March 2005

Espionage, theft and greed restate the need for protection

A welter of tabloid headlines in Detroit last month brought greed, industrial espionage, possible grand larceny and plain old-fashioned theft into the world of powder metallurgy. US patent attorney Harry Brown says that proper protection of intellectual property rights is an essential start in preventing criminal losses…

The threat of corporate espionage or other misappropriation should prod owners of intellectual property to take measures to protect their important information and creations. Intellectual property and other laws may not prevent the acts of unscrupulous persons, but when properly applied, they can function as substantial deterrents against such acts and, in some circumstances, can remedy harm resulting from the acts.

While most organisations have well laid down rules for the audit and protection of their physical possessions, intellectual property is sometimes overlooked. So before setting out to implement a strategy for protecting intellectual property, it is generally useful to know what intellectual property there is to protect. Many organisations conduct periodic audits to identify and classify their intellectual property as, for example, technical information, production information, sales and marketing information, financial information, etc.

No single form of intellectual property protection is appropriate for all information that an organisation might possess. Most successful protection strategies use a variety of approaches tailored to the nature of the information to be protected.

Patent protection will prevent others from making, using, selling, or offering for sale the patented invention, or importing the patented invention into the United States. Patent protection is available for inventions involving new and useful processes, machines, manufactures, or compositions of matter, or any new and useful improvements thereof.

Rigorous requirements

But that is only true if the invention satisfies rigorous requirements such as novelty and non-obviousness.

Copyright protection will prevent others from, among other things, unauthorised copying or making derivative works, ie works based upon one or more pre-existing works. Copyright protection is available for original works of authorship, but it does not "extend to any idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work."

Obviously, not all information is patentable or copyrightable. Information that, for whatever reason, cannot be protected by patent or copyright laws can often be protected under trade secrets laws. The Uniform Trade Secrets Act, adopted in many states, defines a trade secret as:

Information, including a formula, pattern, compilation, program, device, method, technique or process that:
(1) derives independent economic value, actual or potential, from not being generally known to, and not being easily ascertainable by proper means, by other persons who can obtain economic value from its disclosure or use; and
(2) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Factors that are typically considered in determining whether information is a trade secret include:

• The extent to which the information is known outside the owner's business;
• The extent to which it is known by those involved in the owner's business;
• Measures taken to guard the secrecy of the information;
• The value of the information to the owner or to his/her competitors;
• The amount of time, effort, and money expended by the owner in developing the information; and
• The ease or difficulty with which the information could be properly acquired or duplicated by others.

The decision whether to try to protect information as a trade secret or whether to seek patent or copyright protection is an important one. Patent and copyright laws are fundamentally at odds with trade secret protection, as the aim of patent and copyright laws is to encourage public disclosure of information in exchange for providing the right to exclude others for limited terms. On the other hand, trade secret protection relies on non-disclosure and can last for as long as secrecy can be maintained. Once information is disclosed in a patent or copyright, of course, it cannot be maintained as a secret and, when information is used but maintained as a secret, a bar to patentability may arise. Accordingly, the decision how to protect particular items of information should ordinarily be made on an item by item basis.

Creative approaches

Where patent, copyright, and trade secret laws cannot effectively protect information, other creative approaches have also been used. These approaches have included contractual approaches such as "shrink-wrap" or "install-wrap" licenses for computer software, and technological approaches, such as copy-protected CDs and DVDs.

Patents and copyrights only go so far in protecting intellectual property. Restrictions on access to sensitive information and physical security measures, such as fences, alarms, and security guards, are another feature of most effective intellectual property protection strategies. Physical security measures provide useful objective evidence of efforts to maintain secrecy that is important for purposes of assessing the reasonableness of measures taken to protect trade secret information.

Simple and effective

Whether measures taken to protect information are reasonable will also often involve considering whether efforts have been undertaken to form suitable contracts with persons who will or may have access to intellectual property. Contractual security measures are simple and effective and, unfortunately, often overlooked.

Among the various contractual measures, employment contracts are one of the most important tools in an intellectual property protection program.

It is important to note, however, that provisions in employment contracts can be treated very differently from state to state. Whether a particular state's law will permit enforcement of some or all of the terms of an employment agreement should be investigated before adopting it for use in a particular state, and changes in the law should be tracked to see if it is necessary to revise an employment agreement. However, generally speaking, reasonable provisions that do not unduly restrict the ability of an employee to find work in his or her chosen field will be enforced by the courts.

US patent law provides that rights to an invention are owned by the inventor. Entities that employ others who invent patentable subject matter are often unpleasantly surprised to discover that it would have been a good idea to have had a signed employment agreement requiring their employees, contractors, or consultants to assign their rights to inventions made in the course of their employment.

