Effective Trade Secret Management: Under the First-Inventor-to-File System, U.S. Utility Patent Applications May Become a Bigger Part of a Balanced IP Portfolio
Dean A. Pelletier
Dean A. Pelletier is the managing director of Ocean Tomo’s Trade Secret practice. Dean works on the management and monetization of all intellectual property assets, with a particular focus on assisting companies in proactively developing, protecting and capitalizing on their trade secret portfolios.
A balanced intellectual property portfolio is the product of a properly defined and executed business strategy. That portfolio often includes patents (utility and design), trade secrets (technical and business-related), trademarks and copyrights.
When the U.S. patent system was a first-to-invent system, pending U.S. patent applications in which a company had an interest (through, e.g., employee assignments) also often would be a part, albeit an inchoate part, of the company’s balanced IP portfolio. With the March 16, 2013 implementation of the United States’ first-inventor-to-file patent system, an important, strategic question for companies is: what is the makeup of a balanced IP portfolio under this new system?1
In short, pending U.S. utility patent applications may become more popular and opportunistic IP assets if or when a company loses the race to the Patent and Trademark Office.
To illustrate why the market for pending U.S. utility patent applications may further develop, suppose the following facts:
(1) Atlantic Inc. is engaging in a secret research and development project;
(2) All of Atlantic’s employees that have worked or are working on that project have executed proper IP assignments and, as a result, Atlantic owns all IP in and resulting from that project;
(3) Atlantic is considering (a) preparing one or more U.S. utility patent applications relating to some or all of the results of those R&D efforts and (b) maintaining some or all of the results of those R&D efforts as trade secrets;
(4) Atlantic fails to file a U.S. utility patent application before Pacific Inc. files a U.S. utility patent application on subject matter that is the same, or substantially the same, as some of the results of Atlantic’s R&D efforts; and
(5) Atlantic learns of Pacific’s patent application when Pacific’s patent application is published.2 Of course, if Atlantic legitimately learns of Pacific’s patent application before it is published, then Atlantic promptly should consider whether to take steps to preserve the secrecy of its R&D efforts, i.e., potentially patentable inventions and trade secrets.
Four Strategic Options
Having lost the race to the PTO, Atlantic has four strategic options.
First, Atlantic should determine if there is a question of inventorship. That is, has “an inventor named in [Pacific's] earlier application derived the claimed invention from an inventor named in [Atlantic's contemplated, but not yet filed] application and, without authorization, [Pacific's] earlier application claiming such invention was filed.”3
Such circumstances could arise, for example, if a former employee of Atlantic became an employee of Pacific and provided Pacific with information relating to Atlantic’s R&D efforts. Indeed, employee migration is a common conduit for trade secret misappropriation. If there is a question of inventorship–i.e., Atlantic believes that its invention has been stolen by Pacific (vis-a-vis Atlantic’s former employee)–then Atlantic should consider at least two options: (a) filing a lawsuit to protect and enforce its rights and (b) filing its own patent application and pursuing a derivation proceeding to correct inventorship and, ultimately, ownership of the invention.4
Second, Atlantic should assess the overall time-line of events. In particular, has Atlantic begun using the invention claimed in Pacific’s patent application and, if so, when did that use begin?
Depending on that time-line and other circumstances, Atlantic may have a prior commercial use defense to patent infringement–i.e., if Pacific obtains a patent and, thereafter, sues Atlantic for patent infringement.5 Notably, the issue of derivation should be considered in connection with that potential defense.6
If the prior commercial use defense is supportable and there is not an inventorship issue, then Atlantic may decide to forego filing contemplated patent application. The net result of that choice may be that Atlantic possesses (a) a defensive IP asset, i.e., a former trade secret that can be asserted as a defense to patent infringement, but no longer can be affirmatively asserted or monetized because the trade secret has been publicly disclosed in Pacific’s patent application and (b) other IP assets, i.e., trade secrets, that are not disclosed in Pacific’s patent application and, as such, can be affirmatively asserted and monetized and, if necessary, defensively asserted.
