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FROM RESPONDENT 003:
NAME: David Silverstein
COMPANY: LAPPIN & KUSMER
COUNSELLORS AT LAW
ADDR-1: TWO HUNDRED STATE STREET
CITY, STATE ZIP: BOSTON, MASSACHUSETTS 02109
TELEPHONE: (617) 330-1300
FAX: (617) 330-1311
REPRESENT: self
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QUESTION 01:
Should the PTO require that all Official application related
materials be delivered to a central location? Specifically, what
problems would a requirement that all official application-related
materials be delivered to a central location cause?
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COMMENT ON QUESTION 01:
No comments supplied
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QUESTION 02:
Should the PTO adopt a standard application format? If so, what
portions of the application papers should the PTO require be
submitted in a standard size and/or format, and what sanction
(e.g., surcharge) should be established for the failure to comply
with these requirements?
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COMMENT ON QUESTION 02:
No comments supplied
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QUESTION 03:
If the entire application is not published, what information
concerning the application should be published in the Gazette of
Patent Application Notices?
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COMMENT ON QUESTION 03:
No comments supplied
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QUESTION 04:
Should the patent applicant receive a copy of the published
application -- either published notice and/or application content
at time of publication?
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COMMENT ON QUESTION 04:
No comments supplied
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QUESTION 05:
Should the PTO permit an accelerated examination? If so, under
what conditions?
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COMMENT ON QUESTION 05:
No comments supplied
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QUESTION 06:
Since the cost for publishing applications must be recovered from
fees, how should the cost of publication be allocated among the
various fees, including the possibility of charging a separate
publication fee?
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COMMENT ON QUESTION 06:
No comments supplied
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QUESTION 07:
Should the PTO require an affirmative communication from a patent
applicant indicating that the applicant does not wish the
application to be published, or should failure to timely submit a
publication fee be taken as instruction not to publish the
application? That is, should an application be published unless
the applicant affirmatively indicates that the application is not
to be published, regardless of whether a publication fee has been
submitted? What latitude should the PTO permit for late submission
of a publication fee?
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COMMENT ON QUESTION 07:
No comments supplied
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QUESTION 08:
The delayed filing of either a claim for priority under 35 U.S.C.
119 or 120 may result in the delayed publication of the
application. Should priority or benefit be lost if not made
within a reasonable time after filing? What latitude should the
PTO permit for later claiming of priority or benefit?
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COMMENT ON QUESTION 08:
No comments supplied
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QUESTION 09:
Once the patent has issued, should the paper document containing
information similar to that published in the Gazette of Patent
Application Notice, i.e., the Patent Application Notice, be
removed from the search files, and should publication information
be included on the issued patent?
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COMMENT ON QUESTION 09:
No comments supplied
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QUESTION 10:
After publication, should access to the content of the
application file be limited to the originally filed application
papers? If not, what degree of access should be permilted? Should
access be limited to the content before publication, or should it
extend to materials added after publication?
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COMMENT ON QUESTION 10:
No comments supplied
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QUESTION 11:
11. After publication, should assignment records of a published
application also be made accessible to the public?
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COMMENT ON QUESTION 11:
No comments supplied
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QUESTION 12:
After publication, should access include the deposit of
biological materials as set forth in 37 CFR 1.802 et seq.?
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COMMENT ON QUESTION 12:
No comments supplied
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QUESTION 13:
What types of problems will be encountered if all amendments must
be made by (a) substitute paragraphs and claims, (b) substitute
pages, or (c) replacement of the entire application?
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COMMENT ON QUESTION 13:
No comments supplied
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QUESTION 14:
Should protest procedures be modified to permit the third party
submission of prior art only prior to a specific period after
publication of the application? What action should be taken with
respect to untimely submissions by a third party?
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COMMENT ON QUESTION 14:
No comments supplied
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GENERAL COMMENT:
In response to the recent notice of public hearing and request
for comments on the proposal for an 18-Month Publication of Patent
Applications, enclosed please find a copy of my recently published
article "Patent Law Revision: The Surprising New Challenge to Trade
Secrets," appearing in 27 Business Law Review 69 (1994).
This article argues that adoption of a pre-grant publication
system for U.S. patent applications may unwittingly undermine the
current tenuous judicial foundation for state and common law trade
secret protection in the United States. Accordingly, legislation
adopting pre- grant publication should be expressly coupled to some
form of federal trade secret protection.
PATENT LAW REVISION: THE SURPRISING NEW CHALLENGE TO TRADE SECRETS by
DAVID SILVERSTEIN* INTRODUCTION
Remember the media advertisements for the movie sequel "Jaws II"
- "just when you thought it was safe to go back in the water ..."?
Twenty years ago following a decade of legal chaos resulting from the
1964 United States Supreme Court decisions in the companion cases of
Sears and Compco the Court's 1974 decision in Kewanee Oil Co. v.
Bircon Corp.3 appeared to settle once and for all the question of
whether state trade secret law was "preempted" by federal patent law.
The Supreme Court ruled in Kewanee that there was no clear conflict
between state trade secret protection and federal patent policy;
thus, absent any indication by Congress of an intent to preempt the
field, trade secrets were eligible for state or common law
protection.4 With the Supreme Court's subsequent 1979 decision in
Aronson v. Quick Point Pencil Co.5 upholding the enforceability of a
trade secret license agreement, many businesses and intellectual
property lawyers rested easy, smugly confident that this controversy
was finally behind them.
A few scholars in the field still seemed troubled, however, by
the shaky philosophical and practical underpinnings of the Kewanee
de-
* Professor of Business Law and Department Chair. Suffolk
University, Boston, MA.
1 376 U.S. 225 (1964). 2 376 U.S. 234 (1964). 3 416 U.S. 470 (1974).
4 Id. at 48439. 5 440 IT S 257 (1979).
70 / Vol. 27 / Business Law Review cision and still unsettled
questions about the conflict between trade secret protection and
various federal statutes mandating information disclosure.6 Their
misgivings were muted by the fact that no serious challenge to the
basic viability to trade secret protection arose in the courts
following the Aronson case. But, just when everyone thought it was
safe, a surprising new challenge to trade secrets may be developing
as an unanticipated side effect of ongoing patent law revision
efforts.
