Innovation Law – Spring 2016

Final Outline

Introduction

Incentive Theory

  • Hippodamus of Miletus
  • Those who discovered anything for the good of the state should be honored

Moral Theory

  • John locke
  • Natural property right in ones own labor
  • Alterning state of nature (raw materials) is labor
  • New ideas are a natural property right
  • Society is morally obligated to recognize and protect property rights in ideas

Basis for IP in US

  • US Constitution, Article I, Section 8
  • Congress has power to promote progress of science and useful arts by securing exclusive right to their respective writings (*copyright) and discoveries (*patents)

Forms of Intellectual Property

  • Copyright
  • Patent
  • Utility
  • Process, product
  • Pioneering (something completely new), improvement (on existing product)
  • Design
  • Plant
  • (actual plants…flowers, agriculture)
  • Trademark
  • Trade dress
  • Geographical identifiers
  • Trade secrets
  • Know how
  • Other
  • Databases
  • Maskworks
  • Semiconductor circuits
  • Contract-based

Unit 1 - Trade Secrets and Inventive Employees

  • Trade Secrets
  • Subject Matter
  • What secrets are protectable under TS law?
  • Misappropriation
  • When is learning a TS wrongful (& actionable)?
  • Non-competition agreements
  • Contractual restrictions on competition
  • Remedies
  • What judicial remedies are available?
  • Subject Matter
  • What are trade secrets
  • Information
  • That is not generally known to others
  • The information is not in the public domain
  • That has economic value (usually in trade or business)
  • To those who know it vs. those who don't
  • Value derives from the exclusivity of the information
  • This turns a public good (information) into a private good
  • Where reasonable efforts are made to maintain the secrecy of the information
  • Development of Trade Secret
  • Guilds (collection of craftsmen in a trade)
  • invested time & resources in training, innovation and perfecting their craft
  • developed “human capital” & “know-how”
  • Information is ordinarily a “public good”
  • Keeping it secret turns it into a private good
  • justifying investment
  • Disclosing it deprives it of independent value
  • once in the public domain info may lose proprietary value (apart from its common value to all)
  • How can information be kept secret?
  • Don't disclose it
  • Except to employees who must practice it
  • And then prevent them from disclosing it
  • Via contract law (express or implied employment agreement)
  • And business partners who must evaluate it
  • And keep others from finding out about it
  • Trade secret law is based on state law +
  • Theories of TS Protection
  • Utilitarian (consequentialist):
  • encourages inventive activity by protecting the fruits of those efforts
  • TS as productive property
  • Moral (deontological):
  • deters efforts that have as sole purpose the redistribution of wealth from one to another
  • Wrongful acquisition of another's property
  • Mettalurgical Industries v. Fourtek
  • FACT(S): P has a business that reclaims tungsten carbide, a metallic compound of great value in certain industrial processes. Combined with the metal cobalt, it forms an extremely hard alloy known as "cemented tungsten carbide" used in oil drills, tools for manufacturing metals, and wear-resistent coatings.Two ways to process, and P used the old way cold-stream process. After a new way of reclaiming carbide comes out (zinc recovery process), P decides to try do it and hires D Bielefeldts co (Therm-O-Vac) to design and construct two recovery furnaces for them. After Ps get TOV's furnace, they make their own changes to it to make it better before using it. 8 years later, they go back to TOV for a new furnace, show TOV the modifications they made, and ask them to make it. After they get this one, they still make further modifications. TOV goes bankrupt. Ds form new company (Fourtek), and end up building a furnace for other D Smith Int. Inc., using the modifications that P had shown them in their furnace. P charges Ds with misappropriating its trade secrets
  • ISSUE: Is there a trade secret that can be protected in this case? Is the disclosure to other companies limited disclosure?
  • HOLDING: Yes, "It is easy to recognize the possibility of a trade secret here because Metallurgical presented evidence of all three factors (1. secrecy, 2. advantage over competitors, 3. cost of developing secret) discussed below."
  • RULE(S):
  • To qualify as a trade secret, the subject matter involved must, in fact, be a secret; matters of general knowledge in an industry cannot be appropriated by one as his secret.
