The Role and Value of Trade Secrets in

The Role and Value of Trade Secrets in IP Management Strategies Karl F. Jorda David Rines Professor of IP Law & Industrial Innovation Director, Kenneth J. Germeshausen Center for the Law of Innovation & Entrepreneurship Franklin Pierce Law Center Two White Street, Concord, NH 03301 Seminar Siam Cement Group Bangkok, Thailand December 19 -20, 2006

INTELLECTUAL PROPERTY & IP RIGHTS IP Invention Know-how Brandname Work of Authorship IPR Patent Trade Secret Trademark Copyright 2

INTELLECTUAL PROPERTY (IP) & IP RIGHTS (IPR) IP IPR Invention Know-how, Invention Brand name Work of Authorship Patent, Trade Secret Trademark Copyright 3

Patents Personal Skill Generally Known Trade Secrets Technical Information Business Information Readily Ascertainable

Patentable Subject Matter Personal Skill Technical Information Trade Secrets Business Information Readily Ascertainable Generally Known

HISTORY OF TRADE SECRETS • "Trade Secret law is the oldest form of intellectual property protection, " according to Perritt. (Cave people? !) • Back in Roman times, the law afforded relief against a person who induced another’s employee (slave) to divulge secrets relating to the master’s commercial affairs. Trade secrecy was practiced extensively in the European guilds in the Middle Ages and beyond. • • Modern law evolved in England in early 19 th century — in response to the growing accumulation of technology and know-how and the increased mobility of employees. • Recognized in U. S. by middle of 19 th century, Peabody v. Norfolk (1868) held that a secret manufacturing process is property, protectable against misappropriation; secrecy obligation for an employee outlasts term of employment; a trade secret can be disclosed confidentially to others who need to practice it and a recipient can be enjoined from using a misappropriated trade secret. • By the end of the 19 th century the principal features of contemporary law were well established. • 1939 the Restatement of Torts attempted to “codify” it. 6

DEFINITION OF “TRADE SECRET” 1. A trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. (Restatement of Torts, § 757 comment b (1939)) 2. A trade secret is any information, including a formula, pattern, compilation, device, method, technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. (Unif. Trade Secrets Act § l(4), 14 U. L. A. 372 (1985 & Supp. 1989) 3. A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others. (Restatement (Third) of Unfair Competition, § 39 (1995)) 7

TRADE SECRETS The Restatement of Torts adopted and the courts relied on the following criteria for determining whether a trade secret exists: (1) the extent to which the information is known outside of the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken to guard the secrecy of the information; (4) the value of the information to the business and to competitors; (5) the amount of effort or money expended in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. 8

TRADE SECRET ECONOMIC ESPIONAGE ACT (EEA) DEFINITION The term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, memorialized physically, electronically, graphically, photographically, or in writing if — (A) the owner thereof has taken reasonable measures to keep such information secret; and (B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public. 9

TRIPS DEFINITION Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices so long as such information: (a) Is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kinds of information in question; (b) Has commercial value because it is secret; and (c) Has been subject to reasonable steps under the circumstances, but the person lawfully in control of the information, to keep it secret. (TRIPS Agreement, Part II, Sect. 7: Protection of Undisclosed Information, Art. 39, Par. 2, 1994) 10

DEFINITION OF KNOW-HOW Know-how. The knowledge and skill required to do something correctly. (Dictionary Definition) Know-how. Information that enables one to accomplish a particular task or to operate a particular device or process. (Mc. Carthy’s Desk Encyclopedia of Intellectual Property, Second Edition, p. 236) Know-how is knowledge and experience of a technical, commercial, administrative, financial or other nature, which is practically applicable in the operation of an enterprise or the practice of a profession. (AIPPI Resolution – Mexico Congress – 1973) 11

CHARACTERISTICS OF TRADE SECRETS • • • No registration requirement. No subject matter or term limitation. No tangibility requirement. No strict novelty requirement. Subject matter must not be generally known or available. But secrecy is the most important criterion — a sine qua non. There are no exceptions. • Affirmative measures must be taken to safeguard a trade secret. • Sufficient economic value or competitive advantage is also a requisite. • Proper criterion is not “actual use” but “of value to company”, i. e. negative results can also give a competitive advantage. 12

