[co-author: Jed Greene]
The article was published in the June 1, 2015 issue of LES Insights, a weekly executive summary e-newsletter of noteworthy articles about the transfer, use, development and marketing of intellectual property, published by The Licensing Executives Society. It is reprinted here with permission.
Financial advisors often advise their clients to maintain a balanced investment portfolio. Occasionally these advisors recommend rebalancing the investments within a portfolio to account for changes in market conditions.
Many companies have similarly varied portfolios for their intellectual property holdings, including patents, copyrights, and trade secrets. Based on recent changes in patent law and practice, including the America Invents Act (AIA) and Supreme Court decisions (such as Alice Corp. v. CLS Bank), now may be a good time to rebalance your IP portfolio and consider whether trade secrets are a reasonable alternative to patent protection in certain circumstances. Are we relying too much on what worked in the past?
Innovation is everywhere and unless you do something to protect it and make it yours, it is dedicated to the public. So how can you derive the greatest value from your innovation? For decades, patents, and the exclusivity they provided, offered a safe and reliable method of IP protection. Patents were relatively easy to obtain, difficult to invalidate, and costly to litigate. But the proverbial “sport of kings” has changed.
Patents are now more difficult to obtain, enforce, and prove damages for than ever before. Recent decisions (such as Alice), as well as the remarkable trend at the Patent Trial and Appeals Board (PTAB), have dramatically increased the chance of a patent being invalidated. Unlike the predecessor inter partes examination, PTAB actions are relatively speedy, can be sought based on many grounds to challenge the validity of a patent claim, have been a highly effective method to invalidate patent claims, and, as a result, have been very popular.1 These patent changes have, in part, caused the first annual decline in the number of federal court patent cases, with a 13 percent decline in the number of federal court patent cases filed in 2014.2
Difficult to Obtain
Applying for a patent takes time and money. There are attorneys’ fees to prepare the patent, patent application fees, fees to file the patent, and fees to maintain the patent during its life. Once the patent application is filed, it may take several years before the patent is actually issued by the United States Patent and Tradmark Office (USPTO). In addition, there are challenges during the prosecution process. Predicting how difficult a patent’s prosecution will be has become its own gating function. Likewise, the patentable subject matter test articulated in the Supreme Court’s Alice decision dramatically changed the landscape for computer-implemented inventions.3 Alice makes clear that merely using a computer to implement a known process without any “inventive concept” constitutes an “abstract idea” and is unpatentable. Applications for such software patents are now frequently rejected by the USPTO and District Courts, and the Federal Circuit appears to be strictly applying the “Alice test” to find software patent claims ineligible.
Trade secrets, on the other hand, can be relatively inexpensive to maintain. If it is not easily reverse-engineered, not readily ascertainable or observable, and not patented, it’s likely you can shoehorn it into a trade secret. There are corporate procedures that must be implemented to protect a company's trade secrets. Consistent designations of material as “confidential,” as well as agreements and contracts, such as non-disclosure agreements and employment agreements, if crafted with care, can go a long way in protecting your ideas.
PTAB Risks
The Leahy-Smith America Invents Act (AIA) created the PTAB which oversees inter partes reviews (IPRs) and covered business method (CBM) reviews. As of May 14, 2015, there have been 3,255 AIA petitions filed, with a large percentage of petitions being granted and an even larger percentage invalidating patent claims in the Final Written Decision.4 With these current statistics, defendants in patent cases are frequently raising an IPR, CBM, or similar challenge at the outset of a case. The increasingly likelihood of the court staying the litigation pending proceedings before the PTAB can make the enforceability of patents even less profitable and predictable.
Patent Versus Trade Secret Damages
Patent damages analyses, specifically reasonable royalty calculations, have been heavily criticized by the court system. Case after case suggests that courts are requiring a level of precision and certainty in damages that are not consistently applied by the courts and can be difficult to reach given the evidence produced in a case. In 2013 alone, as an example, only 38 percent of Daubert challenges against patent damage calculations were denied by the courts.5 Courts have also asked patent holders to apportion the relevant patented technology contained within infringing unit separate from other non-asserted components. An inappropriate apportionment analysis may leave the patent holder without a proper damage claim for trial.
Conversely, case law reflects a considerable flexibility in the method of calculating appropriate monetary relief in trade secret actions. For example, trade secret damages allow the plaintiff damages based on the disgorged profits of the defendant. Often the defendant has the burden of showing which costs are relevant to the accused sales. It can also be the defendant's burden to prove which sales or portion of sales are not related or caused by the alleged trade secret misappropriation.
The Future Is Murky
Both Congress and the Supreme Court have shown a significant interest in the patent system. In the current Congress (2015-2016), there are six patent reform bills that have been introduced.6 Last year, the Supreme Court reviewed more patent cases (six) than any previous year. So far this year, the Supreme Court has reviewed one patent case, agreed to review two more cases and has made changes to the Federal Rules of Civil Procedure regarding patents. The instability of the patent law can cloud the value and protection provided by patents.
Trade secrets, although subject to changes in the law, have not garnered the same attention from Congress or the Supreme Court. For the time being, the future of trade secret laws appears to be more stable than patent laws.
Conclusion
Patents remain a fundamental and formidable method of protecting intellectual property. But patent law’s formerly bright line rules have lost some of their rigidity. The lack of predictability that follows should encourage companies to think creatively about the most attractive and efficient tool for managing their IP assets.
Endnotes
1 https://lawreview.uchicago.edu/page/inter-partes-review-early-look-numbers; http://fishpostgrant.com/postgrantreview/.
2 PwC’s 2015 Patent Litigation Study: A change in patentee fortunes, May 2015.
3 Other recent Supreme Court rulings such as Molecular Pathology v. Myriad Genetics and Teva Pharmaceuticals v. Sandoz have also impacted patent litigation.
4 http://ipr-pgr.com/30-months-of-ipr-practice-by-the-numbers/.
5 https://www.docketnavigator.com/browse/results/773709ed-9be6-80c3-2d4e-2a4bb2d6d01c.
6 http://www.patentprogress.org/patent-progress-legislation-guides/patent-progresss-guide-patent-reform-legislation/.