  • A holder may divulge his information to a limited extent without destroying its status as a trade secret.
  • Look at facts of case
  • Time, money is important
  • Competitive advantage is important
  • Subject matter:
  • Is MI's new carbide reclamation process protectable information?
  • Issue 1:
  • Is the information secret? Have they kept it a secret or is the information generally known?
  • How did Bielefeldt come by the information?
  • Was process already known in the industry?
  • Issue 2:
  • Does this process have economic value?
  • Does info have economic value as result of it being kept secret?
  • Conclusion on subject matter - YES
  • Secret information, having
  • Economic value to ¶ in trade or business
  • Issue 3(maintained as a secret):
  • Did MI take precautions to keep info secret?
  • Modified furnaces hidden from public view
  • Those with need to know had to sign NDAs
  • But MI disclosed the process to others
  • e.g., disclosed it to furnace supplier (Therm-o-Vac)
  • When is TS forfeited for lack of security?
  • Note: absolute secrecy not required
  • Limited disclosures allowed
  • So long as reasonable precautions taken viz others
  • What information Counts?
  • Broad scope of protectable information
  • Usually information of a technical character
  • But business methods and market information (e.g., customer lists) can also be “business valuable”
  • Includes “blind alleys” or “negative know-how”
  • what not to do
  • Except where the information (even if unknown) can be acquired w/ trivial effort
  • Quality of Metallurgical’s information
  • Process required time and money to develop
  • “much work & ingenuity” involved
  • How secret must a secret be?
  • Someone needs to know (besides the CEO)
  • Employees, suppliers, licensees
  • Absolute secrecy not required (or practical)
  • So long as enough secrecy maintained as to prevent others from gaining knowledge
  • Limited disclosures ok (see Restatement Torts §757)
  • Factors (not dispositive)
  • public or private disclosures
  • whether disclosed only to exploit advantage of TS
  • whether disclosed in confidence
  • Trade Secret v. Patent
  • Mutually exclusive
  • Cannot have both trade secret and patent in same thing
  • Why didn’t metallurgical patent its process?
  • May not be 'novel'
  • If previously known by anybody else, defeats patent
  • Defeats TS only if generally known or known by defendant
  • -->two can keep a secret, only one can have a patent
  • May have been obvious extension of knowledge
  • New item has to be non-obvious to receive a patent
  • Patent law only rewards some degree of ingenuity/inventiveness
  • Obviousness does not usually defeat a trade secret
  • Patents are expensive
  • TS's are relatively cheap…just need to take reasonable measures to keep the secret
  • Patents last 20 years, Trade Secrets are indefinite
  • Cannot have both TS & patent in same thing
  • Patents are published (thus no longer secret)
  • Rockwell v. Dev
  • FACT(S): RG created innovative machine parts, did not patent them. Tried to maintain the knowledge as a trade secret. They felt the parts could not be reverse engineered. DEV acquires RGs property, says RG forfeited TS protection by failing to take reasonable precautions to maintain secrecy. Vendors had the drawings; But, vendors have 1.) need of access and 2.) duty of confidentiality. Customers also had drawings, but those assembly drawings didn’t contain TS info
  • ISSUE: Did Rockwell take reasonable/enough precautions to keep its piece-part drawings (the TS) secret?
  • HOLDING: Possibly. The court held that the mere fact that plaintiff gave piece part drawings to vendors who made parts for plaintiff did not forfeit trade secret protection. The court said that only in an extreme case could what was a reasonable precaution be determined on a motion for summary judgment, because the answer depended on a balancing of costs and benefits that would vary from case to case.
  • RULE(S):
  • The law of trade secrets requires a plaintiff to show that he took reasonable precautions to keep the secret a secret.
  • A firm's act in making public some of its documents (or part of a document) does not destroy the status as trade secrets of information contained in other documents (or another part of the same document)
  • Disclosure of trade secrets to a limited number of outsiders for a particular purpose does not forfeit trade secret protection. On the contrary, such disclosure, which is often necessary to the efficient exploitation of a trade secret, imposes a duty of confidentiality on the part of the person to whom the disclosure is made.
