Trade Secrets Offer an End-Around to Patent Ineligibility

DANA FINBERG

Imagine your client calls you one day and tells you they have developed a great new idea for a software product and, because you are their trusted advisor, they want your help in devising a legal strategy for protecting this valuable intellectual property.

As you listen to them describe this great new idea, because you are a diligent IP practitioner and familiar with the U.S. Supreme Court’s June 19 decision in Alice Corp. v. CLS Bank International, 573 U.S. __ (2014), it begins to sound suspiciously like what they have come up with is an “abstract” idea—an idea constituting a category of patent ineligible subject matter, including algorithms, mathematical concepts, chemical elements, naturally occurring biological products and methods that can be carried out in a person’s head.

Since it appears your client cannot obtain a patent for their bright new idea for a software product, do they have any options for attempting to protect the fruits of their hard work?

Fortunately for your client, you have also been keeping up with recent developments in trade secrets law. In a decision filed in May, the California Court of Appeals held that ideas, if kept secret, can constitute information protectable by trade secret law. By so holding, the court in Altavion Inc. v. Konica Minolta Systems Laboratory Inc. went a long way in clearing up confusion created by a 2010 decision, Silvaco Data Systems v. Intel Corp., which stated that “[t]rade secret law does not protect ideas as such” and trade secret protection only extends to information tending to communicate or disclose ideas to another.

Keep it secret, keep it safe

In Altavion, the dispute arose when the defendant took the plaintiff’s overall concept and specific design implementations for digital stamping technology—which it had received under a non-disclosure agreement executed in the course of business negotiations between the parties—and covertly incorporated them into patent applications in its own name. The trial court found for Altavion on its claims of trade secret misappropriation, and on appeal Konica Minolta Systems Laboratory (KMSL) argued that, under Silvaco, Altavion’s concept was not protectable because “[g]eneralized ideas and inventions are protectable by patents and thus cannot be trade secrets.”

The California Court of Appeals rejected this argument, relying on earlier precedent explaining the overlap between trade secret law and patent law, explaining that “a trade secret in the broad sense consists of any unpatented idea which may be used for industrial and commercial purposes.” The court unambiguously declared “it is clear that if a patentable idea is kept secret, the idea itself can constitute information protectable by trade secret law” and “trade secret law may be used to sanction the misappropriation of the idea the plaintiff kept secret.”

The trade secret ideas at issue in Altavion were ultimately embodied in at least eight patents obtained by the defendant, so the information constituted patentable subject matter, at least before the recent U.S. Supreme Court decision in Alice Corp. However, the Court of Appeal’s detailed explanation of the interrelationship of patent and trade secret law made clear trade secret law extends to inventions which, for whatever reason, may not be patent-eligible.

As the court explained, “[P]atentability is not a condition precedent to the classification of a trade secret. Thus it has been said that a trade secret may be a device or process which is clearly anticipated in the prior art or one which is merely a mechanical improvement on a machine or device. Novelty and invention are not requisite for a trade secret as they are for patentability.”

Prepare to be invalidated

As long as a company’s ideas and information meet the general requirements for trade secret status under the Uniform Trade Secrets Act, then trade secrets law will provide protection and powerful remedies for misappropriation. Those requirements include that the ideas and information are not generally known; derive independent economic value from their secrecy; and are the subject of reasonable efforts under the circumstances to protect their secrecy.

By clearly assigning trade secret status to ideas, the Altavion decision provides important additional protections for inventors and companies electing not to patent their intellectual property. As the Court of Appeals recognized, while patents can and do convey significant rights and benefits to their owners, they also come with some significant risks—particularly if those patents are later invalidated. Indeed, as Roger Milgrim, a leading trade secrets scholar, has observed, “[B]ecause a ‘substantial number of patents’ are invalidated by the courts, resulting in disclosure of an invention to competitors with no benefit, many businesses now elect to protect commercially valuable information through reliance upon the state law of trade secret protection.”

In the wake of the Supreme Court’s June 14 decision in Alice Corp., defendants will likely seek to invalidate even more patents as embodying abstract, patent-ineligible subject matter, and the subject matter of those patents could become freely available to the public. Software patents, in particular, will be the likely subject of these invalidation efforts.

How, then, can your client establish and maintain trade secret status and protections for the ideas embodied in their new software product? California law has long held that source code can constitute a protectable trade secret, and the Altavion court reiterated this precept.

Knowing source code from Software design

The Court of Appeals reiterated the precept, first announced in the Silvaco opinion, that ordinarily the design of a software product “is not a trade secret to the extent the design elements are disclosed and evident to the end user.” Thus, there is an important distinction between source code on the one hand and software design concepts on the other, because the latter ordinarily are not protectable as trade secrets where they can be ascertained by the end user of the software.

However, the Altavion court identified and highlighted cases that have extended trade secret protections to computer programs and their designs that are maintained as confidential. For example, courts have extended trade secret protections to aspects of software programs that can only be accessed by authorized individuals using a passcode, or a “key” to unlock an individual or enterprise license to a software product, and in situations where the owner required a licensee to execute a confidentiality agreement or NDA like the one executed and breached by the defendant in Altavion. Those cases reasoned that the use of measures intended to prevent aspects of software programs from becoming “generally known or readily ascertainable” can preserve trade secret status, and the Altavion court reinforced these protections.

The Altavion decision also reiterated the protected status of so-called “compilation” trade secrets, which can consist of information in the public domain. Citing federal appellate decisions from other jurisdictions, the court held that, even if some or all of the elements of Altavion’s software design concepts were in the public domain and thus individually unprotectable, the combination of those elements can be a protectable trade secret if the compilation itself is secret and has independent economic value.

The court embraced the doctrine that “a trade secret can include a system where the elements are in the public domain, but there has been accomplished an effective, successful and valuable integration of the public domain elements.”

As long as the secret compilation provides the owner with a competitive advantage, and is itself the subject of reasonable efforts to maintain its secrecy, trade secret law can provide protections from misappropriation.

In Practice articles inform readers on developments in substantive law. Contact James Cronin with submissions or questions at 
jcronin@alm.com.

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