Indeed, several very different lines of patent reform appear to
be converging toward one major proposed revision to U.S. patent law:
namely, abandoning the historical U.S. practice of maintaining the
secrecy of pending U.S. patent applications in favor of the more open
system, practiced by most of the rest of the developed world, whereby
patent applications are published relatively shortly (typically 6- 18
months) after an application is filed.7 Such a change in U.S.
practice is considered to be an important element in continuing
efforts to "harmonize" U.S. and foreign intellectual property (IP)
laws. IP harmonization has been a centerpiece of recent international
treaty negotiations such as the North American Free Trade Agreement
(NAFTA) and the General Agreement on Tariffs and Trade (GATT).
In addition, studies and public hearings are now underway to
consider extending patent protection to a broader range of computer
software. Because of the special difficulties the Patent and
Trademark Office would face in performing comprehensive patentability
searches in this complex and rapidly evolving field, it seems
generally accepted that any such extension of patent protection would
necessarily have to be coupled to a pre-grant publication and
opposition procedure.8 Thus, it now seems inevitable that the U.S.
will, sooner or later, adopt pre-grant publication of patent
applications.
Why should such a seemingly simple procedural change to
pre-grant publication of patent applications have any impact
whatsoever on trade secret protection? Answering this question
requires retracing the fateful and controversial U.S. Supreme Court
decisions beginning with Sears and Compco in 1964 and culminating
with the
6 See, e.g., Phillips, Are Trade Secrets Dead? The Effect of the
Toxic Substances Control Act and the Freedom of Information Act on
Trade Secrets, 62 J. PAT. OFF. SOC'Y 652 (1980); and Stern, A
Reexamination of the Preemption of State Trade Secret Law After
Kewanee, 42 GEO. WASH. L. REV. 927 (1974).
7 See Note, Eighteen Months to Publication: Should the United
States Join Europe and Japan by Promptly Publishing Patent
Applications?, 26 GEO. WASH. J. INTEL L. & ECON. 143 (1992).
8 See, e.g., PTO Hears From Silicon Valley on Patent Protection
for Software, 47 PAT., Trade & Copy. .J. /(BNA) 307 (1994).
1994 / Patent Law Revision / 71 Kewanee case exactly one decade
later. In part I of this article, patents and trade secrets are
generally compared and contrasted as a foundation for the subsequent
legal analysis. Part II of this article then reviews the landmark
Sears and Compco decisions and a few of the key subsequent cases in
which the federal courts struggled to apply the underlying
philosophy of Sears and Compco to related legal problems, including
trade secret protection. Part III of this article analyzes a seeming
retreat by the U.S. Supreme Court during the early 1970s from
strict application of the federal preemption doctrine, as reflected
in the cases of Goldstein v. California and Kewanee. Finally, part IV
considers recent renewed legislative and judicial threats to the
viability of trade secret protection, and offers a few suggestions
for business managers to respond proactively to those threats.
I. A COMPARISON OF PATENTS AND TRADE SECRETS
Trade secrets today constitute a valuable and widely- used
business asset in the United States. Thousands of businesses, large
and small, rely on trade secret protection, often without even
realizing it. Trade secrets range from the mundane-e.g., customer
lists, ways of keeping accounting records and techniques for
inventory control-to some extremely sophisticated technology- e.g.,
software, plant design, and biotechnology processes. Although trade
secrets overlap with patentable subject matter, they also go well
beyond. There is no federal trade secret law; protection of trade
secrets thus rests on state and common law remedies.
A. Scope of Trade Secret Protection
Probably the most comprehensive and generally-accepted
definition of a trade secret appears in the 1939 edition of the
Restatement of the Law of Torts.9 Section 757 of the Restatement
observed that while there had been considerable discussion and
controversy over the basis for protecting trade secrets, "[t]he
theory that has prevailed is that the protection is afforded only by
a general duty of good faith and that the liability rests upon
breach of this duty; that is, breach of contract, abuse of confidence
or impropriety in the method of ascertaining the secret."10 Thus, it
has long been clear that "[o]ne
9 See generally R.M. MILGRIM, MILGRIM ON TRADE SECRETS (1985).
In Note, Trade Secret Misappropriation: A Cost-Benefit Response to
the Fourth Amendment Analogy, 106 HARV. L. REV. 461, 462 (1992), the
author declares: "Despite the adoption of the USTA (Uniform Trade
Secret Act) by thirty-six states and the District of Columbia. the
1939 Restatement of Torts remains the courts' preferred source of
definition and guidance ."
~0 Id. at 4.
72 / Vol. 27 I Business Law Review who discovers another's trade
secret properly, as, for example, by inspection or analysis of the
commercial product embodying the secret, or by independent invention,
or by gift or purchase from the owner, is free to disclose it or use
it in his own business without liability to the owner."11 As a
practical matter, this definition limited trade secret protection to
three varieties of eases: (1) those in which a trade secret is
learned by "improper" means, e.g. industrial espionage, bribery of
company employees, etc.; (2) those in which an employee who is privy
to the trade secret as a part of his/her normal work is hired by a
competitor and divulges the trade secret to his/her new employer or
else leaves his/her original employer to start his/her own
competitive business; and (3) those in which a trade secret is
disclosed to another under a licensing agreement and, at some point,
the licensee becomes discontented with the arrangement, refuses to
pay any further royalties, but continues to use the trade secret.
The bulk of the ease law, and the most thorny legal issues, arise in
the latter two types of cases where the decisive issue is normally
whether there has been a breach of fiduciary duties.
The Restatement also noted that "[t]he subject matter of a trade
secret must be secret. Matters of public knowledge or of general
knowledge in an industry cannot be appropriated by one as his/her
secret. Matters which are completely disclosed by the goods which
one markets cannot be his/her secret. Substantially a trade secret is
known only in the particular business in which it is used.''l2
B. Categories of Trade Secrets
One useful and important way of categorizing trade secrets is
according to how the trade secret is used commercially. Certain types
of trade secrets, for instance, a prized customer list or a special
accounting method, are most likely to be used internally. This kind
of a trade secret will be disclosed only to company employees on a
"need-to-know" basis and, even then, only subject to a
confidentiality provision in the employment contract. Trade secrets
of this nature are not usually the subject of licensing agreements
nor are they in any way disclosed by being embodied in a commercial
product. At the opposite end of the spectrum are trade secrets
which can be commercially utilized only by sale or licensing to
others. This can be the case either where the originator of the
trade secret has no
12 Id at 5-6. See, e.g., K 2 Ski Company v. Head Ski Co.. Inc.,
183 U.S.P.Q. 724 (9th Cir 1974).
1994 / Patent Law Revision / 73 interest in utilizing it him/herself,
for example an independent inventor, or else where the trade secret
is completely embodied in a commercial product. In the first case,
the originator can realize a financial return on his/her discovery
only by selling or licensing it to another. In the second case where
the trade secret consists of a mechanical device or a chemical
composition, for instance a special recipe, the secret can, at least
in theory, be "reverse engineered" by a skilled mechanic or chemist
having the equipment necessary for analyzing the commercial
product.l3 It should be apparent that the owner of a trade secret
which can be exploited internally enjoys a more secure position than
one who must license his/her trade secret or sell a product which
embodies the secret.
