Seeking Shelter From the Patent Eligibility Storm: Does the DTSA Provide Sanctuary?

Pepper Hamilton LLP

This article was originally published in the Life Sciences Law & Industry Report™ (June 2016). Reproduced here with permission from Copyright© 2016 The Bureau of National Affairs, Inc. (800.372.1033)

For many charged with the development of intellectual property portfolios in the life sciences  and software industries, navigating the stormy waters of patent eligibility has recently proven difficult. U.S. Supreme Court and U.S. Court of Appeals for the Federal Circuit decisions have altered previous and long-established views on what inventions are (and are not) eligible for patent protection, but, years after the first of these opinions were published, significant ambiguity remains as to the exact borders of eligibility. Maintaining technological innovations as trade secrets has always been a potential alternative to patents for certain technologies, but reliance on trade secrets is not without its own set of risks. Among other things, differences between the states in statutory language and interpretation of their trade secret laws often weigh in favor of seeking nationwide patent protection for those engaged in interstate and foreign commerce, even if the patent protection is narrow.

The recent enactment of the Defend Trade Secrets Act of 2016 (DTSA) may provide some respite for those struggling in the murky waters of patent eligibility. The DTSA has been criticized by those who believe it solves neither of the risks that primarily concerned lawmakers, namely, international corporate espionage and cyber threats. However, a single, nationally applicable intellectual property statute, which allows for private causes of action and civil remedies for trade secret misappropriation in a federal court venue, may be just the predictable enforcement regime that some software and life sciences companies need. Here’s why.

What Subject Matter Is Patentable?

The language of the patent statute is deceptively simple: “Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvements thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” 35 U.S.C. § 101. As the Supreme Court has reminded us repeatedly and with respect to a wide variety of technologies, the devil — as is often the case — is in the details. Although not in the text of the statute, the Supreme Court cites its own long-held and implicit exceptions to the § 101 definition of what is patentable: “Laws of nature, natural phenomena, and abstract ideas.” While recognizing that all inventions “at some level embody, use, reflect, rest upon, or apply laws of nature,” the Supreme Court in quick succession found unpatentable subject matter in claims covering a method for determining appropriate dosage levels of thiopurine drugs, Mayo Collaborative Servs. v. Prometheus Labs., Inc. (2012) (law of nature); claims directed to isolated DNA, Ass’n for Molecular Pathology v. Myriad Genetics, Inc. (2013) (naturally occurring product); and claims directed to a process for reducing the risk in settling a financial transaction, Alice Corp. v. CLS Bank Int’l (2014) (abstract idea).

In the years following these decisions, the Federal Circuit, district courts and the U.S. Patent and Trademark Office (PTO) have largely followed suit. District courts have entertained and granted early dismissal of cases on the basis that asserted patent claims were patent ineligible, in many cases without the benefit of expert testimony. In early 2014, the PTO issued guidance in an attempt to illustrate examples of the application of Federal Circuit and Supreme Court decisions on patent eligibility issues during prosecution. Criticism of the original guidelines erupted immediately, and a revision followed quickly in late 2014 with the publication of the 2014 Interim Guidance on Subject Matter Eligibility. This guidance, too, has been updated, most recently in May 2016. Meanwhile, the Federal Circuit has upheld rejections from the PTO as well as district court decisions finding patent ineligibility in cases involving a full spectrum of technologies, from claims covering the products of cloning methods, In re Roslin Inst. (Fed. Cir. 2014), to claims relating to methods for taking, transmitting and organizing digital images, In re TLI Commc’ns LLC Patent Litig. (Fed. Cir. 2016).

The practical effect of these decisions should not be understated. In its 2016 Patent Litigation Study, PricewaterhouseCoopers reported a drop in patent grants during 2015 — the first drop in seven years — reportedly attributable in part to the decision on patent eligibility in Alice. District courts have found patent ineligible subject matter in up to 75 percent of cases in which issues of “abstract ideas” are raised. District court judges, meanwhile, have expressed their own frustration with the difficulties of actually applying the tests outlined by the Supreme Court. Judge George H. Wu of the U.S. District Court for the Central District of California likened the two-part test for patent eligibility articulated in the Mayo decision to the “I know it when I see it” test for obscenity famously coined by Justice Stewart in 1964. McRO Inc. v. Namco Bandai Games Am., Inc. (C.D. Cal. 2014). The Federal Circuit has been similarly reluctant to find and define that “something more” that could transform claims from excluded to patentable subject matter. And, as recently as April, David Kappos, the former director of the PTO, joined others in reportedly calling for the abolition of § 101 altogether, declaring that recent decisions on the matter have resulted in a “real mess,” and suggesting as a practical matter that companies in the biotechnology and software fields focus their patent protection strategies outside the U.S. for now.