  • Fencing measures:
  • NDA's for employees, not putting TS's on maps, keep secret in vault
  • Could RG have done more to protect TS?
  • Always yes….but only qualified secrecy required
  • Evidentiary significance of secrecy efforts
  • The greater the precautions…
  • The more likely that a 3rd party wrongly acquired
  • Higher probability that D obtained info through wrongful act if the owner had taken paints to prevent them from being obtained otherwise
  • The more likely that the info has economic value
  • Drawings cannot have been worth much if RG did not think it worthwhile to make serious efforts to keep the info secret
  • Reverse Engineering
  • Note: if you feel like your invention can be easily reverse engineered, you should seek patent protection
  • Reverse Engineering is perfectly lawful. If one learns a trade secret by RE, it is not a misappropriation.
  • Reverse engineering not helpful if the product/process is patented…you still cannot use the patented technology (and RE of patent isnt even necessary because the process is fully disclosed)
  • Reasonable Precautions
  • UTSA
  • Separate element of proof
  • Plaintiff bears burden
  • Restatement3rd Unfair Competition
  • No separate element
  • “If the value and secrecy of the information are clear, evidence of specific precautions taken by the trade secret owner may be unnecessary.”
  • Confidentiality agreements go to precaution element and misappropriation element
  • Misappropriation
  • Data General v. Digital Computer Controls
  • FACT(S): DG provides schematics to computer customers; subject to a non-disclosure agreement (NDA). DC buys computer & drawings from DG customer. DC uses DG drawings to design own computer
  • ISSUE:
  • Does sale to the public forfeit secrecy?
  • Did DG fail to secure secrecy in its sales?
  • HOLDING:
  • Yes
  • Sale to the public forfeits secrecy if the product “fully discloses” the TS to the public
  • Reverse engineering is ok, and destroys a TS
  • But here the design was not RE’d, but obtained through confidential drawings
  • No, since it employed some fencing measures (e.g., NDA), no summary judgment for defendant
  • RULE(S): To prove violation of a trade secret, a plaintiff must demonstrate the existence of a trade secret, that the defendant did not properly receive the information in question in such a manner that its confidential nature should have been known, and that defendant proposes to misuse such information.
  • Data General Corp v. Digital Computer Controls
  • Implicit takeaway: even a widespread disclosure to customers may not compromise secrecy of the computer design
  • Involuntary Disclosures
  • Inadvertent (negligent)
  • E.g. Apple engineer left iPhone 4 in a bar
  • Factor in determining reasonableness of precautions
  • Compelled
  • E.g. government contracts, approvals
  • Not a disclosure to the public (or to competitors)
  • If the government discloses to 3rd parties, it may owe compensation under 5th amendment
  • See Rucklehaus v. Monsanto
  • Gov’t contracts may vest ownership in gov’t
  • Misappropriation
  • Restatement of Torts Section 757
  • Liable to another for disclosing/using TS if discovered by
  • Improper means
  • Breach of confidence
  • Wrongfully acquired from 3rd person
  • Knowing that disclosure was made by mistake
  • -->note: don’t need to establish all of these…establishing even one will suffice
  • See also UTSA Section 1
  • Du Pont v. Christopher
  • FACT(S): Ps are building process for producing methanol, which they say will give them competitive advantage over producers. Are keeping it a secret, but the plant where process is still under construction, could see into it from above. Ds are allegedly hired by unknown 3rd party, go in plane and take pictures of exposed area for the 3rd party. P finds out, files suit.
  • ISSUE: Violation of trade secret here? Specifically, is aerial photography of plant construction an improper means of obtaining anothers trade secret?
  • HOLDING: Yes, trade secret violated. Aerial photography was improper means…D shouldn’t have to take great expense of building roof over all of plant so quickly in order to keep his hard earned process a secret, to make them have a duty to do so is unreasonable.
  • These were improper means used that otherwise were not improper behavior
  • RULE(S): Perhaps ordinary fences and roofs must be built to shut out incursive eyes, but courts need not require the discoverer of a trade secret to guard against the unanticipated, the undetectable, or the unpreventable methods of espionage available.
  • What means are improper?
  • UTSA: "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;