A large group of trade secrets fall somewhere between these two
extremes. A special manufacturing process, for example, may be used
exclusively internally, but the commercial return can be increased by
also licensing it to others. In such cases, however, the potential
for increased profits must be carefully weighed against the added
risk that the trade secret will be accidentally disclosed.
A second type of typology which can be usefully applied to trade
secrets is the extent to which a trade secret that is embodied in a
commercial product can be discovered through "reverse engineering" of
the product. Once again there is a spectrum ranging from trade
secrets which are apparent upon casual inspection, to those which
defy the most sophisticated analytical techniques.14 The majority of
trade secrets that are embodied in commercial products, however, fall
somewhere in between: many will yield to analysis but only at
considerable effort and expense.l5
A third important way of classifying trade secrets is according
to whether they are patentable. With respect to patentability, trade
secrets fall into three broad categories: (a) those which are
clearly patentable if the proper steps are timely followed, i.e. the
prompt filing of a patent application; (b) those which are of
questionable patentability; and, (c) those which are clearly
unpatentable. For some purposes, it may be important to subdivide the
last category according to whether patentability is foreclosed
because of U.S. constitutional restrictions under Article I, Section
8 (8)l6, or merely because
13 In Aronson v. Quick Point Pencil Co., 440 U.S. 257, 259
(1979), the Supreme Court noted that the trade secret involved a
keyholder "so simple that it readily could be espied unless it was
protected by patent." By contrast, the trade secret formula for "COCA
COLA" has defied chemical analysis for more than a century.
14 Id.
15 See, e.g., Warner-Lambert Pharmaceutical Co., Inc. v. John F.
Reynolds, Inc., 178 F. Supp. 655 (S.D.N.Y. 1959), aff'd 280 F. 2d 197
(2nd Cir. 1960).
16 See notes 23 and 24 infra and accompanying text.
74 / Vol. 27 / Business Law Review Congress has not seen fit in its
authorizing legislation to extend patent protection to its
constitutional limits.l7
C. Differences Between Trade Secrets and Patents
Section 757, comment (b), of the Restatement made it clear that,
unlike patents, trade secrets are not necessarily limited to what is
conventionally thought of as patentable "technology."18 First, trade
secrets encompass a considerably broader field of subject matter
than patents including compilations of information, such as customer
lists, which are not usually patentable.
Second, even subject matter which is generally of the type which
is patentable under 35 U.S.C. Section 101l9 must also meet a
"usefulness" test under the statute in order to qualify for a
patent.20 Trade secrets, on the other hand, are subject to no such
constitutional restriction. The only "usefulness" requirement for a
trade secret is that it confer on the owner "an opportunity to obtain
an advantage over competitors who do not know or use it.''2l The
commercial advantage, however, cannot relate to merely a single or
limited set of events, for example the amount or other terms of a
secret bid for a contract.22 A trade secret must be an integral and
continuing element in carrying on a business or trade; and, in this
sense, it differs from other types of secret information which may be
used, from time to time, in a business.
The Restatement also pointed out that a trade secret may, but
need not, meet the standards of "novelty" and "unobviousness" which
the law imposes on patentable invention.23 Similar to the
"usefulness" standard required for patentable inventions, the
standards of "novelty" and "unobviousness" are mandated by the
constitutional prescription that patents "promote the progress of ...
useful arts."24 An invention which is either already known or is no
more than an "obvious" modification of an existing device or process
contributes nothing to advancing the state of the art.25
Compare Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489
U.S. 141 (1989) with Goldstein v. California, 412 U.S. 546 (1973).
18 Patentable subject matter is defined by 35 U.S.C. 101 (1970) as
any "new and useful process, machine, manufacture, or composition of
matter...." t9 Id. 20 Id. See, e.g., Brenner v. Manson, 383 U.S. 519
(1966). Restatement of the Law of Torts (1939), 757 at 5. Id.
Thus, comment (b) to 757, id., states: "A trade secret may be a
device or process which is patentable; but it need not be that." 24
See, e.g., Graham v. John Deere Co., 383 U.S. 1, 13-17 (1965); and
Sakraida v. Ag Pro, 425 U.S. 273 (1976). 25 See generally J.F.
WITHERSPOON ED., NONOBVIOUSNESS - THE ULTIMATE CONDITION OF
PATENTABILITY (1980)
. 1994 / Patent Law Revision / 75 As the Restatement observed,
different purposes are served in awarding patents than in protecting
trade secrets. "The patent monopoly is a reward to the inventor."26
By contrast, legal protection of trade secrets "is not based on a
policy of rewarding or otherwise encouraging the development of
secret processes or devices [but rather] is merely against breach of
faith and reprehensible means of learning another's secret."27 The
societal interest protected in the case of trade secrets is the
preservation of "rule of law," namely justice and fair play.25 In
the short-run certain economic benefits might accrue to a society
which completely abandoned protection of trade secrets; in the
long-run, however, not only would industry and commerce be likely to
suffer, but also serious damage to the underpinnings of societal
order might ensue.29 If it were considered all right to pirate
someone else's trade secrets, why not also his car, his jewelry, or
his house?30 To satisfy these limited social objectives, "it is not
appropriate to require also the kind of novelty and invention which
is a requisite of patentability."31'
In short, the differences between patent and trade secret
protection were well summarized by the Restatement as follows:32
The protection afforded by the rule stated in this Section is in some
respects greater and in some respects less than that afforded by
the patent law. It is greater in that it is not limited to a fixed
number of years and does not require novelty and invention as in the
ease of patents... It is less in that secrecy of the process and
impropriety in the method of procuring the secret are requisite here
but not in the ease of patents.
With this background, we can now turn to the extraordinary legal
cases that first raised the issue of whether state trade secret
protection was compatible with federal patent law.
