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Things move quickly on the Web and slowly at the U.S. Patent and Trademark Office. Intellectual property lawyers often forget this at their peril. Any lawyer who represents high-tech clients has a bag of tools to use protecting intellectual property. Patents are useful in some instances, of course, but they are rarely adequate to cover all the technologies a client may consider valuable and proprietary. Patent prosecution is a lengthy and costly process with often unpredictable results, and some inventions that might be worthy of protection simply are not worth the cost of prosecution. Other technologies may not be patentable at all, but that does not mean their owners do not want to reap the benefits of inventing and deploying them. Attorneys, therefore, turn to other areas of the law for protection: the law of trade secrets, for example, the contractual protections of non-disclosure agreements and torts such as unjust enrichment and unfair competition. These tools have traditionally offered broad protection to technologies at the edges of patentability. The explosive development of highly complex Web-based software has made this kind of non-patent protection for ideas more important than ever. At the same time, however, a recent decision from the U.S. District Court for the Southern District of New York may have limited its reach, at least in the area of unfair competition. Broadly defined, a Web-based application is any piece of software that resides on a remote server (that is, a computer other than the user’s computer) and delivers its content to a Web browser over a network. If you have tried Google’s Web-based e-mail system, gmail, you have used an elaborate Web-based application. The software that permits organization of an address book and the sending, receiving, sorting, composing, and storing of the gmail resides on Google’s server and is accessed through a Web browser. The world of software development and distribution has changed and, as usual, the law is struggling to keep up. The accelerated process of innovation, development and deployment for Web-based applications means that the life cycle for a given version of a product is compressed into weeks or months, rather than years. For many such products, the term “version” ceases to have any meaning at all because there is no need to ship a new CD of the product to users and nothing to install on the customer’s computer, the product can undergo constant improvement, modification and feature growth on a daily basis. In this context, the traditional protection of patent law is next to useless. New technologies are developed and deployed so quickly that the patent process cannot keep up — nor is it designed to do so — and many valuable innovations would not be patentable anyway. Instead, the law has other means of protecting these kinds of intellectual property assets. TRADE SECRET PROTECTION Perhaps the most familiar protections for non-patented proprietary technology are non-disclosure agreement (and similar agreements enforced under contract law) and the common law of trade secrets. For Web-based applications, however, these tools may not provide much protection. The New York Court of Appeals has set out six-prong test to determine whether material constitutes a trade secret: (1) the extent to which the material is known outside of the business; (2) the extent to which it is known by employees and others in the business; (3) the extent of measures taken to guard its secrecy; (4) its value to the business and its competitors; (5) the resources expended to develop it; and (6) the ease with which it could be properly acquired or duplicated by others. [FOOTNOTE 1] The upshot is that, unsurprisingly, a trade secret must first and foremost be a secret. If a product is shipped to the public, the readily discernible elements of that product are no longer secret, and so are not afforded trade secret protection. Under the traditional software development model, this was not a serious issue. The “design elements” of a piece of commercial software might be obvious to the user, but typically the internal structure and source code would not be. A user who purchases a copy of Microsoft Word has no way to figure out the structure of the program or examine its source code and more than the purchaser of a can of Coke can figure out its formula. These are typical examples of trade secrets. [FOOTNOTE 2] Web-based applications tend to be different, however. In many (though by no means all) cases, the technologies used to deploy applications over the Web do not hide the source code from the user. Typically, the more tricks a developer uses to hide implementation details, the less likely the application is to run on a wide variety of different computers, operating systems and browsers (a core strength of Web-based applications). As importantly, companies typically want to protect the particular features of their software, not just the way that software is structured. These features are, by definition, exposed to every member of the public who uses the software, so trade secret protection simply is not available for them. Non-disclosure agreements have the same limitations: They must be narrowly tailored to avoid enforceability issues, so they almost always exclude publicly available information from their scope. Thus, as one would expect, the protection of novel but non-patented ideas is sharply limited once those ideas make their way to the market, but under New York law some areas of protection still remain. ‘LINKCO’ In LinkCo, Inc. v. Fujitsu Ltd., [FOOTNOTE 3] a federal court considered these issues and came to the conclusion that, under New York law, the tort of unfair competition can cover misappropriation of materials by a competitor, even if those materials are neither patented nor trade secrets. In LinkCo, plaintiff had designed an elaborate and detailed software architecture that it intended to use to develop financial disclosure and data management software for Japanese companies. LinkCo never developed any commercial programs using its architecture, but it did make efforts to keep the architecture documents secret, using internal non-disclosure agreements and similar clauses in employment agreements. Subsequently, Fujitsu met