Strategies for building intellectual property portfolios have never lacked in complexity. But some degree of predictability is necessary for those building portfolios, as well as those in the process of evaluating existing portfolios. In the present environment, however, predictability is not easy to find with respect to the treatment of patent claims (whether pending or issued) that involve any technology arguably within the scope of the “law of nature” and “abstract idea” exceptions. For companies developing those technologies, it is possible that the DTSA provides some solutions.

What Does the DTSA Have that the UTSA Does Not?

Trade secrets are not new. The longtime existence and implementation in many states of the  model law Uniform Trade Secret Act (UTSA) has been cited by some in the academic community as one reason the DTSA is, at best, unnecessary. See, e.g., “Do We Need a New Federal Trade Secret Law?” Eric Goldman, Santa Clara University School of Law (September 2014).

The traditional give and take when making decisions about whether to seek patent protection for an innovation or to create a structure to protect that innovation as a trade secret is also not new. The essence of a trade secret is its secrecy — and the manner in which, and the consistency with which, an owner defines and protects that secret is important. Reasonable measures are required to maintain trade secrets as such. In the maelstrom of the creative process, the necessary discipline is sometimes difficult to manage; however, when managed effectively, a trade secret has no expiration date. On the other hand, a patent, once issued, does not require such discipline in order to maintain its validity. It is a public record and, theoretically, a specific description of the innovation. In exchange for making the details of the innovation public, a patent owner is given an exclusive right to preclude others from using that specifically described innovation — for a period of time, at least. None of that dynamic changed with the passage of the DTSA.

What has changed is that the DTSA is now a uniform federal law governing the enforcement of trade secrets. For the first time, it creates a federal cause of action for trade secret  misappropriation, original jurisdiction over which is established in federal courts. While many states have enacted laws that, like the DTSA, are consistent with the UTSA, differences abound between the states in terms of form and definitions, creating a somewhat piecemeal approach to significant issues such as what efforts are required to maintain trade secrets and what constitutes misappropriation of a trade secret. For a company involved in interstate (or foreign) commerce, the existence of a single federal law governing trade secret misappropriation and civil remedies for the same alleviates some of the risk of jurisdictional and state court differences in the approach to and scope of trade secret enforcement.

This is particularly true for a company engaged with developing technology in one of the technology areas specifically identified by federal statute as a “trade secret”:

the term “trade secret” means all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if-

(A) the owner thereof has taken reasonable measures to keep such information secret; and

(B) the information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information

18 U.S.C. § 1839(3) (emphasis added).

Much technology in the biotechnology and software industries may fall comfortably within the federal definition of a trade secret, including that which is currently being challenged on the basis of patentability under the patent statute. The decision between seeking patent protection or creating a trade secret regime may just have become a little easier for some in those industries.

What’s Next?

Like many newly enacted laws, much about the DTSA will not be defined fully and consistently among the various federal districts until it is tested in courts. Questions on a number of significant issues remain. How often (and under what circumstances) will courts be willing to use the new ex parte seizure provision in the DTSA? How will state laws governing issues such as employee mobility interact with enforcement actions brought under the DTSA? Will district courts look for guidance to state law practice, so that a true single federal law will be many years in the making? All of these open questions will affect predictability in the near term.

However, biotechnology and software companies planning for the long term should look closely at their pipelines and think carefully about what may make sense to maintain as a trade secret and whether it makes sense to seek patent protection. In some cases, intellectual property owners may have some of both. A few questions along this line have always been worth asking. Now, with the enactment of the DTSA and if your technology arguably falls into an exclusion for patentability, a close examination of your options for protecting intellectual property assets is particularly appropriate. Here are a few good things to think about:

  • Will your technology be easy to reverse engineer once available to the public? The DTSA specifically excludes “reverse engineering, independent derivation, or other lawful means of acquisition” from its definition of “improper acts” that could constitute misappropriation of trade secrets. 18 U.S.C. § 1839(6). And the easier it is to reverse engineer or independently derive an innovation, the less an IP owner loses by making the public disclosure that would occur with an issued patent. Conversely, if some or all of your innovation is hidden from view — e.g., an algorithm, a process, a formula — creating a trade secret regime and consistently maintaining it may ultimately net a more valuable portfolio. Biotechnology companies should think carefully, for example, about what aspects of their innovations constitute discovery of an arguably natural process or substance and whether it is possible and more valuable to maintain those aspects as secrets rather than disclose them in an effort to obtain patent protection.
  • Are there other ways to do what you do (even if you do it better)? If your “secret sauce” is one of many other similar sauces that are available to your customer base, think carefully about what is driving you towards seeking patent protection. Disclosing your particular secret sauce as part of prosecution or in an issued patent — assuming you get one — may simply provide your competitors with a map for a design-around.
  • Is the real driver for customer acceptance a visible feature? Don’t forget to consider other intellectual property options, such as trademark, copyright or design patents. If your competitive edge includes something visible — a design or an end user feature — one or more of these intellectual property protections may also be advantageous to complete your portfolio.
  • Where is your market? If your market is international, your U.S. strategy still needs to be aligned with your strategy abroad.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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