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USPTO Report Supports "Prior Commercial Use" Defense under the America Invents Act: An Important Victory for Trade Secret Protection?

 
by John Marsh 23. January 2012 10:00

In an important development for trade secrets, the United States Patent and Trademark Office (USPTO) submitted a report to Congress on January 13, 2012 affirming the "prior commercial use" defense to the recently-enacted America Invents Act (AIA). The USPTO's website, which provides a PDF link to the 64-page Report, can be found here. 

As James Schweikert and I wrote last month, the prior commercial use defense was expanded from business methods patents to patents for all technologies, a change that is universally believed to favor trade secret protection. This defense requires clear and convincing evidence that the invention or process has been commercially used for more than one year prior to the filing of the patent application.

In its Report, the USPTO finds that the expanded prior use defense "strikes the appropriate balance" between patent rights and trade secret protection. Prior to the Report, the USPTO held a hearing on October 25, 2011, after having made a request for comments. The USPTO ultimately received 29 written comments from large and small companies, inventors, leading patent practitioners, universities, academics and professional organizations. At the hearing, 5 patent community stakeholders attended and gave their full support for the AIA's expanded prior user rights, with none expressing any concerns either about any constitutional issues or negative impact on innovation.

One of the reasons that Congress expanded the prior use defense was to bring the U.S. in line with other countries that provide a similar defense and level the competitive playing field. Although the USPTO does not identify any data tying prior user rights in other countries to innovation, it notes that the speakers did identify several countries that provide prior user rights and discussed them in the context of how having rights overseas but not in the United States plays out competitively.

This Report will only intensify the alarm raised by many in the patent community over the prior use defense. Gene Quinn of IP Watchdog, for example, continues to be one of the most vocal critics of the new provision and insists that it is a "big mistake." Gene has argued that the defense shifts the balance of power from patent law to trade secret law and has likened it to a Trojan Horse that will dilute patent protection and innovation (these comments were provided last fall in a fine panel presentation in PLI's "American Invents Act: How the New Law Impacts Your Clients and Your Patent Practice"). Others have argued that the expanded defense violates the Takings Clause of the Fifth Amendment and that Congress exceeded its constitutional authority by eliminating the exclusivity of patent protection in favor of trade secrets.

The Trade Secret Litigator's Initial Take on the Prior Commercial Use Defense: While I do agree that this new provision does have the potential to shift the balance of power from patent law to trade secret law, it hardly sounds the death knell for patent protection in the U.S.  Here are some of the reasons that I think the defense is a good idea:

No. 1:  Greater flexibility. The expanded defense provides small and large businesses with an additional option for their technology. If a company or inventor wants to patent an invention or process, they can patent it. If, however, a small or large company doesn't want to incur the expense of a patent, it now can elect to use the underlying invention or process in secret if they so desire. Again, nothing prevents a company or inventor from filing for a patent and there is nothing that would put that patent at risk because it is simply a defense, not a means for challenging the validity or enforceability of the patent. 

No. 2:  Less costly.  Lawyers sometimes fail to appreciate the expense that accompanies a patent prosecution and application, let alone the staggering legal fees that can accompany a patent infringement case. The prior user defense permits a company to avoid those expenses and still commercialize its invention or process.

Protecting an invention or process as a trade secret is significantly less expensive then as a patent. However, it is critical to remember that given the clear and convincing standard for proving this defense, there will be a premium on thoroughly documenting the prior use.  Lab notebooks, quality control documents, engineering drawings and specifications will all need to be preserved for the inventions and processes that a user elects not to patent.

The defense should also reduce the number of "defensive" patent filings in which companies file patent applications simply to avoid being precluded from using or developing an invention, process or technology. These defensive patents, while a boon to the patent bar, are a drain on the resources of businesses and a strain on an already over-burdened USPTO. (Thanks to Xerox's patent counsel, David Arthur, for making this point).

No. 3: No harm to a patent owner.  ll that a patent applicant loses is the potential monetary recovery from someone who can demonstrate that they were using it BEFORE in secrecy. If a company decides the invention is sufficiently novel or important, it can decide to patent the invention. As a result, I don't see how this will dissuade anyone from filing a patent application if they think it is a truly important invention or process.
 
