Trade Secrets

secrets
“Sshh” by Deborah Azzopradi

Consider trade secrets, especially when your commercially important secrets are unsuitable for patent or copyright protection.

Consider the formula for Coca-Cola and its “natural flavorings”, which dates back over 100 years.  Even if the formula could have been patented (unlikely), the patent would be long expired.  The formula might not be even eligible for copyright since it is a list.  In any event, copyrights by now would be both expired and useless. This is because copyrights for a recipe would only cover the sequence of printed words.  However as various closely guarded trade secrets, the formula remains valuable (the trademark, of course, is almost priceless).

In addition to recipes, trade secrets can include production methods, marketing methods, computer software, and the like. Pretty much any information that gives a business competitive advantage, and is not generally known, is a potential trade secret.

Trade secret protection is very narrow – unless you can prove to a court that you carefully guarded the secret, such as with NDA, and someone with access to the secret then misappropriated the secret, you are out of luck. If someone figures out the secret by other means (e.g. reverse engineering), there is no protection, even for Coca-Cola.

However, if you can convince the court that trade secret theft occurred, you can request injunctions (e.g. block disclosure), damages (your economic harm caused by the theft), and possibly even seizure of materials and/or attorney fees.

Until recently, trade secrets were only handled at the state level.  However, in May 2016, the federal Defend Trade Secrets Act of 2016 (DTSA) was signed into law.  Trade secret theft can now be handled in either state or federal court. This type of theft can now be charged under both civil and even criminal law.

So if you are doing a startup, think about which of your non-commonly known information gives you a competitive edge. Where appropriate, apply for patents and trademarks and register copyrights to prove copyright ownership.  For the rest, although some disclosure may be required for marketing and fund-raising, try to limit this disclosure, and take positive steps (e.g. restriction of access, nondisclosure agreements) to preserve not-generally-known information that is competitively important.

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Startup IP due diligence

Maat goddess of due diligence
Maat – Egyptian goddess of truth

Startup investors know that they are mostly investing in just your IP.  So get your IP ownership situation under control before due diligence starts.

What does a startup investor get for his money? Startup companies are really just a bundle of information (usually ideas), people (founders, contractors, consultants), and things (tangible property, cash). A startup’s “things” will usually have minimal value. The people can walk out the door at any minute. So all that an investor may actually get for his money is some sort of ownership option in the information – the startup’s intellectual property (IP).  Prudent startup investors thus often conduct a fair amount of due diligence on this “IP”.

A startup’s IP can be viewed as being a mixture of alleged inventions (e.g. actual or potential patents), alleged copyrights, alleged trademarks, and alleged trade secrets.  At least some of this information may still only exist in the minds of the founders, contractors, and consultants. What is potentially real here, and what is not?

Sophisticated investors also know that according to our IP laws, unless actions are taken to protect the IP, the IP may either still belong to the individual that created it; or it may have become public domain.  Investors also know that startups often don’t fully understand IP law. Has that intriguing startup already accidentally lost its key IP?  Was it missing essential IP to begin with?  This is why investors want IP due diligence studies.

Some ways that IP can be missing or lost include failure to obtain written IP assignment contracts, inadvertently placing IP into the public domain, and reliance on IP owned by someone else.

Failure to obtain written IP assignment contracts: IP assignment agreements should be obtained from anyone who has materially contributed to the company’s IP. Don’t assume that just because you paid for something, your company owns that IP — you often don’t. Try to do these IP assignments upfront, because the longer you wait, the more leverage the other party has. For example, they could make unreasonable demands, or deny assignment altogether.

Inadvertently placing IP in the public domain: For patents, assume that anything you publish before a patent application is filed can be used against you, and be careful to update your patent filings as your technology advances. For trade secrets (i.e. important, not-generally known information which is often not patentable), take active steps to restrict access, require confidentiality agreements, and of course never publish this at all.

Reliance on IP owned by someone else: For patents, consider prior art searches to reduce the chances that you are infringing on other patents. Make sure you have listed the right inventors on any patent applications. For copyrights, check the status of your software licenses, and that you and your contractors are not copying other work. Avoid using names that might confuse customers from related companies, since this may cause trademark problems. For trade secrets, stay away from inside knowledge (not generally known in your field) that you or your contractors may have obtained from other companies.

Remember that from an IP due diligence perspective, if you can’t prove you did things right, the assumption will probably be that you didn’t.  So keep your documentation on file.

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International patents

World map of PCT international patents by Japinderum (CC BY-SA 3.0) license
PCT international patent treaty countries

Applying for international patents: Most countries maintain their own separate patent and trademark offices, and typically (Europe being a partial exception), patents operate within national borders.  Thus a US patent, for example, covers just the US.

The Paris Convention: The process of extending a patent application to cover multiple countries was worked out by several international treaties. One important treaty, which is still in effect, was the 1880’s era Paris Convention. This established that, for example, a foreign patent office will recognize the priority of a US utility patent application (or provisional patent application) for up to 12 months after its initial filing date.

This was a good start, but it often takes more than 12 months to determine if a new invention is commercially important. It is very expensive to file patent applications in many different countries. So for many applicants, 12 months just wasn’t long enough.