II. IMPACT OF THE FEDERAL PREEMPTION DOCTRINE
A. Sears and Compco Cases
Sears, Roebuck & Co. v. Stiffel Company33 and Compco Corp. v.
DayBrite Lighting, Inc. 34 were companion cases at the United States
26 Restatement of the Law of Torts, supra note 21. 27 Id. 28 See
generally R.M. UNGER, LAW IN MODERN SOCIETY (1976) at 192-223. 29 Id.
30 Such a society recalls Hobbes' alternative to political and social
order, a state wherein life is "poor, nasty, brutish and short." T.
HOBBES, LEVIATHAN (Bobbs-Merril Co. ed. 1958) at 107.
31 Restatement of the Law of Torts, supra note 21. See also
University Computing Co. v. Lykes - Youngstown Corp., 183 U.S.P.Q.
705 (5th Cir. 1974). 32 Restatement of the Law of Torts, supra, note
21. 33 376 U.S. 225 (1964). 34 376 U.S. 234 (1964).
76 I Vol. 27 / Business Law Review Supreme Court on writs of
certiorari to reexamine holdings by the Seventh Circuit Court of
Appeals relating to the scope of Illinois unfair competition law. The
facts of the Sears case are representative of both cases.
Stiffel Company had designed and secured both mechanical and design
patents on a pole lamp, a vertical floor-to-ceiling tube having lamp
fixtures positioned at varying heights along the tube.35 Soon after
Stiffel introduced its pole lamps, Sears, Roebuck & Company began to
market a substantially identical pole lamp at a cheaper price than
the Stiffel lamps. Stiffel brought suit in the United States
District Court for the Northern District of Illinois charging Sears
with infringement of its patents and with unfair competition under
Illinois law.
The District Court held both of the Stiffel patents invalid
under 35 U.S.C. Section 103 on the grounds that the pole lamp was
merely an "obvious" modification of existing lamp and lighting
devices.36 The District Court found, however, that the Sears lamp
was a substantially identical copy of the Stiffel lamp with respect
to both functional and nonfunctional details and ornamentation. In
view of this finding, the District Court held that, with respect to
the public, there was a likelihood of confusion between the Sears and
the Stiffel lamps and, accordingly, Sears was in violation of
Illinois unfair competition law.37 This was so even though there was
no evidence or allegations that Sears had in any way mislabeled its
lamps so as to suggest any connection with Stiffel.
The Seventh Circuit affirmed the District Court's award of
monetary damages and injunctive relief to Stiffel.38 The Court of
Appeals expressly rejected arguments on behalf of Sears that
Illinois unfair competition law required "palming off" or "secondary
meaning"; it was sufficient, according to the Court of Appeals, that
the similarity in design created a "likelihood of confusion" as to
the source of the products.39 The Supreme Court granted certiorari
"to consider whether this use of a State's law of unfair competition
is compatible with the federal patent law.40
The Supreme Court opinion in Sears opened appropriately with a
lengthy discourse by Justice Black on the history and philosophy of
federal patent law as a narrow and limited exception to the
historical 376 U.S. at 225-26.
36 Id. at 226. 37 Id. 38 313 F. 2d 115 (7th Cir. 1963). 39 Id. at
118. 40 376 U.S. at 228.
1994 / Patent Law Revision / 77 Anglo-American antipathy to monopoly
privileges.4l Special note was made of the fact that "when the
patent expires the monopoly created by it expires, too, and the right
to make the article - including the right to make it in precisely
the shape it carried when patented passes to the public."42 For
these reasons, concluded Justice Black "the patent system is one in
which uniform federal standards are carefully used to promote
invention while at the same time preserving free competition."43
The difficulty with permitting a state to safeguard through its
unfair competition laws that which fails to meet the standards of
federal patent protection, said Black, is that "States could allow
perpetual protection to articles too lacking in novelty to merit any
patent at all under federal constitutional standards. This would be
too great an encroachment on the federal patent system to be
tolerated."44 Under the so-called "Supremacy Clause"45 of the U.S.
Constitution, where state law conflicts with federal policy the
state law is "preempted." Justice Black acknowledged that "a State
may, in appropriate circumstances, require that goods, whether
patented or unpatented, be labeled or that other precautionary steps
be taken to prevent customers from being misled as to the source."46
Because of the conflict with federal patent law, however, the Court
held that "a State may not, when the article is unpatented and
uncopyrighted, prohibit the copying of the article itself or award
damages for such copying."47 On this basis, the holdings of the
Court of Appeals in both Sears and Compco were reversed.
B. Brulotte v. Thys Company It soon became clear that the
extensive discussion by the Supreme Court in the Sears and Compco
decisions about the historical, philosophical, and constitutional
foundations of the U.S. patent systems was not mere dicta nor limited
to the fact pattern of those two cases. In the later 1964 case of
Brulotte v. Thys Company,48 the Supreme Court demonstrated its intent
to apply the same federal preemption reasoning that dictated the
outcome of Sears and Compco to a broad
41 Id. at 229-30. 42 Id. 43 Id. at 230-31. 44 Id. at 232. 45 U.S.
Const., Art. VI, para 2, reads in part: "This Constitution. and the
Laws of the United States...shall be the supreme Law of the Land. ."
46 376 U.S. at 232. 47 Id. 48 379 U.S. 29 (19641.
78 / Vol. 27 / Business Law Review range of related issues where
conflicts were perceived to exist between state/common law and
federal patent principles.
In Brulotte, the Court held invalid several patent licensing
agreements which provided for royalty payments continuing beyond the
date on which the last of those patents had expired. The Court
reasoned that once the patent monopoly expired, everyone (including
former licensees) should be free to use the invention without paying
additional tribute to the inventor. State contract law could no more
be used to protect an invention after patent expiration than state
unfair competition law could protect an invention after patent
invalidity. The Court expressly rejected a lower court holding that
the arrangement at issue was merely a reasonable way "to spread the
payments for the use of the patents."49
C. Lear, Incorporated v. Adkins
Sears, Compco, and Brulotte, of course, were not trade secret
cases. Not until five years later in Lear Incorporated v. Adkins50
was the potential impact of these cases on trade secret protection
fully appreciated.5l In Lear, however, the Court addressed for the
first time the question of whether, by logical extension of the
doctrines of Sears, Compco, and Brulotte, a licensee should also be
able to avoid royalty payments when an unexpired patent underlying a
licensing agreement is found to be invalid.
