guarantee that a patent will
eventually issue. It also does not guarantee that if a patent does
issue, it will have the scope the inventor desires, since the scope of
protection can be affected by necessary amendments made to the patent
application during prosecution through the PTO. Additionally, when a
patent eventually issues, it is limited to only 20 years of protection,
unlike a trade secret, which potentially can offer indefinite
protection.
Publication is a further disadvantage with a patent. In the U.S.,
once a patent issues it is published, allowing the patent holder's
competitors a chance to analyze the invention. Filing in certain foreign
countries results in publication of the patent application at 18 months
from the filing date, even if a patent never eventually issues from the
application.
It is possible to use patent protection in conjunction with trade
secret protection. For instance, one may file a patent application on
the confidential technology and at the same time use trade secret
protocols. If patent prosecution proceeds poorly, the application may be
abandoned and the confidential technology may enjoy trade secret
protection, provided the application is not referenced in a subsequent
U.S. patent. Under U.S. law, patent applications are kept confidential
until issuance, unless referred to in a U.S. patent, wherein the
abandoned application then is available to any member of the public,
thereby destroying trade secret protection. If the individual proceeds
with prosecution and a patent does eventually issue (and is thereby
publicly disclosed), trade secret protection also is lost.
|
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Mimi C.
Goller, Marquette 1993, is a patent and trademark counsel for Abbott
Laboratories, Abbott Park, Ill., concentrating in biotechnology. She
formerly was with the Milwaukee law firm of Andrus, Sceales, Starke
& Sawall. |
There are several factors to consider in determining whether patent
protection is available. One factor is the type of subject matter at
issue. Utility patents may cover machines, articles of manufacture,
compositions of matter, and processes.
21
While patentable subject matter is not as broad as trade secret subject
matter, it is quite far reaching. For example, patentable subject matter
could include inventions ranging from methods of producing cortisone to
commercial package configurations,
22 to
fishing lures, and to diagnostic X-ray systems. Transgenic animals,
fungi, viral strains, and bacteria also have received patent protection.
Another factor to consider is public disclosure. If an item was sold,
offered for sale, or displayed to the public, it may not be patentable
due to statutory bars that require a U.S. patent application be filed no
later than 12 months from the aforementioned activity. However, trade
secret protection still may be an option, depending upon the specific
circumstances.
Further, if an industry is one in which technology progresses
rapidly, thereby making advancements obsolete in a short time, trade
secret may be the most logical form of protection. This is due primarily
to the cost of filing a patent application and the amount of time an
application may spend during prosecution in the PTO, usually several
years.
Conclusion
Trade secret and patent protection can be very effective tools in
securing a company's intangible assets and competitive edge. However, a
careful analysis must be conducted to determine which type of protection
is best suited for a particular piece of information and the specific
circumstances. As evidenced, a client's long-term goals, product line,
and the specific industry the client is in must be reviewed carefully in
making this determination.
Endnotes
1 See generally, Milgrim on
Trade Secrets, §1.01[1] at 1-20, (1993) (Matthew Bender).
2K.F.C. Corp. v.
Marion-Kay, 620 F. Supp. 1160, 1172, 228 U.S.P.Q. (BNA) 545 (S.D.
Ind. 1985).
3Coca-Cola Bottling Co. v.
Coca-Cola Co., 107 F.R.D. 288, 289, 294, 227 U.S.P.Q. (BNA) 18 (D.
Del. 1985).
4 Pioneer Hi-Bred Int'l. v.
Holden Found. Seeds Inc., 35 F.3d 1226 (8th Cir. 1993).
5 See generally, R. Mark
Haligan, The Recently Enacted Economic Espionage Act, Nat'l.
L.J., Dec. 9, 1996.
6 If the trade secret theft
benefits a foreign government, the penalties are even more severe,
fining an individual up to $500,000 and a possible prison term of 15
years. A corporation may be fined up to $10 million. See 18
U.S.C. § 1831.
7 Stacey A. Barlow and Stasia L.
Ogeden, After the Economic Espionage Act: Hiring, Firing, and
Dealing in Corporate America, Intell. Prop. Today (1997).
8 See Minuteman Inc. v.
Alexander, 147 Wis. 2d 842 (1989), for a general discussion of
Wisconsin trade secret law.
9Wis. Stat.
§ 943. 205(3).
10 D. Goodin, "Busting Industrial
Spies," The Recorder,American Lawyer Media, L.P., Sept. 25,
1996.
11 Stephen A. Bent et al.,
Intellectual Rights in Biotechnology Worldwide, 346-47 (1987).
12 Haligan, id. at note
5; see also Religious Tech. Ctr. v. Lerma, 908 F.
Supp. 1362 (E.D. Va. 1995) (A disgruntled former member of the Church of
Scientology posted various documents on the Internet that were deemed
trade secret information by the Church of Scientology. A court held that
because this information was posted on the Internet, it was effectively
part of the public domain, impossible to retrieve, and a party who
merely downloads Internet information cannot be liable for
misappropriation of what was once a trade secret even though the
individual who originally posted the trade secret information on the
Internet may be liable for misappropriation.)
13 This general rule is derived
from the strong public policy to encourage employees to use the general
skills and knowledge they acquired during employment. This policy of
favoring employee mobility and free competition puts a heavy burden on
the employer. See Derek P. Martin, An Employer's Guide to
Protecting Trade Secrets from Employee Misappropriation, BYU L.
Rev., at 958 (1993); Lee T. Gesmer, Protection of Trade Secrets in
the Computer Industry, LGU Tech. L. Bull. (January 1986).
14Arthur Wineburg,
Reconciling IP Rights and Industrial Policy, Legal Times, Sept.
13, 1993.
15 Kevin Rivette and Orving
Rappaport, Golden Opportunities, Legal Times, Dec. 19,
1994.
16 Id. at n.13.
17 Id.
1835 U.S.C. §
284.
1935 U.S.C. §
285.
20 19
C.F.R. § 12.39.
21 See generally, Chisum
on Patents, chapter 1 (1996) (Matthew Bender).
22U.S. Patent No. 2,435,355,
"Package Construction" patented in 1948 by Edgar Ingram Sr. covers the
White Castle box still used today.
Wisconsin Lawyer