The Patent Cooperation Treaty: To extend this time, in the 1970’s the Patent Cooperation Treaty (PCT) was enacted. This treaty is a bit complicated. Think of it as a temporary “holding tank” for patent applications. The key idea is that if you file a PCT application within 12 months of the filing date of the original patent application, you can extend your ability to then file international patents to 30 months from the filing date of the original patent application.  Note that the PCT treats both utility patent applications and provisional patent applications in the same way.

After 30 months from the filing date of the original patent application, however, you then need to make some tough decisions. It typically costs thousands of dollars to file (i.e. enter the national phase) in each separate country. So unless the invention is really very promising, often applicants either continue on only in the US, or else only file nationally in a few select countries.

The Patent Prosecution Highway: Typically, each local (national) patent office will then want to examine the patent application itself. This is both expensive and duplicative of resources. To help streamline the process, in the late 2000’s, various Patent Prosecution Highway (PPH) agreements were initiated, typically on a bilateral (country-to country) basis. Here, if a patent application has claims allowed by one (PPH) country’s patent office, the applicant can petition to have these claims accepted by other participating PPH offices. The US participates in the PPH, as do a number of other countries. The PPH is great when it works, but it is presently a patchwork of agreements rather than a comprehensive international treaty. So view the PPH as being somewhat in the “pilot” or “beta” stage.

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Design patent infringement

Design patent infringement
Three way visual comparison test

Design patent infringement isn’t just exact copying. Instead, the test is if an “ordinary observer” will see “substantial similarity.” 

Determining if a particular design of interest does or does not infringe upon another design patent is a tricky area of intellectual property law.

What is design patent infringement?

According to the 2008 Federal Circuit ruling in “Egyptian Goddess, Inc. v. Swisa, Inc. 543 F.3d 665: to infringe, a given design does not have to be an exact copy of another design patent. Instead, the question is one of “substantial similarity” under the “ordinary observer” test.

Great — what the heck is this, and how does this test determine design patent infringement?

The underlying idea is that customers looking to purchase a design patented product “Y” should not be confused by a similar-looking product “X.”

So as a practical matter, you should run this test using ordinary observers. Realize that if you are involved, it may be difficult for you to be entirely objective.  In this case, you are probably not a suitable “ordinary observer.”  Instead, determine if disinterested outsiders see “substantial similarity.”

Sometimes the differences between a given design and a particular design patent may be so high that no further comparisons are necessary. But sometimes the two devices are close.

The three-way visual comparison test

When two designs are close, a “three-way visual comparison test” can be useful. You can do this test by making a composite illustration showing the patented design on one side. Place the “accused design” (i.e., the device you are investigating) in the middle. Put the other devices representing the closest prior art on the other side.

Essentially it is a pattern recognition problem.  The idea is to use the prior art examples to instruct the ordinary observers as to how much variation is typical in this field.  Then the average observer can determine if the design of interest is overly close to the design patent of interest or not.

Consider the handheld blender designs in Braun Inc. V Dynamics Corp. 975 F.2d 815, in 1992.  As you can see in the above image, the “accused design” was visually much closer to the patented design than it was to the nearest prior art. The court determined that the “accused design” was infringing.

The best times to consider these design patent infringement issues are before you start producing and selling a new design. So if you have a new device that you are worried about, get the opinion of some neutral outsiders ASAP.  Indeed, consider running some focus groups as appropriate. If things look too close, consider making some further design changes, and trying again.

Also, consider filing your own set of design patent applications. To speed this up and make sure that the examiner looks at your competition, use the rocket docket. The rocket docket lets you directly cite the design(s) that most concern you. This way, you can generate proof that USPTO examiners have considered your competition, and still think your device is different. Your patents can reduce the chance of litigation because you will own IP in this area.

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Copyright: DMCA vs Fair Use

copyrights DMCA vs fair use
39 steps movie poster (copyright expired)

The DMCA (Digital Millenium Copyright Act) has created a significant copyright law divide between analog and digital media. For analog works, traditional copyright principles such as “fair use” apply. For digital media, not so much, because the DMCA shifts the burden of proof.

Plays, for example, are an analog medium. An excellent way to understand the differences is to analyze a modern play, and see what elements might cause problems for digital content.

Traditional (Analog) Copyright Law:

The four-person play “39 steps” humorously interprets the classic 1935 Hitchcock film. Appropriately enough for our topic, the plot involves intrigue, secrets, and a falsely accused innocent man. This play is also an excellent example of how, at least for analog media, creatives who understand traditional copyright law can use a mix of public domain and copyrighted source material in their creative works.

The 1935 Hitchcock film has a US copyright that expires in 2026. The film had a large cast and budget, was a big success, and had dramatic elements that Hitchcock reused in later films.

By contrast, 39 steps (the play) was written in 1995 (later revised in 2005). It also has been very successful, first as a 9-year run in London, and since 2008, in the US.

What about copyright permission? The playrights wrote the play so that a license wasn’t needed. They cleverly exploited various permissive areas of traditional copyright law, including copyright term limits and fair use.