After summarizing the facts and procedural posture of the case,
Justice Harlan began the majority opinion with a lengthy history and
analysis of the doctrine of licensee estoppel.52 "Licensee estoppel,"
a modern application of the ancient maxim that you should not bite
the hand that feeds you, was a judicially-created doctrine which held
that a licensee was estopped from challenging the validity of the
patent unless he/she first repudiated the licensing agreement.53
Because a patent licensing agreement is, in essence, a covenant by
the patent owner not to sue the licensee for patent infringement,
repudiation of the agreement would leave the licensee open to suit
for infringement as well as breach of contract should the patent
subsequently be declared valid. In view of the high costs and
uncertainties involved in litigating the validity of a patent, the
doctrine of licensee
49 Id. at 31. See also Boggild v. Kenner Products, 228 U.S.P.Q.
130 (6th Cir. 1985) reversing 576 F. Supp. 533 (S.D. Ohio 1983).
45 395 U.S. 653 (1969).
51 See, e.g., Sutton, Trade Secrets - Federal Preemption and
Legislative Solutions, 1971 PAT. L. ANN. 129 (1971).
52 395 U.S. at 662-68.
See Automatic Radio Company v. Hazeltine Research, Inc., 339
U.S. 827 (1950).
1994 / Patent Law Revision / 79 estoppel proved to be a substantial
deterrent to licensee patent challenges.
Harlan observed that the case law in this area had struggled for
many years to try to accommodate the conflicting policies of
contract law and federal patent law. One the one hand, the courts
were reluctant to create an anomaly in patent licensing whereby a
contract would be judged by hindsight and an imprudent licensee
permitted to escape from the terms of what, in retrospect, proved to
be a bad bargain. On the other hand, a uniform and consistent
federal patent policy required that there be free competition in
ideas and inventions which were not protected by federal patents or
copyrights. The problem, observed Harlan, came down to a "search for
an acceptable middle ground."54
In reviewing this search, the Court concluded that the balance
which it previously struck in Automatic Radio Company v. Hazeltine
Research, Inc., by sanctioning the licensee-estoppel doctrine, was
improperly weighted in favor of contract principles under state
laws. It found that the Court's more recent decisions in Sears and
Compco compelled a holding that federal patent policies prevailed
over conflicting state contract law.55 Accordingly, the Court had
little trouble in overruling Hazeltine and the licensee- estoppel
doctrine.56
But, the issues raised in Lear, noted the Court, were "far more
complicated"57 than simply a licensee-estoppel case. In the "easy"
case where a patent owner licenses an already-issued patent, the
licensee gains two advantages over its competitors: first, freedom
from the threat of a patent infringement suit; second, deterrence
against competitors entering the field. As Justice Harlan observed,
however, the licensee in this case, i.e. Lear, "gained an important
benefit not generally obtained by the typical licensee."58 This was
the benefit of access to secret, proprietary information several
years before Lear's competitors obtained access to this information
upon publication of Adkins' patent.59 "At the core of this case,
then," said Harlan, "is the difficult question whether federal
patent policy bars a State from enforcing a contract regulating
access to an unpatented secret idea."50 This key quotation was the
very first time that the U.S. Supreme Court raised the "difficult
question"51 of the continued
54 395 U.S. at 668 55 Id. at 670. 56 Id. 57 Id. 58 Id. at 671. 59 Id.
at 671-72. 60 Id. at 672. 61 Id.
80 / Vol. 27 / Business Law Review viability of trade secret
protection in light of federal patent policy.
At one extreme, observed Harlan, was the position taken by
Adkins that because Lear obtained privileged access to Adkins' ideas
before the patent issued, the trade secret and license agreement with
Lear should be legally enforceable irrespective of the validity of
the patent. This position, however, clearly contravened the
principles of Sears, Compco, and Brulotte.62 A fall- back,
alternative position advanced by Adkins was, even assuming that
Lear could raise patent invalidity as a defense to Adkins' breach of
contract action, at least until such time as the patent was actually
declared invalid Lear should be obliged to continue its royalty
payments. This argument, too, was flatly rejected by the Court.63 A
host of related and even more difficult questions touching directly
on the continued viability of trade secrets were raised by Justice
Harlan but were left unanswered.64
Harlan's majority opinion was far from unanimous. One justice
argued that the majority had gone too far, while three others urged
that it had not gone far enough. Justice White, while concurring
with the majority on the licensee- estoppel issue, contended that
until the validity issue was determined in the lower courts, the
Supreme Court lacked jurisdiction to rule on Adkins' claims for
royalties.65
By contrast, Justices Black and Douglas, the drafters and
leading proponents of the decisions in Sears, Compco, and Brulotte,
in a separate opinion joined by Chief Justice Warren, excoriated the
majority for failing to carry through the mandate of the Sears and
Compco doctrine to its logical conclusion.66 Specifically focusing on
trade secret protection, Justice Black concluded:67 One who makes a
discovery may, of course, keep it secret if he wishes, but private
arrangements under which self-styled "inventors" do not keep their
discoveries secret, but rather disclose them, in return for
contractual payments, run counter to the plan of our patent laws,
which tightly regulate the kind of inventions that may be
protected and the manner in which they may be protected. The
national policy expressed in the patent laws, favoring free
competition and narrowly limiting monopoly, cannot be frustrated by
62 Id . 63 Id. 64 Although the Court freely acknowledged that its
present decision would "of course, require the state courts to
reconsider the theoretical basis of [trade secret protection]," id.,
the Court side-stepped this thorny issue with the observation that
the state "courts may well reconcile the competing demands of patent
and contract law in a way which would not warrant further review in
this Court," id. 65 395 U.S. at 677-81. 66 Id. at 676-77. 67 Id. at
677.
1994 / Patent Law Revision / 81 private agreements among individuals,
with or without the approval of the State.
