Deck 3: Protection of Intellectual Property Assets Through Trade Secret Law, Contractual Agreements, and Business Strategies

Question 1

Now assume that, as part of her employment, Eileen signed a nondisclosure agreement. As after-thought, Eileen cleaned out the rest of her desk and took general operating and employee manuals. These manuals do not meet the requirements for trade secret status. In time, she turns the documents over to XYZ, who implements some of the ABC strategies. True or False: Because the documents were not trade secrets, they legally could not be covered by the nondisclosure agreement.

A) True.
B) False.

Answer 1

B

Question 2

Discuss whether independent creation is prohibited in each of the following areas of law: 1) patent law; 2) copyright law; and 3) trade secret law.

Answer 2

Independent creation is prohibited in patent law, in the sense that even independently created works will infringe upon an existing patent.
Independent creation is permitted in both copyright and trade secret law, in the sense that independently-created works, even if identical to the copyrighted work or protected trade secret, will not result in either copyright infringement or trade secret misappropriation.

Question 3

Martin Causton filed for a patent on a consumer freezer package sealing device on November 12, 2002. The application was published on May 12, 2003, and the patent issued on May 12, 2004. Causton's invention permits a consumer to put an airtight seal on packages of frozen food using a combination of an adhesive and heat, thus ensuring that the frozen food will remain of highest quality and not suffer "freezer burn."

Answer 3

Before filing his application, Causton attempted to generate interest in his device among manufacturers of plastic freezer bags. On June 23, 2001, he wrote to HappyWrap, Inc., a manufacturer of plastic storage bags:
We have developed a machine which can produce the product you see enclosed-a home freezer bag from which all air has been extracted and on which an airtight seal has been placed, thus ensuring the contents do not suffer freezer burn. The machine has been finalized and perfected and is ready for the consumer market, and we are prepared to sell or license this technology to one manufacturer on an exclusive basis immediately. Please let us know of your interest promptly.
The letter also set forth separate terms for sale and licensing of the terms.
HappyWrap expressed interest in the technology, and the parties entered into some correspondence about the matter. Ultimately, they scheduled a meeting for February 17, 2002, to discuss the invention. Prior to the meeting, the parties negotiated a Confidential Disclosure Agreement "CDA") regarding the technology to be discussed at the meeting. However, HappyWrap never signed it. On February 14, 2002, shortly before the scheduled meeting, Causton had a telephone conference with a HappyWrap engineer, in which the parties discussed details of Causton's machine and method. At the time, Causton had signed the CDA and incorrectly) thought HappyWrap had done so as well. HappyWrap cancelled the planned February 17 meeting, deciding it would instead evaluate its own internal capability of producing a sealing machine.
On June 6, 2002, HappyWrap sent a letter to Causton, indicating that it had "developed our own machine for sealing home freezer bags, and therefore we are not presently interested in purchasing such a machine from your firm." The letter went on to state: "We would like to thank your firm for suggesting the sealed home freezer bag product to us by paying you $500." Apparently anticipating a claim of misappropriation, the letter specifically pointed out that HappyWrap had never signed the CDA "pending our internal consideration of such product," and requested that Causton sign a release "on account of our use of the sealed home freezer bag idea" in return for the $500 payment. The letter makes no mention of the telephone conference of February 14, 2002 or the information HappyWrap obtained during the conference. Causton declined the $500 and did not sign the release.
Sometime in March or April 2005, HappyWrap began producing and selling its "SealFast" product - a consumer home freezer bag sealing device.
Causton has filed suit against HappyWrap for 1) patent infringement and 2) trade secret theft.
How should the court respond to each of these claims?
Analyze each issue separately:
Patent Law:
One defense to patent infringement is patent invalidity. HappyWrap should win on these grounds. The patent application was filed on May 12, 2002, making the critical date November 12, 2001. However, we see that on June 23, 2001, Causton had sent a letter to HappyWrap offering to sell or license the technology and setting for the terms for same. This communication is definite enough to constitute an offer for sale for purposes of the Section 102b) on-sale bar. Because the machine had been "on sale" more than one year prior to the filing date, the patent is invalid, and there can be no patent infringement.
Trade Secret Law:
The next question is whether Causton can protect his invention through trade secret law. Even assuming that the CDA discussed by the parties but not signed by HappyWrap was effective an unlikely assumption, quite frankly), any claim that Causton had for a trade secret disappeared when the patent application was published on May 12, 2003. After this date, the information was no longer secret because it had been made available to the public. So, there is no trade secret misappropriation, either.
Based on Group One, Ltd. v. Hallmark Cards, Inc., 254 F.3d 1041 Fed. Cir. 2001). In the real case, the court said that the inventor could obtain damages from the defendant for any profits that the defendant had made as a result of its illegal "head start," i.e., profits attributable to the fact that the defendant started making its product based on confidential conversations preceding the patent publication date. The inventor could not prove any such damages, however, and so received nothing.

