Protecting Software: The Trade Secret or Patent Decision Tree

For decades, innovators in software have turned to the patent system for protection of their ideas. It was not a surprising development. The patent system provided broad, monopoly protection against competitors which often lasted long past the effective life of a software product. Further, that protection often came without the need for a comprehensive disclosure of the software being patented. The push for patent protection was also fueled by a series of large, highly publicized damage awards supported by claims of software patent infringement. The tides however are undoubtedly changing. Software patents are becoming increasingly difficult to obtain and are becoming even harder to hold in light of the newly created Patent Office inter partes review procedures where software patents make up a significant portion of contested patents. Further, although the Supreme Court sent few signals during the recent oral argument in Alice Corporation Pty. Ltd. v. CLS Bank Int’l., U.S., No. 13-298, ( argued 3/31/14) (87 PTCJ 1289, 4/4/14)—a case dealing with the patentability of software—that it was poised to abolish software patenting altogether, future cases may give it the opportunity. Even if not by edict of the Supreme Court, given a substantial public outcry, ongoing legislative action may itself unravel the patentability of software. Given the multiple fronts of assault directed at software patents, what strategy should a software company execute in light of these developments? Consider calling the trade secret function.

Defining a Trade Secret.

Like in a software application, it is important to begin by defining the key variables. In most states, a “trade secret” is information, including a formula, pattern, compilation, program, device, method, technique, or process, that: (1) derives independent economic value from not being generally known or readily ascertainable by others; and (2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. There are a number of key issues here. First, there must be value to the software not being widely known or readily ascertainable. This is often the case with software since its design is a constant effort to construct and refine efficient algorithms that distinguish the end product from the competition. Putting aside the benefits of open source software development, software companies often derive value in not simply releasing those methods to the public. Second, there must be reasonable efforts to maintain the secrecy of those methods. Here lies one of the fundamental rubs between patent protection and trade secret protection. The quid pro quo of patent protection is that an applicant discloses what is being patented to the public. The patent application, therefore, can have profound impact on whether the software technique can be maintained as a trade secret. More importantly, as software patents become increasingly difficult to procure, the demands for disclosure of novel techniques will only increase.

Switch (To Trade Secrets)?

Answering the question of what a trade secret is does not, however, answer the more fundamental question of why software companies should again consider relying upon trade secret protection. The primary benefit of relying upon trade secret protection as compared to patent protection is that an owner can keep the information a secret. This can be critically important for small and nascent software companies working on revolutionary or new algorithms, data structures, or methods for delivering content while facing well-funded and fast moving competition. In contrast, seeking patent protection for those same techniques would require disclosing those secrets to the public. If a software company believes its innovation is truly proprietary and not readily replicated, the decision becomes far easier.

How does trade secret protection help software companies keep their secrets, secret? Trade secret law provides legal mechanisms to prevent others from misappropriating those trade secrets along with tools to obtain money damages if they are. For most states, at its most basic level, “misappropriation” means acquiring a trade secret by a person who knew or had reason to know that the trade secret was acquired by improper means or disclosing or using a trade secret of another without the owner’s permission. A key theme for each type of misappropriation is the concept of “improper means,” or the action involving such things as theft, bribery, misrepresentation, not adhering to a duty to maintain secrecy, or espionage.

In addition to providing a mechanism to prevent the disclosure of trade secrets, trade secret law has also begun to deliver the mega verdicts—previously the exclusive rein of patent law—when secrets are improperly disclosed. Trade secret verdicts are increasingly taking their place on the intellectual property leaderboard with more than half of the top intellectual property verdicts over the last year relating to trade secrets, not patents. Those verdicts include a multi-billion dollar awards to St. Jude, a $919 million dollar verdict for Du Pont (just recently overturned by the Fourth Circuit), and a $465.4 million verdict in favor of Lexar Media. At least two explanations help explain this trend. First, more companies are beginning to embrace trade secret enforcement as a viable means to protect themselves within the marketplace. Second, trade secret verdicts are not hindered by the same web of legal hurdles facing patent plaintiffs as the Federal Circuit—the appellate court exclusively charged with overseeing appeals in patent cases—struggles to curtail large patent damages. As a consequence, trade secret law is becoming a powerful weapon for companies seeking to keep their most valuable secrets, secret and their competitive advantages secure.

Further, unlike patent owners, trade secret owners are not limited to civil injunctive and money damages relief. Trade secret misappropriation also can result in criminal penalties providing trade secret owners, in certain circumstances, alternate avenues for enforcing their trade secrets including leveraging the government’s ability to obtain more expansive discovery (through search warrants) and assistance in recovery of stolen trade secrets.