SAFEGUARDING TRADE SECRETS 1. Memorialize the trade secret policy in writing 2. Inform employees of trade secrets 3. Have employees sign Employment Agreements with confidentiality obligations 4. Conduct exit interviews 5. Restrict access to trade secrets (on need-to-know basis) 6. Lock gates and cabinets 7. Label trade secret documents 8. Restrict public accessibility 9. Screen speeches and publications 10. Use contracts in dealing with third parties 13

MISAPPROPRIATION OF TRADE SECRETS 1. 2. 3. Acquisition by improper means Acquisition by accident or mistake Use of or disclosure of a trade secret a) Acquired improperly b) In violation of a duty to maintain confidentiality “Improper means” includes “theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means. ” “Proper means” which do not support a claim for misappropriation, include independent discovery, reverse engineering, or discovery from observing what has been allowed to enter the public domain. 14

TRADE SECRETS True or False? 1. Patents and trade secrets are at best only alternative forms for protection of innovation. 2. Trade secrets at best are but supplements to patents. 3. Patents and trade secrets are mutually exclusive and one or the other has to be chosen for protection to the exclusion of the other. 4. Because the patent system requires enabling and best mode disclosures, patents necessarily disclose and hence preempt all the trade secrets that are useful in the practice of the patented invention. 5. Because patents require disclosure of the invention as a quid pro quo for exclusivity, it is reprehensible to rely on trade secrets. 6. The patent specification, which discloses the best mode and otherwise is enabling, as is required, is sufficient to practice the invention or to be licensed. 7. Trade secrets are merely a matter of "contract rights created in trade secret agreements" as per abstract of our "U. S. Patent & Trade Secret Law" course; that is, no contract rights, no trade secrets. Hence, trade secrets are not property per se like patent and copyrights. 8. The fact that the trade secret to be utilized must be disclosed to others under secrecy obligation set forth in a non-disclosure, confidentiality, secrecy or pre-negotiation agreement, makes trade secret protection merely a matter of contract law. 15

TRADE SECRETS True or False? 9. Know-how, trade secrets and confidential, proprietary or "undisclosed" information are synonymous terms and can be used interchangeably. 10. There are great differences between patent and trade secrets in terms of duration, scope of protection, kind of protection, degree of exclusivity, and costs. 11. A patentable invention must be patented for protection, while only unpatentable knowhow can be protected via trade secrets. 12. A trade secret by definition is "concealed" and "suppressed" under § 102(g), so that a patentee has superior rights, even if he made the invention later in time. 13. "Under current U. S. law the inventor who chooses trade secret protection, accepts the risk that another inventor will seek and obtain patent protection, thereby excluding the original inventor from using his own creation. " (Pooley, MIP, Oct. '99, p. 68) 14. Trade secrets don't need protection because they are secrets. (So why this course? What's there to talk about? ) 15. "Trade Secrets are the cesspool of the patent system. " (Professor Kayton) 16

ROLE AND VALUE OF TRADE SECRETS IN IP MANAGEMENT STRATEGIES Overview Introduction I. Integration of IPRs II. Importance of Trade Secrets III. The Patent/Trade Secret Interface IV. The Patent/Trade Secret Complementariness V. The Best Mode Requirement VI. Exemplary Trade Secret Cases VII. Conclusion 17 i

I. Introduction • In our knowledge-based high-tech era it is important to exploit the overlap between IP categories for dual or multiple protection. • This is true especially between patents and trade secrets. • Patents and trade secrets are not incompatible but dovetail: the latter can protect volumes of collateral know-how. • This results in synergistic integration and secures invulnerable exclusivity. • Most technology licenses are hybrid licenses covering patents and trade secrets. • Licenses under patents without access to collateral know-how are insufficient for commercial use of patented technology. 18