For US copyrights, authors own the rights to their work. However, in the case of "works made for hire", the employer or person for whom a work was prepared is considered to be the author and, unless the parties agree otherwise in a signed, written agreement, the author owns rights to the work. Trouble can arise, however, when there is uncertainty whether a person is an employee, such that an employer will own rights to works prepared for the employer, or an independent contractor who may own all rights to a work of authorship.

Employers subject themselves to significant risk if it is not clear from the start that employees, contractors, or consultants are obliged to assign rights to their inventions and works of authorship.

Confidentiality policies

Employment agreements often include provisions requiring employees to acknowledge that they will maintain information that they receive in the course of their employment as confidential and will not disclose it without authorisation. Organisations should also have written confidentiality policies and distribute them to all employees. Particularly with respect to more sensitive confidential information, "CONFIDENTIAL" notices should be provided on documents and other materials, and recipients should be notified in writing that information is proprietary and is not to be disclosed or used without consent. Also, when employment terminates, an exit interview should be conducted to remind the ex-employee of the confidentiality obligation.

Many employment agreements include non-compete clauses. While these can be useful, they are generally construed very narrowly against former employers or partners. They are usually subject to a "reasonableness" test because of the inequality of bargaining power between an employer and an employee. Courts are reluctant to enforce agreements that might prevent people from obtaining work in their chosen profession. Non-competition agreements are more likely to be enforceable if they are limited, particularly in terms of geographical scope and duration.

It is often necessary for modern organisations to exchange information with a variety of other entities for a variety of reasons and under a variety of circumstances. While structuring of these relationships may not fall under the umbrella of what is traditionally viewed as an intellectual property protection strategy, knowledge of the law pertaining to these relationships is important to make sure that valuable intellectual property is not unintentionally lost.

Real and potential risks associated with several types of relationships are discussed below.

Agreement on rights

When entities, such as corporations, agree to collaborate on a project, such as in a joint venture, they should agree at the outset who will own rights to intellectual property developed in the course of the collaboration. For example, as previously noted, the rights to a patentable invention belong to the inventor unless he is under some kind of an obligation to assign. Even if an inventor is under an obligation to assign to his employer, the objectives of another entity collaborating with that employer may be frustrated and its contribution of information may be lost if it is not granted some rights under a patent resulting from the collaboration.

Additionally, collaboration agreements should address the treatment of intellectual property that the parties each independently bring to the collaboration. Often, in the course of the agreement, it will be necessary for certain collaborators to use the intellectual property of other collaborators.

Agreements with government

Questions for the parties to consider include how intellectual property of others will be treated during the course of the collaboration and after the collaboration terminates.

US government funding agreements typically require that the government be granted a nonexclusive, royalty-free license to, inter alia, practice patentable inventions developed under a funding agreement.

For organisations performing government funded work, to avoid giving away substantial rights, it is imperative that detailed records be kept concerning what activities are performed in connection with the government funding, and what activities are not.

For similar reasons, organisations collaborating with other organisations performing government funded work should insist that the other organisations maintain appropriate records.

Non-profit organisations that perform certain government funded work, particularly universities performing research, are often not authorised to assign rights to patentable inventions without approval from the government.

This can frustrate the expectations of an entity that is also providing funding for work by the organisation, or that is performing work in conjunction with the work by the organisation.

It does little good to obtain patents and copyrights, to maintain information in secrecy, or to negotiate agreements with employees, contractors, consultants, or other collaborators if there is not also a willingness to enforce intellectual property rights in the courts, usually through civil, and sometimes criminal, action. Courts have power to award statutory and actual damages, award enhanced damages and/or attorney fees (usually limited to circumstances where conduct is particularly egregious), issue orders enjoining further infringing or otherwise improper activities, and impose criminal penalties including fines and prison.

Reluctance to act

In spite of the potentially substantial deterrent effect of penalties such as these, there is a large measure of reluctance in many organisations to resort to legal action.

But it is an invitation to misappropriation for an organisation to be perceived as being afraid to enforce its rights, or too disinterested to incur the expense and aggravation of enforcement activities in the courts. Organisations with reputations for aggressively defending their rights often find that others quickly learn to have respect for it and are wary of interfering with those rights.

The Author: Harry Brown is a patent attorney with White, Redway & Brown LLP, 1217 King Street, Alexandria, Virginia, and can be reached by phone at +1 (703) 299-0953 and by e-mail at harry@wrb-ip.com. This paper represents the present views of the author and does not necessarily reflect the views of any clients of White, Redway & Brown LLP.