---------------------------------------- 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 ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 01: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 02: No comments supplied ---------------------------------------- QUESTION 03: If the entire application is not published, what information concerning the application should be published in the Gazette of Patent Application Notices? ---------------------------------------- COMMENT ON QUESTION 03: No comments supplied ---------------------------------------- QUESTION 04: Should the patent applicant receive a copy of the published application -- either published notice and/or application content at time of publication? ---------------------------------------- COMMENT ON QUESTION 04: No comments supplied ---------------------------------------- QUESTION 05: Should the PTO permit an accelerated examination? If so, under what conditions? ---------------------------------------- COMMENT ON QUESTION 05: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 06: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 07: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 08: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 09: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 10: No comments supplied ---------------------------------------- QUESTION 11: 11. After publication, should assignment records of a published application also be made accessible to the public? ---------------------------------------- COMMENT ON QUESTION 11: No comments supplied ---------------------------------------- QUESTION 12: After publication, should access include the deposit of biological materials as set forth in 37 CFR 1.802 et seq.? ---------------------------------------- COMMENT ON QUESTION 12: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 13: No comments supplied ---------------------------------------- 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? ---------------------------------------- COMMENT ON QUESTION 14: No comments supplied ---------------------------------------- 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