by Paul Fraulo

Recently there have been many articles discussing the choice between protecting technology as a trade secret as opposed to seeking a patent. While patent law arguably provides stronger protection for an invention, one of the major advantages of protecting technology as a Trade Secret is that it does not have to meet the strict requirements of patentability that companies face in the patent process, such as novelty and non-obviousness. Recently though, the patent process has become even more tricky, and the advantages of safekeeping information as a trade secret have grown. The legal industry has devoted a great deal of attention to three things in particular as they pertain to the relationship between patents and trade secrets, 1) the America Invents Act (AIA), 2) the ruling in CLS v. Alice, and 3) the increased likelihood of a federal cause of action for trade secret misappropriation. Gradually, as lawyers and businesses begin rethinking their approach to protecting their technology, trade secrets are being recognized as a more viable option in many situations.

The once rote calculus of deciding whether to file a patent or protect technology as a trade secret first started to evolve with the America Invents Act (AIA) coming into effect in late 2012. Before the AIA, protecting your tech as a trade secret meant you ran the risk of somebody else obtaining a patent that covers your technology. While there was always a defense of prior use, the AIA expanded the defense to cover even secret prior use, making secrecy a somewhat more attractive option. The impact of AIA and Alice are both discussed in this article by law firm Robins, Kaplan, Miller, and Ciresi (RKMC).

The Federal Circuit’s decision in Alice made it substantially more difficult to obtain a software patent. RKMC explains that although software patents may still be obtainable, Alice made it clear that an inventive concept beyond the computer implementation of an otherwise abstract idea is not enough to avoid a 101 rejection. Just how much more is needed, is as yet difficult to say, and thus this increased uncertainty has scared off would-be patent applicants who are instead opting to protect their software as a trade secret. At the symposium TSI hosted last month in October 2014, this concern was solidified as an important consideration by one of the panelists, Jeffrey Schwab, who explained that his advice to software companies is far more pro-secrecy now than ever before in the wake of Alice.

Most recently, there has been a stronger push to create a federal cause of action in Trade Secret misappropriation. While the impact is somewhat uncertain, it is clear that a congressional act with no pre-emption creating a federal cause of action can only increase a company’s options, and therefore strengthen the protection of trade secrets. Dennis Crouch explains how this shift in the law may impact not just how companies choose to protect their intellectual property, but also how companies opting out of patent protection means less disclosure of technology to the public. Crouch’s article reviewed a study by three economists which purports to show that this decrease in disclosure, also decreases the liquidity of companies that are now opting to keep their technology secret. The link between disclosure and liquidity here results from asymmetric information between the company and the public. To put it simply, a person is less likely to want to trade stock in companies that are not disclosing their technology to the public, because they cannot assess the value of the company without knowing what technology they have.

Interestingly, Professor Christopher Seaman also recognized the potential impact decreased disclosure may have in a more pro-secrecy environment. In his article in PatentlyO assessing the impact of federalizing trade secrecy, Professor Seaman explains that decreased disclosure can hurt innovation, because in a patent-friendly regime disclosure is “used by others to improve upon the invention and to practice it after the patent’s expiration.” Professor Seaman discussed this issue along with various other aspects of the debate over federalizing trade secret law at TSI’s symposium last month, reviewed here by Alexander Goldman.

Part 1: Proposed Federal Trade Secrets Law
by Alexander Goldman ’14

Congress is considering a Federal trade secrets law to solve a very specific problem: the possibility that an employee of a U.S. company will be at an airport with a thumb drive full of trade secrets before the company can act. This first session of the Trade Secrets Symposium at Brooklyn Law School was moderated by Trade Secrets Fellow Paul Fraulo ’15.

Ted Schroeder, Chief Counselor to U.S. Senator Coons (D-DE), told the symposium to take a close look at the case of Gore, Inc., the company that makes Gore-Tex. Kwang Seoung Jeon did not have one thumb drive full of company documents — he had three of them when he was arrested — and a one-way ticket to his native South Korea.

But Professor Christopher Seaman of the Washington and Lee University School of Law said that federalizing trade secret law will not necessarily simplify trade secrets litigation because the federal law, as currently written, explicitly does not preempt state law. Seaman said that the provision is vital in order to avoid the creation of a body of federal common law separate from the states, a situation that existed before the famous 1938 Supreme Court case Erie Railroad Co. v. Tompkins. Seaman added that experimentation at the state level is a strength of the U.S. legal system, not a weakness.

Schroeder replied that antitrust and consumer protection are both under a system of interlocking state and federal legal systems.

Ira Levy ’88, partner at Goodwin Procter LLP, suggested that preemption might have been sacrificed in order to ensure the bill passed. He added that practitioners need courts to act quickly because “the value of a trade secret is lost the moment that it is no longer a secret.” He suggested that a federal court might act faster because of a provision in the proposed federal law that provides an ex parte process for the seizure of trade secrets.

Seaman asked why the federal law needs the ex parte process. Schroeder replied that, for the most valuable trade secrets, the ex parte process is critical.

During the question and answer period, Professor David S. Levine of Elon University School of Law (currently visiting researcher at Princeton), warned that the ex parte process would have substantial chilling effects. “Google can defend itself, but can a startup,” he asked. “What about the cloud? Can you seize a Drop Box or a Google Drive?”

by Alexander Goldman

In a case that may just be the first of many, the United States filed charges against five men who are accused of conducting cyber espionage attacks for the government of China against targets in the United States. Wang Dong, Sun Kailiang, Wen Xinyu, Huang Zhenyu, and Gu Chunhui have been indicted by a federal grand jury in Pennsylvania on 31 counts of espionage for activities over the nine years from 2006 to 2014 (inclusive). The defendants were officers in the notorious Unit 61398 of the Chinese People’s Liberation Army (PLA). The U.S. government named six corporate victims of the attacks: Westinghouse, SolarWorld, U.S. Steel, ATI, USW, and Alcoa.

Because any judgment in a U.S. court is unlikely to be enforced in China, the suit is not likely to result in any direct consequences for the defendants.

SolarWorld and USW were involved in trade disputes against Chinese solar energy equipment manufacturers, according to the indictment. Other victims may be U.S. Companies with military ties, who are under constant attack but should be protected by a relatively new and nascent federal program called the Defense Industrial Base.

The case has complex diplomatic ramifications. It will certainly affect relations between the United States and China. Its effect on relations between parties and nonparties is difficult to forecast. Will other nations view the U.S. as sympathetic if they, too, realize they have been victims of state sponsored trade secret theft by Unit 61398?

The message is complicated by the extensive activities of the NSA. The United States is telling the world that espionage for the purposes of national security is legitimate, but that espionage for the purposes of trade secrets theft is not. That message, in turn, is complicated by allegations that the NSA’s program included economic targets such as Petrobras (Brazil’s national petroleum company), Huawei (a Chinese telecommunications equipment manufacturer), and others.

The Guardian quotes James Lewis, a cybersecurity expert at the Center for Strategic and International Studies, as saying that the practical effect of the case will be “intangible” but that it will send a “strong message” to the government of China.

China does have its own trade secrets laws but obtaining enforcement of them in China can be difficult.