Following the decision tree to trade secrets does not, however, come without risk. Most notably, unlike patent protection, trade secret law provides no protection to an owner when the secret is otherwise ascertainable by the public either through independent discovery or reverse engineering. In the same vein, not seeking patent infringement could result in a software company being subject to patent infringement actions by companies that later attempt to patent similar technology. This risk, however, was substantially mitigated by recently enacted patent reform legislation, the America Invents Act. Specifically, patent law now provides companies a defense to patent infringement based on prior commercial (and certain other) uses of a claimed invention, so long as that use occurred at least one year before the filing date of the invention or the invention is disclosed to the public. That protection now exists even if the use occurred in secret. Although there are many nuances surrounding this defense, it provides companies that prefer to keep their innovation secret, a new level of protection against subsequently filed patents.

Protecting Your Class of Secrets.

Once a software company has decided to opt for trade secret protection, how does it go about ensuring those secrets are protected? In order to maintain its trade secrets, a software company must show it took reasonably steps to maintain the secrecy of the trade secret. As with software, the execution is in the details. Applying the same level of diligence as software companies regularly apply to debugging software will help lay the foundation to defend the substantial investment in innovation should patent protection become less viable. Some specific techniques software companies should consider include the following:

• Inventory and identify trade secret materials: An important first step toward protecting the company’s secrets is figuring out what they are. This may not be as intuitive for a software company as it is for Coca Cola, but, much like the secret recipe for Coca Cola or the Colonel’s recipe of eleven herbs and spices, software companies know what makes their product unique and valuable. It is also important to remember trade secret protection is not limited to the specific algorithm in code. Design and other internal documentation may embody the secret details and therefore is protected as well. Once a software company identifies its trade secrets, it should take steps to unambiguously mark those materials. Although source code might be difficult to mark as “confidential,” software companies should consider marking other documents to help eliminate any chance of accidently being leaked to the outside world.
• Don’t release the software into open source: It goes without saying that if the objective is to maintain a trade secret, a software company cannot release those secrets into the open source community or freely distribute its source code and expect that it can later claim those innovations as a trade secret. Instead, software companies should consider distributing software in compiled form.
• Establish employee confidentiality agreements and policies: Software companies should consider requiring their employees execute confidentiality and proprietary information agreements. These agreements eliminate any ambiguity on employees’ responsibilities to protect the company’s confidential material, establish protocols for any newly created innovations to be assigned to or remain the property of the company, and provide the company a mechanism to engage employees on the importance of secrecy from the onset of the employment relationship. Software companies’ efforts, however, should not end there. Software companies should consider creating policies to ensure any documents embodying the company’s secrets get clearly identified as confidential and are appropriately secured. Further, because software companies are some of the most active in social media, software companies should consider reexamining social media policies to make sure that they clearly inform employees not to divulge company confidential information when using social media. Finally, given the higher than average employee turnover experienced by software companies, software companies should consider maintaining an effective exit interview process to remind employees of their obligations and ensure employees do not leave with the company’s secrets.
• Ensure third parties sign confidentiality agreements: Just as software companies should ensure their employees know not to disclose confidential information, they should ensure third parties that need to be provided access to the company’s secrets also know not to disclose the material. Software companies often engage in joint development agreements, actively canvas for venture capital, or provide critical details about their software to potential customers. In each case, software companies should ensure proper non-disclosure or confidentiality agreements are in place, not only to ensure there is no question about whether materials can be disclosed, but, to establish who owns what whenever materials are exchanged.
• Establish adequate physical security for secrets: Best practices in collaborative software design necessitate a code repository. This is an effective first step to ensuring necessary physical security to protect a software company’s secrets as it provides a means for monitoring and securing access to materials. Software companies should, however, do more. All confidential materials—not just the source code—should be secured from prying eyes. Copying of these materials should be monitored and logged. Software companies should also consider other forms of standard physical security—both in its storage equipment and the facilities housing them.

A software company is not obligated to do everything possible to secure its secrets, but, the more it does the better chance it will have preventing misappropriation and demonstrating to a court should it occur that it took reasonable steps to protect those secrets.

Conclusion.

Software patents—and the software industry—have undoubtedly received the most scrutiny of any when it comes to patent eligibility. The strong judicial and legislative ground swell of support in curtailing patent protection for software will only continue to increase the pressure on software companies to rethink their intellectual property strategies. Although few software companies will find it desirable or necessary at this stage to completely abandon their patent-seeking strategies, unambiguous signs point to the need to do so soon. Developing strategies for ensuring that software remains protectable as a trade secret will therefore be an instrumental corporate strategy for both large and small software companies in the coming years.