    • The movie used a now copyright-expired 1915 novel by John Buchan.
    • The play uses many fair use copyright principles, including:
        • Parody – the play pokes gentle fun at Hitchcock’s works
        • Transformation – the play uses clever tricks to reimagine the movie.
        • Amount of material taken – Only short Hitchcock film references
        • Trivial impact on the potential market for the original 1935 film

Traditional (analog) copyright laws acts to protect the interests of content creators. It also serves, through fair use, to allow others to create new works.

DMCA (Digital) Copyright Law: 

Sadly, for digital media, copyright law presently suffers from regulatory capture. Specifically, the Digital Millennium Copyright Act (DMCA). Although the DMCA states that it “shall not affect” fair use, this is not the case. In reality, the DMCA has specific “guilty until proven innocent features that have significantly damaged fair use. The “gotcha” is that legally, fair use does not mean “no” copyright infringement. Instead, traditionally, fair use is only a “defense” against an accusation of copyright infringement. So, under traditional law, all fair use material is still infringing; it is just OK infringement.

Takedown notices:

The DMCA requires content servers, such as YouTube, to almost immediately remove the content in response to a takedown notice. Here, an agent representing a copyright holder files a takedown notice asserting that: the content “infringes”, and was unauthorized by the owner or by the law. There are no perjury penalties regarding the content assertions. (Perjury does apply if there was no authorization.)

Think that “or by the law” includes fair use? Maybe, but to what extent? Remember that traditionally, all fair use material still infringes. Congress has not established any explicit, fair use rules, and it may take a Federal court to decide if the fair use is OK. Courts can be prohibitively expensive and time-consuming. So, a takedown notice that fails to consider, or only superficially addresses, fair use is not committing perjury.  (No DMCA penalties if they did not tell the truth.)

The 39 steps play would not work under the DMCA:

The 39 steps play, discussed above, shows the difference between analog and digital copyright law. The DMCA switches the burden of proof and undermines centuries of fair use law. It gives us intrigue, secrets, and innocent persons accused of dastardly deeds.

All is not lost, however. Some recent developments include:

    • In an influential 2015 ruling, the Federal 9th district (California) court held that 17 USC. 107 requires at least a limited DMCA fair use analysis.  So copyright holders need to consider fair use at least or pretend they did.
    • Due to the court decision, fair use is now a legitimate response to a takedown notice. For example, YouTube has a copyright counter-notification process to respond to takedown notices. YouTube states that it may consider, at least for the US, certain types of fair use defenses. Results may vary.
    • YouTube has also recently added an “explicit trim” function that enables video uploaders to avoid takedown by quickly removing allegedly infringing sections.

Be careful:

The bottom line is that digital content creatives need to be cautious. Don’t just quickly read about fair use, and assume that it will automatically protect your work from takedown notices. It won’t.

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Copyright registration

copyright registration
Copyright registration

In the US, copyright registration is needed to enforce your copyrights. This can be done online at the Electronic Copyright Office (eCO).

In theory, copyright exists as soon as a work is created. But, thanks to the recent Supreme Court Fourth Estate v. Wallstreet.com ruling, without formal copyright registration, you can’t ask the courts to enforce or defend your legal rights.

Copyrights are registered at the United States Copyright Office. This office maintains an online electronic copyright registration website (eCO) at copyright.gov. Their website allows you to upload and file most (but not all) creative works, along with authorship and ownership information.

In addition to the work itself, other registration information that you need to provide includes work title, year of completion, date of first publication, and name of the authors. If you are claiming that you own the work (e.g. author or “work for hire”), you also need to state this and give the owner’s name and address. You also need to include a brief description of the work. You must also disclose any preexisting material that may be included in your uploaded work.  This preexisting material can include stock graphics or sounds, for example.

The website accepts a fairly decent range of common text, image, audio, and video file types, including pdf, rtf, doc, midi, jpg, pdf, png, mpg, mp3, mp4, avi, and mov. The website also accepts common compressed formats such as rar and zip.  The file sizes are limited by your connection speed and the website’s sixty-minute upload time limit. So at broadband speeds, Gigabyte+ sized files are possible. However, unless you pay extra for “full-term retention”, the copyright office will only guarantee to retain your file(s) for 20 years.

Although the submission process itself is quick, the copyright office then takes about 3 months (1-6 months) to process electronic submissions.  “Snail Mail” submissions can take twice as long! If there are problems with the submission, the copyright office will correspond with you and require that these problems be fixed.  This “correspondence” can delay registration by many more months.  You can pay extra for expedited registration, but you must also adequately explain why there is a rush.

There are some tricky aspects to the system. Many creative works are divided into sections, such as book chapters, images in a picture book, slide shows, video sections, music album tracks, and so on. Many creative works also combine more than one media (e.g. combine text, images, video, sound). The copyright office distinguishes between these different media types, and also distinguishes between individual works, “groups”, and “collections”. These have different filing fees and requirements. To ensure success and avoid “correspondence”, it is important to get this right.

Copyright legal actions often have short deadlines. Thus, it is generally a good idea to start the copyright registration process early (in advance of any legal problems), so that registration delays don’t cause you to blow a legal deadline.

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