II. Integration Strategy for IPRs From former fragmentation by specialties, IPRs are now a “seamless web, ” due to progress in technology and commerce, per Professor Jay Dratler. Professor Dratler was the first one to “tie all the fields of IP together. ” “Integrative treatment. ” (Intellectual Property Law: Commercial, Creative, and Industrial – 1991) In 1997 the authors of “Intellectual Property in the New Technological Age” (Professors Merges, Merrell, Lemly & Jorde) also • avoid the fragmented coverage • approach IP as a unified whole; and • concentrate on the interaction between different types of IPRs. Thus we now have a unified theory in the IP world, a single field of law with subsets and significant overlap between IP fields. Several IPRs are available for the same IP or different aspects of the same IP for dual or multiple protection. Not taking advantage of the overlap misses opportunities or, worse, amounts to malpractice. 19

II. Integration Strategy for IPRs (continued) Especially for high-tech products, trademarks and copyright protection may supplement patents, trade secrets and mask works for the product’s technological content. One IPR category is center of gravity and more important. Other IPR categories are then supplementary but very valuable to • cover additional subject matter • strengthen exclusivity • invoke additional remedies • standup if primary IPR becomes invalid and thus provide synergy and optimize legal protection. Multiple forms of protection are especially important in the fields of biotechnology and computer. The most important strategy is exploiting the overlap between patents and trade secrets. Illustrative examples are: • GE’s industrial diamond process technology • Wyeth’s Premarin process • Pizza Hut decision 20

Multiple Protection in Biotech Protection for a diagnostic kit involving monoclonal antibodies: • Product patent on the test kit • Process patent on the preparation of the antibodies • Trade secrecy for production know-how • Copyright for test kit’s instructions • trademark 21

Multiple Protection for Computers A data processing system can involve: • patented hardware and software • patented computer architecture on circuit designs • patented business methods • trade secret production processes • copyrighted microcode • copyrighted operating system • copyrighted instruction manual • semiconductor chips protected as mask works • consoles or keyboards protected by design patents • or as trade dress under trademark principles • trademark registration 22

IP Integration Concepts EXPLOIT THE OVERLAP DEVELOP A FALL BACK POSITION CREATE A WEB OF RIGHTS BUILD AN IP ESTATE BUILD A WALL BUILD A RINGFENCE (India) OVERPROTECT LAY A MINEFIELD for SYNERGISTIC EFFECT via DUAL OR MULTIPLE PROTECTION 23

III. The Importance of Trade Secrets Trade secrets are the “crown jewels” of corporations — not the “cesspool of the patent system. ” Mark Halligan: “Trade secrets are the IP of the new millennium and can no longer be treated as a stepchild. ” James Pooley: “Forget patents, trademarks and copyrights…trade secrets could be your company’s most important and valuable assets. ” Trade secret misappropriation cost Walt Disney $240 million and Cargill $300 million. 88% of responses in an IPO Survey indicate trade secrets to be the really important intellectual assets because patents have limits: 24 patentability requirements, publication, invent-around feasibility.

III. The Importance of Trade Secrets (con’t. ) Trade secret protection operates without delay and undue cost against the world — unlike patents which are territorial and so expensive to obtain and maintain that only very selective foreign filing is done. Patents are tips of icebergs in an ocean of trade secrets • Trade secrets cover 90% of new technology • Over 80% of technology licenses cover trade secrets or are hybrid licenses Trade Secrets are the “workhorse of tech transfer. ” (Bob Sherwood). 25

IV. Patent/Trade Secret Interface As a practical matter, licenses under patents without access to associated, collateral know-how are often not enough, because patents rarely disclose the ultimate scaled-up commercial embodiments of products and processes. “In many cases, particularly in chemical technology, the know-how is the most important part of a technology transfer agreement. ” (Homer Blair). “It is common practice in industry to seek and obtain patents on that part of a technology that is amenable to patent protection, while maintaining related technological data and other information in confidence. Some regard a patent as little more than an advertisement for the sale of accompanying know-how. ” (Peter Rosenberg). In technology licensing “(r)elated patent rights generally are mentioned late in the discussion and are perceived to have ‘insignificant’ value relative to the know-how. ” (Michael Ward, Honeywell VP Licensing). 26