D. Painton & Company, Ltd. v. Bourns, Inc.
It did not take long for the Black-Douglas philosophies, as
expressed in their Lear concurrence, to find expression in the
decision of a sympathetic federal trial judge. Less than a year
after Lear was decided, Judge Constance Baker Motley relied on this
case as the basis for summarily dismissing counterclaims for an
injunction and unpaid royalties due under a trade secret licensing
agreement in Painton & Company, Ltd. v. Bourns, Inc.68
The Painton case involved a "naked" trade secret license. There
was no patent involved, valid or otherwise. No patent application
had ever been filed, nor had one even been contemplated. In an
extraordinary exposition on the potential evils of trade secrets,69
Judge Motley concluded that "[f]or these reasons, this court holds
that federal patent law requires an inventor to submit his ideas to
the Patent Office before he can compel consideration [to be paid]
for the use of his idea."79
On appeal, in a unanimous and carefully-reasoned opinion by
Judge Henry Friendly, the Second Circuit Court of Appeals reversed.7l
First, the Court noted that not even the opinion of Justice Black in
Lear went so far as to rule out the collection of royalties prior to
the filing of a patent application.72 Next, the Court addressed Judge
Motley's arguments that protection of trade secrets was contrary to
public policy because it discouraged patent applications.73 The Court
carefully distinguished three categories of trade secrets: "(1) the
trade secret believed by its owner to constitute a validly patentable
invention; (2) the trade secret known to its owner not to be so
patentable; and (3) the trade secret whose valid patentability is
considered dubious."74
The Court concluded with respect to type (1) that there was
little danger that inventors of clearly patentable inventions would
choose to forego a patent in lieu of trade secret protection.75 With
respect to type (2), the Court concluded that there was no merit in
promoting 68 309 F. Supp. 271 (S.D.N.Y. 1970).
69 Id. at 274. 70 Id. 71 Painton & Company, Ltd. v. Bourns, Inc., 442
F.2d 216 (2nd Cir. 1971). 72 Id. at 223. 73 Id. at 223-24. 74 Id. at
224. 75 [~
1994 / Patent Law Revision 1 83 opportunity to cash in on the
successful recordings of others by making counterfeit tapes from a
master recording and selling them well below the prices of the
genuine recordings.83 This was possible under U.S. copyright laws
because tapes were not considered to be "copies" of the underlying
copyrighted words and music, and protection for sound recordings per
se did not become available until February 15, 1972, when a long
overdue amendment to the Copyright Act became effective.84 Several
states responded to this congressional oversight either by enacting
their own laws, like California, or by affording protection based on
common law copyright.85
Goldstein argued, however, that California's record piracy
statute was preempted by federal copyright law and, therefore, was
invalid. In particular, Goldstein contended that the principles
enunciated by the Supreme Court in the Sears and Compco cases
prevented the states from affording legal protection to works which
did not qualify for federal copyright protection.86 All of the
recordings duplicated by Goldstein had been "fixed" prior to
February 15, 1972 and, thus, were ineligible for protection under the
Sound Recording Amendment of 1972.87 Furthermore, Goldstein argued
that even under the Sound Recording Amendment, records and tapes
were protected from duplication only for the normal copyright term.
By contrast, under the California statute, pre-1972 recordings were
protected in perpetuity,88 just as state unfair competition law would
have done in Sears and Compco.
But, writing for a narrow 5-4 majority, Chief Justice Burger
reaffirmed Goldstein's conviction.89 Instead of the Sears and Compco
blunderbuss approach to federal preemption, Justice Burger adopted a
more deliberate and discriminating analysis. First, he noted, this
was not an area where the Constitution granted exclusive authority to
the federal government.90 Nor, he observed, was this an area where
the Constitution granted authority to the federal government and
prohibited the States from exercising similar authority.9l
Instead, Burger concluded, this was a third type of situation
where the Constitution granted authority to the federal government
but 83 Id. at 549-51.
84 The Sound Recording Amendment. Pub.L. 92-140 (1971). 85 See, e.g.,
Mercury Record Productions, Inc. v. Economic Consultants, Inc., 183
U.S.P.Q. 358 (Wisc. Sup. Ct. 1974). 86 412 U.S. at 551 87 Id. at 552.
88 Id. 89 Id. at 570. 90 Id. at 552. 91 Id. at 553.
84 / Vol. 27 / Business Law Review said nothing about the concurrent
exercise of state authority. In this third type of case, Burger
argued, concurrent state regulation should be upheld unless Congress
had expressly withdrawn state power or such state regulation was
"absolutely and totally contradictory and repugnant" to federal
authority.92 Because neither of these limitations applied to the
California statute at issue, it was held valid. Over vigorous
dissenting opinions by Justices Douglas and Marshall,93 the Court
concluded:94 "[I]t is difficult to see how the concurrent exercise of
the power to grant copyrights by Congress and the States will
necessarily and inevitably lead to difficulty."
The Sears and Compco cases were neither overruled nor
convincingly distinguished. A distinction which the majority opinion
raised but never fully elaborated was that pre-1972 sound recordings
were subject matter left unregulated by federal law. Thus, states
were free to step into this vacuum without infringing on federal
policies.95 By this line of reasoning, technology not encompassed by
current patent law could presumably be validly protected under state
trade secret law.96 But what about inventions which are of
questionable patentability? This and a host of related questions
were left unanswered until Kewanee.
B. Kewanee Oil Co. v. Bicron Corp.
Kewanee Oil Co. v. Bicron Corp97 involved former employees of
the plaintiff who formed or later joined the defendant, a competitor
in the same technical field as the plaintiff. While employed by
Harshaw Chemical Company, an unincorporated division of Kewanee Oil
Company, each of the subject employees had executed confidential
disclosure agreements which, as a condition of their employment,
required them not to disclose confidential information or trade
secrets obtained in the course of employment.98
Kewanee commenced this action in the U.S. District Court in Ohio
seeking injunctive relief and damages under Ohio's trade secret laws
for the misappropriation of its trade secrets by Bicron Corp. The
Id. at 554. 93 Id. at 572-79.
Id. at 559.
Id. at 569-70.
More recent case law has indicated that the enforceability of
"hybrid" license agreements covering both patented and trade secret
subject matter may turn on the express allocation of royalties
between the two. See, e.g., Mestre v. Pitney Bowes, Inc., 701 F. 2d.