Question 4

An inventor must choose between either patent protection or trade secret protection, as these are mutually exclusive options.

Question 5

Acme Sales Corp. sold septic cleaning systems via telemarketing calls. Acme had spent a great deal of money and effort developing a sales technique, including a tailored "sales pitch" that made it one of the most successful telemarketers in its field. Employees were required to sign a confidentiality agreement and a non-compete before starting work, and Acme diligently enforced the provisions of these agreements against the handful of former employees who attempted to circumvent them.

Question 6

Even if the elements of an allegedly secret process are known to the public, the combination of the elements may be protected as a trade secret.

Question 7

Who may own "shop rights" in a trade secret?

A) The employee.
B) The employer.
C) The employee and the employer each own an equal share of the shop rights.
D) Shop rights are not owned by anyone, but they give the employee the right to use an invention in another business.

Question 8

Korrent Equipment Co. and Troy Machine Co. design and sell similar types of specialized industrial machinery. In particular, in 1992, Korrent designed and developed an industrial polisher. Two of the engineers working on the project were Chris Cooke and Lee Schultz. Both were involved in making detailed drawings of Korrent's polisher. Only a small group of engineers were involved in the project and knew how to make the polisher. All were told, in writing and orally, that the design and development of the polisher was a trade secret belonging to Korrent. All documentation relating to the project was kept in a secured area to which access was limited to those with a demonstrated need to know.
a. Is Troy's argument correct?
No. An employer can be liable for an employee's misappropriation where the employer knew or should have known that the misappropriation was going on. As we said in class, the employer cannot bury its head in the sand-if it a reasonable employer would have inquired or investigated further about potential misappropriation based on the facts before it, the employer can be held liable even though it did not actually know.
You didn't need to assess Troy's liability here, but the facts given suggest that Troy likely should have been liable. Troy recruited two employees from a competitor, knowing the employees had worked on the invention at issue allowed the employees to work on the same project for Troy. The fact that the employees were able to produce a design within a matter of months, when Troy had been unable to reverse engineer the invention previously also raises red flags. Troy did make some half-hearted efforts here, by asking the employees if they had misappropriated, but these efforts really weren't a reasonable inquiry.
b. What might each party have done to minimize the likelihood of this type of dispute arising?
It's very likely that Korrent's measures were sufficient under the common law to establish a trade secret, and that the employees and Troy are liable for misappropriation. It's always better to stop the misappropriation in the first place, though, rather than to seek injunctions or damages once it has occurred. Stronger security measures could have helped Korrent emphasize to these employees the importance of keeping trade secret information secret. In particular, it could have put in place contractual agreements - specifically, a nondisclosure or proprietary information agreement, and a non-compete, that could have helped emphasize to the employees the need for confidentiality, and could have limited the employees' ability to work for competitors for a period of time. An exit interview will also help emphasize to departing employees the importance of maintaining the confidentiality of the former employer's secrets.
Troy should also have taken steps to avoid misappropriating these secrets. Troy recruited the employees knowing that they had worked on Korrent's trade secret polisher design, and while it warned the employees it did not want access to trade secrets, it also allowed these employees to begin work on a similar project for it, almost guaranteeing that trade secrets would end up being misappropriated. These employees should have been assigned to different tasks.