IV. Patent/Trade Secret Interface (con’t. ) “Trade secrets are a component of almost every technology license…(and) can increase the value of a license up to 3 to 10 times the value of the deal if no trade secrets are involved. ” (Melvin Jager). “One potential shortcoming of focusing on patents as a measure of innovation, besides the fact that it ignores the other types of intellectual property, is that patents are often valueless absent the ‘know-how’ that translates protected intellectual property into viable products. ” (Gavin Clarkson, Harvard). “A company with one or more patents for its technology will usually have substantial valuable technical and business information related to, but outside the direct coverage or disclosure obligations of, its patents. The company can maintain vigorous efforts in both areas of legal protection. (Jerry Cohen, Perkins, Smith & Cohen). “It is frequently stated that know-how is the most valuable element of technology transfer. This is consistent with the writer’s own experience. ” (Robert Goldscheider). Failed Brazilian tactic — translate foreign patents CIBA-GEIGY examples: Eastman Kodak & Du. Pont licenses. 27

V. Patent/Trade Secret Complementariness • Supreme Court (Kewanee Oil, 1974): perfectly viable alternatives. • Not mutually exclusive but mutually reinforcing — dovetail, in harmony • “Coexistence is well-established. ” (Don Chisum). • Inextricably intertwined: Most R&D data and collateral know-how cannot and need not be included in patent applications — grist for trade secrets. • Trade secrets precede, accompany and follow patents. • Tom Arnold: it’s “flat wrong” to assume that “because the patent law requires a best mode requirement, patents necessarily disclose or preempt all the trade secrets that are useful in the practice of the invention. ” 28 13

V. Patent/Trade Secret Complementariness (con’t. ) 1. In the critical R&D state and before any patents issue, trade secret law “dovetails” with patent law. 2. Assuming that a development has been enabled and the best mode described, all collateral know-how not disclosed, whether or not inventive, can be retained as a trade secret. 3. All R&D data, including data pertaining to better modes, developed after filing, again whether or not inventive, can also be protected as trade secrets. 4. With respect to technologically complex developments consisting of many patentable inventions and volumes of associated know-how, complementary patenting and secreting is tantamount to having the best of both worlds The question is not whether to patent or to padlock but rather what to patent and what to keep a trade secret. Best policy and strategy is to patent as well as to padlock. 29

VI. The Best Mode Requirement The “best mode” requirement applies • only to the knowledge of the inventor, • only at the time of filing and • only to the claimed invention Hence best mode requirement is no impediment, because — 1. Patent applications are filed early in the R&D stage to get the earliest possible filing or priority date. 2. The specification normally describes in but a few pages only rudimentary lab experiments or prototypes. 3. The best mode for commercial manufacture and use remains to be developed later. 4. Patent claims tend to be narrow for distance from the prior art. 5. As shown by case law, manufacturing process details are, even if available, not a part of the statutorily-required best mode disclosure of a patent. 30

VII. Exemplary Trade Secret Cases 1. GE’s exclusive industrial diamond process technology • Holds patents (some expired) and trade secrets • Refused to grant licenses • Fast-track GE scientists stole trade secrets for Far Eastern interests for million dollar payments • In the end got caught, tried, jailed 2. Wyeth’s exclusive Premarin manufacturing process • Has market exclusivity since 1942 • Patents expired decades ago • Closely guards its trade secrets • Natural Biologies stole these trade secrets • Wyeth sued, got sweeping injunction 31

VII. Exemplary Trade Secret Cases 3. Pizza Hut case (con’t. ) • Pizza Hut supplier, C&F Packing, invented and patented a manufacturing process for pizza sausage toppings and kept improvements secret • Pizza Hut misappropriated trade secrets and got sued • Court decision: 1. patents are invalid on on-sale bar grounds (on Summary Judgment) 2. trade secrets are enforceable and Pizza Hut had to pay $10. 9 million (after trial) 32 17

HYBRID LICENSES Patents and trade secrets (and other IPRs) Very prevalent — >80% Problematic — different duration, etc. Brulotte v. Thys Co. (Supreme court, 1964): collection of royalties after patent expiration — per se patent misuse or antitrust violation Solutions: • Separate agreements — ideally • Lumpsum payments • Differentiation between patents and trade secrets • Allocation of royalties to each • Reduction of royalty rate if patents • terminate • declared invalid • if applications not issued • Reduction of royalty-payment period (e. g. 10 years) • Grant of royalty-free license to patents • Grant of trade secret license — no patent license 33