Third, Atlantic should monitor the prosecution of Pacific’s patent application. If Pacific ultimately is granted a patent, then Atlantic can assess whether it should pursue (a) a “post-grant review” of Pacific’s patent or (b) an “inter partes review” of Pacific’s patent. (Those options are presented under the assumption that (i) Pacific has not yet filed a patent infringement action or any other judicial or administrative proceeding against Atlantic and (ii) Atlantic has not yet filed a declaratory judgment action (e.g., an action seeking a declaration of non-infringement or invalidity of one or more of Pacific’s patent claims) or any other judicial or administrative proceeding against Pacific.) Under either form of review, Atlantic would be seeking to cancel, as unpatentable, one or more of Pacific’s patent claims.7 Of course, Atlantic should carefully weigh the pros and cons of each type of review before pursuing either of them. Importantly, a position that Atlantic takes or does not take during either type of review can have evidentiary consequences (i.e., create an estoppel) in subsequent proceedings, including U.S. district court litigation.8
Fourth,but certainly not last, Atlantic should think outside the box and consider a “strategic business solution”–as opposed to an adversarial solution–to the above-posed problem. Ideally, a strategic business solution results in a “win-win” outcome for both parties. Indeed, because most adversarial pursuits ultimately result in settlement, often after significant expenditures of time, money and effort and development of a certain amount of ill will, starting from the premise that there may be a quicker, less expensive, less confrontational and mutually beneficial solution almost always makes sense.
The first step towards pursuing, and hopefully realizing, a strategic business solution is to recognize what is at stake. That is, presumably, not all of the results of Atlantic’s R&D efforts are disclosed in Pacific’s patent application. Thus, the question to be answered is: Can Atlantic do without the invention claimed in Pacific’s patent application or otherwise design around it?
If Atlantic can do without that invention or otherwise design around it, then Atlantic is likely to gain little, if anything, from obtaining or attempting to obtain a license to any patent resulting from Pacific’s patent application or from purchasing or attempting to purchase Pacific’s patent application and any resulting patent. Of course, Atlantic should consider the time, money and effort that eliminating or designing around the invention will require and factor those considerations into its decision-making process
On the other hand, if Atlantic cannot do without that invention or otherwise design around it, then Atlantic, which already has invested a certain amount of time, money and effort into its R&D project, should consider obtaining (i.e., attempting to obtain) a license to any patent resulting from Pacific’s patent application or purchasing (i.e., attempting to purchase) Pacific’s patent application and any resulting patent. While there are no absolutes (i.e., each situation is fact-specific), the royalty or purchase price for the resulting patent, which provides presumptively valid rights, may well be higher than the purchase price for the patent application, which provides inchoate rights.9
Atlantic’s inability, or unwillingness, to do without or otherwise design around the invention may be a result of the synergistic relationship between the invention and Atlantic’s trade secrets, i.e., the other results of its R&D efforts. Such circumstances are not necessarily a negative. In fact, such circumstances may effectively position Atlantic in any licensing negotiations. That is, to the extent that Atlantic is willing to enter into a cross-license through which Pacific obtains a license to Atlantic’s trade secrets, Atlantic may be able to negotiate more favorable, or at least reasonable, licensing terms. Similarly, the ultimate transaction could be a purchase that includes a patent license back to Pacific and a trade secret license to Pacific.
Atlantic’s willingness to pursue the purchasing, as opposed to the licensing, option may depend on various considerations, but three important considerations are (a) the robustness of the specification in Pacific’s patent application (for purposes of possibly filing continuation or continuation-in-part applications), (b) the “damages potential” of the claims in Pacific’s patent application and (c) Atlantic’s unwillingness to license its trade secrets.10
For many things in life, timing is everything. Indeed, that is initially the case when applying for a U.S. patent. Having said that, a pro-active, opportunistic approach to developing a balanced IP portfolio can turn bad timing and missed opportunities into new opportunities.
6 See 35 U.S.C. §273(e)(2) (“A person may not assert a defense under this section if the subject matter on which the defense is based was derived from the patentee or persons in privity with the patentee.”).
10 See 35 U.S.C. §§120, 154(d) (reasonable royalty patent infringement damages may be available from the date of the utility patent application’s publication if “the invention as claimed in the patent is substantially identical to the invention as claimed in the published patent application”).