secretly with two former employees of LinkCo and eventually hired them as consultants. When Fujitsu produced software allegedly using LinkCo’s architecture, LinkCo sued for, among other things, misappropriation of trade secrets and unfair competition. At the close of trial, the court granted Fujitsu’s judgment as a matter of law motion on LinkCo’s trade secret claim, primarily on the grounds that software architecture (unlike the source code described above) can never be a trade secret. The court reasoned that the software architecture — which LinkCo’s expert had described as being similar to a blueprint for a building — would immediately become obvious and easily duplicable once it was embodied in a product-just as a building’s architecture does once the building is constructed. Thus the architecture, as a matter of law, could not constitute a trade secret. However, the court denied Fujitsu’s motion on the unfair competition claim, noting that New York courts have consistently ruled that unfair competition is a very broad tort designed to encompass an “incalculable variety” of illegal practices. [FOOTNOTE 4] Fujitsu argued that unfair competition, when based on misappropriation, should be limited to one of two circumstances: misappropriation of a trade secret (which was not present here) or “idea misappropriation.” According to Fujitsu, idea misappropriation under New York law requires two elements: (i) a legal relationship of some kind between the parties (fiduciary, contract, or quasi-contract) and (ii) a novel and concrete idea. Because Fujitsu had no relationship whatsoever with LinkCo, it argued that the unfair competition claim could not stand. But the court rejected Fujitsu’s effort to limit the tort of unfair competition, noting that it should encompass at least a third kind of misappropriation: misappropriation of information. Reviewing the New York cases on the subject, the court noted that, where information has been developed by the investment of labor, skill and expenditure of resources, New York law protects it from bad-faith misappropriation by another. The court wrote: The doctrine of unfair competition has been applied in various situations, like this, where a plaintiff alleges misappropriation of information that does not rise to the level of misappropriation of trade secrets or ideas. A claim for unfair competition based on misappropriation generally involves the taking of a property right. New York courts have found that persons have a protectable property interest in their labor, skill, expenditure, name and reputation. [FOOTNOTE 5] This broad reading of the tort of unfair competition offers protection in situations of true bad faith misappropriation, but it may be under attack. Earlier this month, for example, the Southern District court revisited the issue in Atari, Inc. v. Games, Inc., [FOOTNOTE 6] and limited LinkCo to situations in which the plaintiff has some “proprietary interest” in the material to be protected. In Atari, plaintiff and defendant had entered into a series of complex exclusive licensing agreements relating to Atari’s gaming content and a Web site, games.com. As one part of the transaction, Games had developed a method of placing advertising on its site, which Atari apparently used. When the entire transaction collapsed Atari sued Games and Games counterclaimed for, among other things, unfair competition based on Atari’s having misappropriated its method of advertising placement. The court dismissed the claim, calling the language in LinkCo dicta and stating that unfair competition must involve “the bad faith misappropriation of a commercial advantage belonging to another by infringement or dilution of a trademark or trade name or by exploitation of proprietary information or trade secrets.” Noting that Games had not alleged that there was anything novel or proprietary about its technique for placing advertising on the Web site, the court found that there was no basis for a claim of unfair competition. It wrote: “The alleged misappropriation is therefore of Games’s services, not its knowledge, and this will not support an unfair competition claim.” This distinction, between “services” and “knowledge” draws an extremely fine and fact-specific line. How can a developer provide services-at least on an innovative project-without also developing and proving providing proprietary (if not necessarily patentable) ideas? How innovative or novel must a concept be before it can rise to the level of a “proprietary idea” for purposes of this analysis? In a footnote, the Atari court notes (in dicta): “even possessing proprietary information may not confer property rights for purposes of this tort when held informally without legal recognition.” This seems to suggest that the tort of unfair competition might be co-extensive with patent infringement-a position that is difficult to square with the prior decisions of the federal and state courts in New York. Unfair competition, unlike patent infringement, is designed to cover cases of commercial bad faith and not simply to confer on the inventor a time-limited monopoly against the entire public. Because its protections are thus limited, its scope can be broader without endangering innocent infringers. It seems likely that, as the law develops to catch up with the current practices and technology, the line between these two kinds of protection will develop as well. Ashland Management Inc. v. JanienQ-Co Industries, Inc. v. HoffmanExport Co. Establishment of Vaduz, Liechtenstein v. Columbia Broad. Sys. Stephen M. Kramarsky is a member of Dewey Pegno & Kramarsky specializing in complex intellectual property litigation. ::::FOOTNOTES:::: FN1 Ashland Management Inc. v. Janien, 82 N.Y.2d 395, 604 N.Y.S.2d 912 (1993). FN2 E.g. Q-Co Industries, Inc. v. Hoffman, 625 F.Supp. 608, 618 (S.D.N.Y. 1985) (source code of a computer program likely to be trade secret even where machine-readable object code is distributed to market). FN3 230 F.Supp.2d 492 (S.D.N.Y. 2002). FN4 Id at 500, quoting Export Co. Establishment of Vaduz, Liechtenstein v. Columbia Broad. Sys., Inc., 672 F.2d 1095, 1105 (2d Cir.1982). FN5 Id. at 501-02 (internal citations omitted). FN6 No. 04 Civ. 3723(JSR), 2005 WL 447503 (S.D.N.Y Feb. 24, 2005).

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