Impact on Innovation? Too early to tell. Gene Quinn's primary objection to the expanded defense is that it will lead to greater use of trade secrets as opposed to patents, which will in turn lead to less disclosure, and less innovation as a result. This argument was made to the USPTO but there was no empirical data to support this position. The USPTO, however, emphasized the fact that prior user rights were included in U.S. patent law between 1836 and 1952 and that there was no evidence that those rights weakened innovation rates or economic growth during that time. It also noted that the prior use defense did not appear to have a significant impact on business method patents since its enactment in 1999. 

In sum, the USPTO has provided important support to the prior commercial use defense. Stay tuned as James Schweikert will provide the patent lawyer's perspective later this week.

 

Groupon v. Google: Protecting The IPO?

 
by John Marsh 3. November 2011 10:45

As many of you already know, the Internet coupon king Groupon sued two of its former executives last week after they joined Google, alleging that they were violating their two-year non-competes and would inevitably disclose their trade secrets to Google. Womble Carlyle's Trade Secrets Blog has a nice summary of the case that also notes that Groupon has recently sued a sales representative in Illinois state court to enforce that rep's non-compete.

Groupon's fear is that Google will use those trade secrets in its recently launched Google Offers. One of the ways Groupon touts itself over its smaller rivals is its 5,000 sales representative network and 143 million-strong email list. However, as Rolfe Winkler reports in The Wall Street Journal's "Heard on the Street" column, Google presents a real threat to Groupon because it can dilute that advantage by enabling those smaller rivals to benefit from Google's vaunted search technology. Winkler succinctly notes, "As the undisputed search leader, Google has the potential to reach many more users than simply those signed up for daily-deal emails."

It was widely reported that Google had offered to buy Groupon for $6 billion last year, and Groupon's COO recently left to rejoin Google in September, so clearly there is a nice narrative there for a trade secret dispute. Despite those facts, (at the time of this post) Groupon has not yet joined Google in the lawsuit.

Aside from protecting its IP, there is another very important reason that Groupon needs to stem any perceived bleeding: it is in the process of launching an IPO this week. The valuation of high tech companies is notoriously tricky, and you don't have to be an investment banker at Goldman Sachs to figure out that the desire of the world's largest Internet company to aggressively compete against Groupon by hiring its former executives and sales managers introduces even more uncertainty into that equation. As of this morning, Groupon will sell 30 million shares in its IPO, priced at $16 to $18 per share. Groupon estimates its net proceeds will be $478.8 million, down from the $750 million Groupon originally expected to pull in.

It will be interesting to see how aggressively Groupon pursues the two employees after the IPO launches. I will keep an eye on this one.

 

TianRui Group v. ITC: What Happens in China, Does Not Stay in China

 
by John Marsh 14. October 2011 10:07

Fairly or unfairly, China is perceived as the Wild Wild West (or East) when it comes to the protection of intellectual property and trade secrets. Given the perceived lack of protection afforded IP, U.S. companies have become more aggressive in using state and federal remedies to protect their trade secrets. A significant ruling by the U.S. Court of Appeals for the Federal Circuit this week expands the ability of U.S. companies to sue Chinese parties for the misappropriation of trade secrets even though a substantial amount of the activity may have taken place in China. In TianRui Group Co. v. International Trade Commission, Fed. Cir., Case No. 2010-1395 (Oct. 11, 2011), the Federal Circuit has held that the International Trade Commission has statutory authority over conduct occurring in China in the course of a trade secret misappropriation investigation.  

The dissent takes the majority to task for allowing extraterritorial jurisdiction over the following undisputed facts: a Chinese licensee (Datong ABC Castings Company) used a manufacturing process in China which another Chinese company (TianRui Group) misappropriated when it hired Datong's Chinese employees to make railway wheels in China. 

Amsted Industries, an American manufacturer of cast steel railway wheels, had licensed that manufacturing process to Datong for a foundry in China. TianRui approached Amsted in 2005 to negotiate a similar license but was unable to reach an agreement with Amsted; it then hired nine of Datong's employees trained in the process at issue to manufacture the wheels. All of the employees had been notified that the Amsted process was confidential and eight of the nine had signed confidentiality agreements. TianRui ultimately sold the wheels in the U.S. through a joint venture.
 
Amsted filed a complaint with the ITC, arguing that the importation of the wheels violated § 337 of the Tariff Act of 1930, 19 U.S.C. §1937, because the manufacturing process at issue was developed in the U.S. and protected under domestic trade secret law. The administrative judge agreed and rejected arguments by TianRui that Congress did not intend for § 337 to be applied extraterritorially. The ITC elected not to review that decision and issued a limited exclusion order.
 