1365 (11th Cir. 1983); and Chromally American Corp. v. Fischmann,
716 F. 2d 683 (9th Cir. 1983). 9 416 U.S. 470 (1974).
98 Id. at 473. e notes 3
1994 / Patent Law Revision / 85 District Court granted Kewanee a
permanent injunction against Bicron using or disclosing 20 of the 40
claimed trade secrets until such time as they became a matter of
public knowledge through proper means.99 On appeal, the U.S. Court
of Appeals for the Sixth Circuit adopted the trial court's fact
findings that Bicron had appropriated for its own benefit secret
information from the former Harshaw employees.100 As a matter of law,
however, the Court of Appeals reversed the District Court decision
on the grounds that Ohio trade secret law was preempted by federal
patent law.101 Because this holding was in conflict with earlier
decisions in other federal courts of appeals, the Supreme Court
granted certiorari.l02 The unusual importance of this case in
intellectual property circles was underscored by the filing of 21
amicus ("friend-of-the- court") briefs.l03
Again authoring the majority opinion for a divided Court, Chief
Justice Burger reversed the Sixth Circuit Court of Appeals and
reaffirmed the continued viability of trade secrets. Burger relied
heavily on the Goldstein case as a precedent for the general
proposition that concurrent federal and state legislation in the
intellectual property field does not necessarily and inevitably
lead to conflict and, therefore, does not always require federal
preemption.l04
The Chief Justice noted that in the Sears and Compco cases,l05
the lamp and lighting designs had become part of the public domain,
subject only to the existing patent rights.l03 When the patents were
invalidated, patent protection and any other form of legal protection
was terminated. The Supreme Court had held that the information
disclosed to the public as a part of the patent quid pro quo could
not thereafter be withdrawn through the application of state unfair
competition laws.l07 In Kewanee, however, no patent "bargain" had
ever been struck, and no public disclosure had ever been made.
Vis-a-vis the general public, the information involved in Kewanee
was still secret. To help in categorizing analyzing the impact
of trade secrets on patent protection, Justice Burger turned to the
taxonomy of trade secrets employed by the Second Circuit Court of
Appeals in Painton
99 Id. at 473-74. 100 Id. at 474. l01 Id . 102 414 U.S. 818 (1973)
'03 The list included three former Commissioners of Patents and
Trademarks, see 40 L.Ed. 2d 879-80.
t 416 U.S. at 47880. 405 See notes 33-47 supra and accompanying
text. 106 Id. l07 416 U.S. at 481
86 / Vol. 27 / Business Law Review v. Bourns.108 Following an almost
identical line of reasoning as Judge Friendly, Burger concluded that
in none of Judge Friendly's three categories of trade secrets was the
probability of a conflict with federal patent policy so great as to
compel a holding of federal preemption.l09 Sears and Compco were
distinguished on the grounds that in those cases the operation of
state law had the effect of withdrawing knowledge from the public
domain whereas a trade secret, by definition, "has not been placed in
the public domain.''110 Commenting on the possibility that
abolishing trade secret protection would promote more patent
application filings, Justice Burger observed:
The mere filing of applications doomed to be turned down by the
Patent Office will bring forth no new pueblo knowledge or
enlightenment, since under federal statute and regulation patent
applications and abandoned patent applications are held by the Patent
Office in confidence and are not open to pueblo inspection.
It will be apparent that this important line of argument in
defense of the Kewanee decision remains valid only so long as the
United States does not adopt a pre-grant publication system.
In a scathing dissent in Kewanee, Justice Douglas charged:ll2
"Today's decision is at war with the philosophy of [Sears and
Compco.]" The crux of Douglas' argument was that a patent owner must
have an invention which meets certain standards and must disclose
this invention to the public, for which he receives only a limited
period of exclusivity. A trade secret owner, on the other hand, need
not have an invention which meets any standards, gives nothing to
society and, in return, receives a potentially perpetual monopoly.ll3
According to Douglas, "[t]he conflict with the patent laws is
obvious.''ll4 Although Douglas would not have sanctioned the
deliberate theft of a trade secret, he believed that the civil remedy
should have been limited to damages for breach of contract.ll5 In
his opinion, injunctive relief should be reserved for patents where
the inventor has "paid" for his monopoly by making a full public
disclosure of his invention."116
108 See notes 68-78 supra and accompanying text. '09 416 U.S. at
484-89.
to Id. at 484.
Id. at 489.
Id. at 495.
113 Id. at 495-96. Cf: Greenberg v. Croydon Plastics Co., Inc., 184
U.S.P.Q. 27 (E.D. Pa. 1974). 114 416 U.S. at 496. 115 Id. at 498 116
Id.
1994 / Patent Law Revision / 87
Justice Marshall, in a brief concurring opinion, concluded that
there was neither persuasive evidence of actual conflict between the
patent and trade secret systems nor of congressional intent to
preempt the field."7 In contrast with Chief Justice Burger, however,
Justice Marshall had no doubts that "the existence of trade secret
protection provides in some instances a substantial disincentive [to
apply for patents] and thus deprives society of the benefits of
public disclosure of the invention..."ll8
IV. THE FUTURE OF TRADE SECRET PROTECTION
A. Recent Judicial and Legislative Developments
Following the Kewanee decision in 1974, the U.S. Supreme Court
revisited the specific issue of trade secret protection in one case
and the broader issue of federal- state conflicts in the
intellectual property field in another. In the 1979 case of Aronson
v. Quick Point Pencil Co., ll9 another decision authored by
Chief Justice Warren Burger, the Supreme Court applied the Goldstein
preemption analysis to conclude, as in Kewanee, that federal law
preempted state law only in cases where the state law "stands as an
obstacle to the accomplishment and execution of the full purposes and
objectives of Congress.120 The Court thus upheld the validity of the
trade secret license at issue in Aronson based on the conclusion
that no conflict necessarily existed between trade secrets and
patents.121'
The Aronson case added a few wrinkles not present in Kewanee.
The keyholder invention involved in Aronson "[a]lthough ingenious,
... was so simple that it readily could be copied unless it was
protected by patent.''l22 The trade secret license had been
negotiated while a patent application was pending, but no patent was
ever issued. Competitors were therefore able to freely copy the
design while Quick Point was compelled to go on paying royalties.
Still, the Court noted, Quick Point had not done badly in its
bargain: partly as a result of its jump on the market because of its
license agreement with Aronson, it had sold more than seven million
dollars worth of the keyholders.l23 Moreover, Justice Burger noted,
whereas the state unfair competition laws struck down in Sears and
Compco barred
117 Id. at 494. 118 Id. 119 440 U.S. 257 (1979). 120 Id. at 262. 121
Id. at 262-63. 122 Id. at 259. 122 Id. at 263.