Question 9

Mettam Industries makes food products, including aerosol cans of whipped cream. The technology for making such a product has been well-known in the industry for many years, including knowledge of how to process the ingredients and how to fill the cans to produce a product that will dispense properly. After much experimentation, Mettam researchers discovered that by mixing the ingredients in a particular order, and then chilling them to a specific lower temperature and holding them there for a specified number of hours before attempting to fill the cans, the researchers could ensure that the whipped cream would maintain a more consistent, creamy texture, even several weeks after being opened, and even when stored at fluctuating refrigerator temperatures. The end result is a more consistent, tastier product for consumers. Interestingly, the chilling procedure is precisely the procedure followed in the food industry for making aerosol cheese food products.
e.g., is keeping process secret and releasing information to employees on a need-to-know basis).
The real question here is whether the information is in the public domain. The recipe for the whipped cream is well-known, and the technology for filling the cheese food can is also well-known. However, there is no evidence that the information about mixing the ingredients in a particular order is publicly known, and no evidence that others recognize that using the cheese food technology has an application in the whipped cream industry.
Even if all of the constituent elements of an alleged trade secret are publicly known, a new combination of those elements to produce a better result may be protected as a trade secret.

Question 10

Boris Corp. has invented a production process that allows it to produce its product at half the cost incurred by the rest of the industry. Boris' main competitor, Dudley Manufacturing, hires a specialist in industrial espionage to try to learn the secret process. The spy finally hits pay dirt one day while sitting near Boris' engineers at a restaurant. The spy overheard the engineers discussing plans to improve the process further. The spy promptly returns to Dudley and relays the information. Did Dudley obtain this information unlawfully?

A) Yes, it unlawful to hire an industrial spy to follow around another company's employees.
B) Yes, but only if Dudley is an American company.
C) No, because the spy overheard the information in public.
D) No, it is not illegal to obtain the information, but it is illegal to use it to earn profits.

Question 11

After five years of experimentation and research, DGS industries invented a new kind of drill head for use in drilling extremely hard surfaces with a great deal of precision. The technique has particular applications in medical equipment and aircraft. DGS considered applying for a patent on its invention, but determined that the 20-year period of exclusivity granted by a patent was insufficient. DGS sought instead to protect the invention as a trade secret. Two years later, a competitor, Copley Co., began producing precision parts so identical to DGS's that it seemed clear to DGS that misappropriation must have occurred. DGS started an investigation and quickly discovered that the lead scientist involved in the creation of the drill head had left for Copley just six weeks prior to Copley's production of the precision parts.
DGS has filed suit for misappropriation. Copley has defended by arguing that because DGS could have qualified for a patent but failed to apply for one, DGS was prohibited from claiming trade secret protection for its invention. Is Copley right? Explain
No, of course not. There is no requirement that an inventor file for a patent. The inventor can always treat the invention as a trade secret instead, or can forego all IP protection and put the invention out in the public domain if he or she prefers.

Question 12

Eileen is ABC Manufacturing's chief production engineer. ABC is located in a state that has adopted the Uniform Trade Secrets Act USTA). After working at ABC for a year, Eileen decided to leave and work for XYZ Design and Engineering, ABC's chief competitor. On her way out the door, she stopped by the accounting office, waited until the filing clerk stepped out to the water cooler, and took a list of customers labeled "confidential" from a filing drawer. Can this customer list be protected as a trade secret?

A) Yes, because the customer list has commercial value and is not in the public domain.
B) Yes, because ABC only has to use reasonable steps to keep the list secret.
C) No. If Eileen could take the list so easily, ABC obviously did not take appropriate steps to protect the document as a trade secret.
D) both a and b are correct.
E) No. Customer lists never qualify as trade secrets.

Question 13

Assume that Boris sues Dudley for trade secret misappropriation and wins. Which of the following is not a measure of monetary damages that the court might award to Boris?

A) Boris' costs to develop the technology.
B) Boris' lost profits from the misappropriation.
C) A reasonable royalty for Dudley's use of the trade secrets.
D) The amount of profits Dudley made from the use of the trade secrets.

Question 14

InvestEase, Inc. is a franchisor that licenses franchisees to provide investment and tax advice to customers under the "InvestEase" service mark. Spivak was granted an InvestEase franchise in Dayton, Ohio. The franchise agreement contained a clause providing that if Spivak were to cease operating her franchise for any reason, she would be prohibited from operating a competing business within a 350-mile radius for the next two years.