After a review of the relevant legislative history, the Federal Circuit found that the ITC properly applied § 337 based on TianRui's conduct in the U.S. -- namely, the importation of the wheels into the U.S.  Conceding that most of the offending conduct took place in China, the Federal Circuit emphasized the ITC was empowered by Congress to set the conditions for which products may be imported into the U.S.
 
The TianRui Group holding is sure to stir controversy; however, what cannot be disputed is the fact that U.S. companies now have a meaningful remedy to address concerns about protecting their IP in China.

 

Amylin v. Eli Lilly: Raising the Bar to Proving Irreparable Injury in the Trade Secret Case?

 
by John Marsh 13. July 2011 11:00

A recent trade secret case involving a "love triangle" between three pharmaceutical companies, Amylin Pharm., Inc. v. Eli Lilly & Co., Case No. 11-CV-1061 JLS (NLS), U.S. Dist. Ct. for the Southern Dist. of California, illustrates the challenge of proving irreparable harm. (Many thanks to the Emergency Business Litigation Blog for writing a fine post on this case and bringing it to my attention).
 
The facts are straightforward. Amylin and Lilly had created an alliance to develop a drug, exenatide, for the treatment of Type 2 diabetes. Earlier this year, Amylin learned that Lilly had entered into another alliance with a competitor of Amylin's, Boehringer Ingelheim GmbH, to develop a similar drug. Amylin then sought a TRO to prevent the disclosure of confidential information by Lilly's sales staff to that competitor.
 
The district court struggled with the existence of irreparable injury from the beginning. Although the district court granted a TRO (a link to that decision appears below), it avoided any serious analysis of irreparable injury and held that California courts "have presumed irreparable harm when proprietary information is misappropriated.” The district court focused on what it perceived to be a strong showing on the the likelihood of the merits prong necessary for an injunction -- namely, that because Lilly's sales staff had the confidential information, they would inevitably disclose or use that information during the sales process. 
 
After the preliminary injunction hearing and briefing, however, the district court declined to issue an injunction (a link to that opinion also appears below). Citing the Supreme Court's holding in Winter v. NRDC, 555 U.S. 7 (2008), that a claimant must show that irreparable injury is likely, the district court rejected Amylin's contention that Lilly's sales representatives would misuse confidential information as speculative. In particular, it was persuaded by  Lilly's argument that FDA's regulations prohibited Lilly's reps from making statements without any adequate supporting data. Notably, Amylin was unable to show that those reps would be willing to risk the wrath of the FDA during the sales process. The court also noted that money damages could compensate Amylin if it were in fact injured. 
 
Had Amylin been able to proffer any direct or compelling circumstantial evidence of misappropriation, the result may have been different. Remarkably, the district court did not address its concerns about inevitable disclosure, concerns that had figured so prominently in its TRO decision. I suspect that the court was uncomfortable relying on that doctrine in the face of FDA regulations that apparently obviated the court's previous reservations. 
 
The takeaway? Many of us have expected the holdings in eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), and Winter would eventually filter down to trade secret cases. A party seeking an injunction has always been expected to come forward with evidence of improper conduct or misappropriation so that a court is comfortable finding irreparable injury. This means thorough investigation, forensic examination of laptops or other devices, or other means of identifying misappropriation is increasingly important. While many courts recognize the importance of circumstantial evidence in trade secret cases, (see Stratienko v. Cordis Corp., 429 F.3d 592 (6th Cir. 2003)), direct evidence of misconduct or misappropriation may now be critical to proving misappropriation and irreparable injury.
 

 

About John Marsh

John Marsh Hahn Law AttorneyI’m a Columbus, Ohio-based attorney with a national legal practice in trade secret, non-compete, and emergency litigation. Thanks for visiting my blog. I invite you to join in the conversations here by leaving a comment or sending me an email at jmarsh@hahnlaw.com.

Disclaimer

The information in this blog is designed to make you aware of issues you might not have previously considered, but it should not be construed as legal advice, nor solely relied upon in making legal decisions. Statements made on this blog are solely those of the author and do not necessarily reflect the views of Hahn Loeser & Parks LLP. This blog material may be considered attorney advertising under certain rules of professional attorney conduct. Regardless, the hiring of a lawyer is an important decision that should not be based solely upon advertisements.

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