88 / Vol. 27 / Business Law Review everyone from copying the
unpatented designs, enforcement of the trade secret license in
Aronson only restricted Quick Point.l24 The 1989 Supreme Court
decision in Bonito Boats, Inc. v. Thunder Craft Boats, Inc.,l25
however, forced the Court to reexamine the very foundation of Sears
and Compco. The Bonito case involved the validity of a Florida
statute that prohibited the sale of boat hulls made by a copying
process known as direct or "plug" molding. This process made it
possible for competitors to quickly and inexpensively produce carbon
copies of other manufacturers' commercially successful boat hulls
without incurring any of the expenses of design and testing.
Plaintiff-petitioner in this action argued that, unlike the
expansive state unfair competition laws at issue in Sears and
Compco, the subject Florida statute did not prohibit all copying of
unpatented boat designs but rather only copying by one especially
reprehensible technique.l25 But, it was to no avail as the Supreme
Court ruled that the Florida statute was preempted by federal patent
law. Warren Burger had since retired from the Court, and there was
no evidence in Justice O'Connor's opinion in Bonito of the federal
preemption analysis that Burger had employed in Goldstein, Kewanee,
and Aronson.
Under the Goldstein approach, the Court would have started by
asking whether the exercise of concurrent state power in Bonito, as
reflected in the Florida statute, was "absolutely and totally
contradictory and repugnant" to federal authority. Instead,
reverting to the Court's approach in Sears and Compco, Justice
O'Connor began her analysis in Bonito with the history of the patent
laws as a carefully balanced exception to the general public policy
against monopolies. In effect, the Goldstein approach created a
rebuttable presumption against federal preemption, whereas the Sears
and Compco approach established an almost insurmountable presumption
against the exercise of concurrent state protection. Although Justice
O'Connor acknowledged that since Sears the Court's decisions "have
taken a decidedly less rigid view of the scope of federal preemption
under the patent laws, e.g., Kewanee,''l27 in truth it is likely that
a different outcome would have resulted in Kewanee had the Court
applied the Sears instead of the Goldstein approach.
Thus, even prior to recent legislative proposals, there was
reason to question the continued viability of the Kewanee decision.
But, when the legal philosophy reflected by Sears, Compco, and more
recently
Id. at 264. 125 489 U.S. 141 (1989). 126 Id. at 163.
Id. at 156.
1994 / Patent Law Revision / 89 Bonito, is combined with a possible
change in the U.S. patent system, the threat to trade secret
protection becomes manifest. As previously noted, serious
consideration is currently being given to pre-grant publication of
U.S. patent applications.l28 This change would help to harmonize the
U.S. patent system with those of most other developed countries. In
addition, pre-grant publication of patent applications is a necessary
element of a pre-grant public opposition system, which is also a part
of patent practice in some other developed countries. Such a
pre-grant opposition system is considered by many to be the only
workable means of insuring that the most recent and relevant prior
art comes to the attention of the Patent Office in a rapidly evolving
technology such as computer software.
If the U.S. were to adopt pre-grant publication of patent
applications, however, it would mean that the subject matter of
patent applications would, sooner or later, become public knowledge
whether or not any patent were ever issued. Thus, there would
suddenly be a public benefit in compelling the filing of patent
applications even for subject matter that was clearly unpatentable or
where patentability was in doubt. A principal foundation of Chief
Justice Burger's opinion in Kewanee would thereby be undermined.l99
Were this to happen, it is easy to envision a renewed judicial
challenge to the viability of trade secret protection. With Chief
Justice Burger no longer on the Court, with the Court's recent
reaffirmation of the federal preemption doctrine in Bonito, and with
the logic of Kewanee undercut by adoption of pre-grant publication,
it is also not difficult to envision the narrow 5-4 majority
decision in Kewanee being ultimately overturned.
B. Proactive Management Responses
Astute managers do not wait to be run over by legal changes but
rather anticipate such changes and respond proactively.l30 This
author believes it is not too soon for managers to start thinking
about how better to prepare their companies for the possible future
curtailment of trade secret enforceability.
First, it is well to bear in mind that even Justice Douglas in
his vociferous dissent in Kewanee did not argue that there should be
no protection whatsoever for trade secrets. While Justice Douglas
did not believe that a trade secret license, e.g., in Aronson,
should be enforceable, he did believe that businesses should have
some protect-
128 See notes 7 and 8 supra and accompanying text. 129 See notes 110
and 111 supra and accompanying text. 130 See, e.g., Silverstein, The
Litigation Audit: Preventive Legal Maintenance for Management, 31
Bus. HORIZONS 34 (1988).
90 / Vol. 27 / Business Law Review tion against theft of trade
secrets that were being used wholly internally.l3l But, in such
cases as employee theft or industrial espionage, Justice Douglas
urged that the remedies be limited to money damages with no
possibility of injunctive relief.l32 It seems likely that even if,
at some future date, trade secret protection were limited, such
limitations would not exceed those proposed by Justice Douglas.
Therefore, a manager might begin a proactive strategy in this
field by preparing a comprehensive inventory of the company's trade
secrets and categorizing those secrets according to whether they are
utilized internally, externally, or both. The more the secrets are
used externally, for example by being embodied in a product or
licensed to others, the more vulnerable they will be to a future
change in the case law. If feasible, for the more valuable secrets,
the company might want to reduce its exposure to possible
legal change by curtailing external uses, for instance by not adding
any new licensees
or by not licensing the company's newest trade secrets to anyone.
Even for those trade secrets used completely internally, the
company might want to reexamine the extent of in-house disclosure-
which employees really "need to know" the secrets to do their jobs?
If there is a reasonable possibility of obtaining a patent on a new
discovery, the company might be wise to redo the usual cost-benefit
calculus before making the decision between patent and trade secret
protection. These and other similar measures can help a firm better
position itself to withstand a significant change in the law of trade
secrets.
At the same time, businesses will want to be sure that their
federal legislators are well aware of the possible damage to
traditional trade secret protection that could inadvertently result
from adoption of pre-grant publication of patent applications.
Ideally, any such legislation would be coupled with an unequivocal
declaration by Congress that state trade secret law was not intended
to be preempted by federal patent law.
CONCLUSION
Recently proposed revisions to the U.S. patent system, when
viewed together with case law over the last thirty years relating to
federal preemption doctrine as applied to this field, poses
significant risks to the viability of state trade secret protection.
Managers in companies that have large portfolios of trade secrets
need to be aware 1994 / Patent Law Revision /91 of the possible legal
threat to these valuable assets and take appropriate steps now to
safeguard their firms' interests.
Last Modified: March 1995