  • Criminal conduct
  • Theft, trespass
  • Espionage - e.g. Economic Espionage Act
  • (typically when done on behalf of a foreign entity)
  • Electronic surveillance - e.g. Wiretap Act
  • Hacking - e.g. computer fraud and abuse act
  • (cybercrimes generally)
  • Non-criminal conduct
  • Breach of confidence
  • Industrial espionage
  • Unfair competition
  • Means which fall below the generally accepted standards of commercial morality and reasonable conduct
  • This is an objective standard
  • What means are Proper?
  • Independent Development
  • compare patent
  • Reverse Engineering
  • process of working backwards (from lawfully acquired finished product) to see how it works
  • RE promotes discovery, improvement & innovation
  • Licensing
  • Inadvertent disclosure
  • failure to take adequate fencing precautions
  • Questionable Means
  • Violation of EULA (defeats right to RE)
  • Mandated disclosures (might be a taking)
  • Environmental policy conflicts – e.g., can a state require oil companies to disclose the chemicals they use in hydraulic fracking, if they are a TS?
  • Misuse of computer access
  • See U.S. v. Nosal (ND Cal, 2014)
  • Employee gave co-defendant access to protected database to obtain client list (a TS). Both guilty of violating CFAA. Jail time.
  • CFAA federalizes and criminalizes TS misappropriation
  • Proof of Improper Means
  • Direct Evidence
  • duPont: catching def’t “red-handed”
  • Indirect Evidence
  • Pioneer v. Holden: Statistical unlikelihood that product was developed independently (yes)
  • Othentic v. Phelan: speed of product development (not sufficient by itself)
  • Breach of Confidence
  • Smith v. Dravo Corp.
  • FACT(S): Smith created uniform steel freight containers, aiming to facilitate the ship and shore handling and transportation of cargoes. Smith dies and his estate decides to sell company, which D is interested in buying. D gets all the blueprints, patent apps, model container, etc. from P. Few offers back and forth, but ultimately D rejects them and decides to make his own containers. Crates D makes are extremely similar to Ps, just have a smaller width, which actually makes it so that the Smith ones cant be used at all, they become worthless. D even uses the patent app received from P to make his version of containers
  • ISSUE: Did Dravo use Smith’s TS in breach of confidence?
  • HOLDING: Yes. The first thing to be made sure of is that the defendant shall not fraudulently abuse the trust reposed in him. It is the usual incident of confidential relations. If there is any disadvantage in the fact that he knew the plaintiffs' secrets, he must take the burden with the good.
  • RULE(S): The essential elements of a claim for breach of confidence: (1) existence of a trade secret, (2) communicated to the defendant (3) while he is in a position of trust and confidence and (4) use by the defendant to the injury of the plaintiff.
  • NOTES:
  • Use of the patent app is not proper means if its not published yet. Here, was provided in confidence before publication (during 18 month window between filing and pub)…so no proper means here
  • Breach of Confidence
  • Is there a confidential relationship?
  • No express promise of trust
  • Can a trust relationship be implied from facts?
  • drawings delivered pursuant to sale negotiations
  • Dravo knew of limited purpose for Smith’s disclosure
  • What is the policy behind implied trust?
  • Breach of Confidence
  • Arrow’s Information Paradox
  • License, sale or outsourcing of technology
  • necessarily includes the sharing of information across company boundaries
  • once the customer has the info, no need to buy
  • Serious problem with trade secrets
  • must disclose TS so potential licensee can evaluate
  • licensee must be held to a confidential relationship
  • What if info unprotected? e.g., movie treatment
  • Better use an NDA
  • Reverse Engineering
  • UTSA
  • Starting with the known product [lawfully acquired] and working backward to find the method by which it was developed
  • Disassembly, decompiling
  • If your product is easily RE'd, should rely on patent protection or copyright, not TS law
  • Encourages further research and development
  • Kadant v. Seeley
  • FACT(S): Kadant AES manfactures products that clean and condition papermaking machines and filter water used in papermaking process. One of Ds, Corlew, hired by P and worked there for ~7 years, rising in ranks. As part of job, he had access to computer assisted drawing machine that contained recipes for AES products, generated drawings, and bills of materials, which P says they were very careful to keep secret as info.