Two forms of intellectual property—patents and trade secrets—are used to protect technological innovations. Common wisdom is that businesses must choose one or the other, because patents and trade secrets have conflicting requirements. While that is largely the case, it is possible to simultaneously use both forms of protection, if the business carefully and strategically manages the use of each to protect its position.

A recent Federal Circuit decision Texas Advanced Optoelectronic Solutions v. Renesas Electronics. America (Fed. Cir. 2018) (the TAOS case), involved both the assertion of patent and trade secret claims, both of which were directed to the same technology. The court's detailed decision highlights both strategies to simultaneous use patent and trade secret law, and limitations on each of the IP rights.

Patents vs. Trade Secrets

There is a fundamental contradiction between patent and trade secret rights. Patent rights are grounded in the theory that an inventor should disclose to the public (through an application filed with the Patent Office) his invention, and thereby enrich the general knowledge in a particular field. In exchange, if the rigorous requirements for patenting are met, the inventor (or more typically, his or her assignee) are granted a limited monopoly to make, use, or sell the technology.

Trade secrets, in contrast, depend on the owner using the trade secrets in a business, and, as their name implies, taking reasonable efforts to keep the trade secrets confidential.

Disclosing an invention in a patent application terminates trade secret rights, since that is tantamount to disclosing them to the public. (Patent applications, whether issued or denied, are generally published and available on the PTO website 18 months after filing.) So, at least in the long run, businesses must choose whether to protect their technologies through patents or trade secrets.

There are other significant differences. Patents are granted by the Government; until the Patent Office issues the patent, the inventor has no rights. Trade secret rights vest immediately when a business uses particular information in its business and makes efforts to maintain it as confidential.

Patents are of limited duration—20 years from filing. Trade secrets potentially are of limitless time.

Trade secret law only protects against “misappropriation”—meaning obtaining the information through some wrongful means, typically a breach of confidence by an employee. Trade secret law does not protect against either independent invention (someone else inventing the same idea without any input from the trade secret owner), nor against “reverse engineering,” which could mean that a competitor simply buys the product on the market and through examination and analysis learns the technology.

Patents protect against any use of the patented technology, including independent invention and reverse engineering.

'TAOS' Case

TAOS and Intersil competed in the market for ambient light sensors, which detect the level of light and adjust screen brightness in computers and other electronic devices. The sensors are sold to electronic device manufacturers like Apple, who incorporate them in their products. TAOS claimed both patent and trade secret rights in technology for these products.

As the Federal Circuit decision illustrates, the owner of an invention can, to some extent, use both forms of protection together. But the case also illustrates some limitations. Here are the most salient takeaways:

Combinations of Patented Features. TAOS's patent disclosed two features of its technology, both disclosed in the same patent. But, nothing in the patent disclosed that the two features should be used in combination. That, TAOS argued, was still protected by trade secret law—and the Federal Circuit agreed. The fact that both features had been disclosed in the patent did not mean that the patent taught that the two should be used together. Rather, TAOS maintained that as a secret.

The takeaway, of course, is that technology companies might patent some of their inventions but hold back as a trade secret additional advantages gained, for example, by combining different aspects of the invention.

Already Known Information. On the other hand, the Federal Circuit rejected one of the trade secret theories advanced by TAOS, directed to use of relatively inexpensive plastic (instead of glass) in the product. The evidence showed that defendant Intersil had already been using (or already knew) such information before it had been exposed to such information from TAOS.

This illustrates a major limitation on trade secret protection—it only protects from “misappropriation,” not use of information independently known or developed by a competitor.

Reverse-Engineering and 'Head Start'. The jury awarded TAOS over $48 million in Intersil's profits. The Federal Circuit reversed because the vast majority of these profits were earned long after TAOS released the product to market—and Intersil could have acquired a sample and “reversed engineered” the technology. “Accessibility by proper means rendered the photodiode array structure no longer a protected secret.”

This is notable because, even though Intersil had misappropriated at least one trade secret (which the Federal Circuit affirmed), the damages period had to be limited to the point in time when Intersil could have acquired TAOS's product on the market and then learned enough to recreate the structure in its own product.

Nevertheless, this illustrates an important point: Trade secrets can still be valuable by providing a business with a “head start” over its competitors. During the period of time when a company is developing the technology and preparing to go to market, its knowledge can remain a trade secret. Once the product goes to market, then trade secret status can be lost to the extent the secrets can be learned through “reverse engineering.” However, that process takes time—depending on the technology and the market, it may take significant time for a competitor to learn the trade secrets and integrate them into its own competing product. In the meantime, the trade secret owner has obtained a “head start” to enter the market, which depending on how long that is, can be quite valuable.

In a case like TAOS, the head start period extends the period when a misappropriating defendant must pay damages. But even where the trade secret has not been misappropriated, the trade secret owner can exploit the “head start” to gain profits from a superior product during the time competitors are attempting to reverse engineer the product and then integrate that information into their own products. And, depending on market dynamics, that period can also be valuable in gaining market share and brand loyalty, since the trade secret owner has for a period of time a superior product.

The head-start period is where patent and trade secret protection can be used in a complementary fashion to maximize protection. While patent applications are eventually published (and so trade secrets in the application are lost), by law they are kept confidential for at least 18 months, during which trade secret protection can remain. A business that has maintained the information as a trade secret could include it in a patent application and still maintain trade secret rights for 18 months. That is the time where a business should attempt to use the head start concept discussed to exploit its technology and gain those benefits. Once the time has expired and the application publishes, then the owner will, hopefully, be much closer to gaining patent protection.

Geographic Limitations. Patent rights are statutory, and they have long been held to be limited to the territory of the jurisdiction which issued the patent. TAOS learned this to its chagrin when the district court ruled on summary judgment (with the Federal Circuit affirming) that the vast majority of its patent damages were held uncompensable because they reflected activities abroad. Although Intersil's infringing product made its way into Apple products sold in the United States, all but a tiny amount of them were manufactured abroad and sold and delivered to customers abroad. Hence, they were outside U.S. patent protection.

Trade secret protection, on the other hand, is a common law protection. (Although recently the United States enacted the Defend Trade Secrets Act of 2016, that provides a federal forum for trade secret claims, but trade secrets still vest as a matter of use and secrecy, not through government grant.) There is no reason that a party like TAOS that was the victim of trade secret misappropriation (assuming that occurred in the United States) could not seek damages for actions abroad.

The TAOS court awarded disgorgement of Intersil's profits from the misappropriation under Texas law—and that is now allowed under federal law as well.  Although, as noted above, there was a temporal problem with that award, there does not seem to have been a geographic one—Intersil's profits were fully awardable, even if they were earned abroad.

TAOS could, of course, have obtained patent protection in foreign countries, but that would then have required suit in multiple jurisdictions, potentially a complex and expensive endeavor. In any event, the case does show that trade secrets may be more useful in some situations in protecting rights on a global scale.

Conclusion

When a patent application is published after 18 months, its contents become public knowledge and are no longer protected as trade secrets. Nevertheless, the TAOS case shows that businesses can still exploit both forms of protection, if the nuances and limitations of each form of intellectual property are appreciated.

Milton Springut is a partner at Springut Law PC. Tal S. Benschar, a partner at the firm, assisted in the preparation of this article.