FALL 2010

Trade Secrets


Course No. 9200-704 (& 804)-801

ID No. 85737 & 85736

Time:  W 6:30 - 9:30 p.m.
Room:  W-215
Professor Jay Dratler, Jr.
Room Across from 231D (IP Alcove)
Home: 330-835-4537
Copyright © 2000, 2002, 2003, 2006, 2008, 2010   Jay Dratler, Jr.   For permission, see CMI.

Questions and Notes on Kewanee

1.  Sears and Compco made waves not only in the small sea of unfair-competition law.  They also roiled the waters in the ocean of intellectual property generally.  At the time, trade-secret protection arose only under state law.  (The federal Economic Espionage Act of 1996 lay far in the future.)  If the Supreme Court, at the stroke of a pen, could virtually wipe out protection of product configurations under the state law of unfair competition, why not trade secrecy, too?  Weren't most trade secrets unpatented, and therefore eligible for rampant copying under the broadest theory of Sears and Compco?  Can you articulate any distinctions between state unfair competition law (as applied to product configurations) and state trade-secret law that might prevent his result?

2.  An intervening decision hinted that trade secrecy might not be headed for the same judicial guillotine that had decapitated unfair competition as applied to product configurations.  See Goldstein v. California, 412 U.S. 546, 93 S.Ct. 2303, 37 L. Ed. 2d 163, 178 U.S.P.Q. (BNA) 129 (1973).  In Goldstein, the Supreme Court allowed a criminal conviction for record piracy to withstand pre-emption analysis.  Federal copyright had not protected sound recordings at the times of interest, and California had attempted to protect its recording industry by filling the gap with state criminal sanctions.  See id., 412 U.S. at 548-552.

In upholding California's criminal antipiracy statute, the Goldstein Court addressed three issues.  First, it asked whether the Constitution categorically prohibits the states from protecting intellectual property that might fall within the realm of copyright.  The Constitution, it ruled, imposes no such categorical prohibition on state action:
    "[I]t is difficult to see how the concurrent exercise of the power to grant copyrights by Congress and the States will necessarily and inevitably lead to difficulty.  At any time Congress determines that a particular category of 'writing' is worthy of national protection and the incidental expenses of federal administration, federal copyright protection may be authorized.  Where the need for free and unrestricted distribution of a writing is thought to be required by the national interest, the Copyright Clause and the Commerce Clause would allow Congress to eschew all protection.  In such cases, a conflict would develop if a State attempted to protect that which Congress intended to be free from restraint or to free that which Congress had protected.  However, where Congress determines that neither federal protection nor freedom from restraint is required by the national interest, it is at liberty to stay its hand entirely. Since state protection would not then conflict with federal action, total relinquishment of the States' power to grant copyright protection cannot be inferred.

    [*560]  "As we have seen, the language of the Constitution neither explicitly precludes the States from granting copyrights nor grants such authority exclusively to the Federal Government.  The subject matter to which the Copyright Clause is addressed may at times be of purely local concern.  No conflict will necessarily arise from a lack of uniform state regulation, nor will the interest of one State be significantly prejudiced by the actions of another.  No reason exists why Congress must take affirmative action either to authorize protection of all categories of writings or to free them from all restraint.  We therefore conclude that, under the Constitution, the States have not relinquished all power to grant to authors 'the exclusive Right to their respective Writings.'"
412 U.S. at 559-560.

Second, the Goldstein Court next addressed whether the states may grant protection of unlimited duration, notwithstanding the "limited Times" restriction on Congress' power.  Again, the Court saw no categorical limitation on the states' power to act:
    "Section 8 [of Article I of the Constitution] enumerates those powers which have been granted to Congress; whatever limitations have been appended to such powers can only be understood as a limit on congressional, and not state, action.  Moreover, it is not clear that the dangers to which this limitation was addressed apply with equal force to both the Federal Government and the States.  When Congress grants an exclusive right or monopoly, its effects are pervasive; no citizen or State may escape its reach.  As we have noted, however, the exclusive right granted by a State is confined to its [*561] borders.  Consequently, even when the right is unlimited in duration, any tendency to inhibit further progress in science or the arts is narrowly circumscribed.  The challenged statute cannot be voided for lack of a durational limitation."
412 U.S. at 560-561. (Emphasis in original.)

Finally, the Court addressed whether Congress, directly or by implication, had expressed an intention to deny sound recordings protection against piracy. After a lengthy review of the relevant copyright statutes and their legislative history, the Court ruled that Congress had no such intention and accordingly upheld California's criminal record-piracy statute. See 412 U.S. at 562-571.

The Goldstein Court, however, by no means laid Sears and Compco to rest.  Rather it distinguished them on the basis of congressional purpose and intent.  Said the Court, "we have concluded that our decisions in Sears and Compco, which we reaffirm today, have no application in the present case, since Congress has indicated neither that it wishes to protect, nor to free from protection, recordings of musical performances fixed prior to February 15, 1972."  The Supreme Court decided Kewanee in the very next Term, no doubt with this formulation fresh in mind.

3.  In Goldstein, the Supreme Court focused primarily on the intention of Congress, as revealed in various statutory amendments and the legislative history.  It did so in part because Congress had provided copyright protection for sound recordings shortly after the events at issue in Goldstein.  See 412 U.S. 551-552 & n.7, discussing Pub. L. 92-140, 85 Stat. 391 (providing protection on and after February 15, 1972).

In Kewanee, however, there was no such recent statutory amendment. Nor was the legislative history of the Patent Act of 1952 nearly as rich as that of the copyright act.  Accordingly, the Court focused on whether there was an irreconcilable conflict between patent law, as enacted by Congress, and trade-secrecy as practiced by the states.

Where does the "irreconcilable conflict" standard come from?  What portion of the Constitution, and what line of reasoning, suggests it?

4.  Courts addressing pre-emption questions generally engage in a three-step analysis. First, they consider so-called "explicit" pre-emption: does the Constitution or do the relevant federal statutes explicitly preclude the states from acting?  Second, is federal legislation on the subject so thorough and comprehensive that it "occupies the field" and leaves no room for state action?  Finally, is there an irreconcilable conflict between the state and federal laws so that upholding the state law would undermine the federal law?  The Kewanee court followed the last approach.  Can you explain why it did not follow the other two?

5. The first step in analyzing whether an "irreconcilable conflict" exists is to examine the purposes or policies underlying the two laws. What are the relevant purposes and policies underlying federal patent law?   state protection of trade secrets?  Which of these policies create(s) the greatest potential for conflict?  Does any feature of trade-secret protection mitigate the potential for conflict?  If so, which one(s)?

6.  Following the lead of Judge Friendly of the Second Circuit, the Supreme Court slices the salami still further.  It analyzes the potential for conflict separately for three categories of innovations: (1) those believed not to be patentable; (2) those of "dubious" patentability; and (3) those believed to be patentable.  Are these categories realistic?  Are they categories into which inventors (and the investors who back them) might put real inventions in real business planning?  What about the second, or "dubious" category?  Would inventors and investors be inclined to analyze that category separately, as the Court does?  Why or why not?

7.  For each of Judge Friendly's three categories, summarize the reasons why the Court finds no irreconcilable conflict between patent and trade-secret law.  In protecting inventions known to be unpatentable, says the Court, "[t]rade secret law will encourage invention in areas where patent law does not reach, and will prompt the independent innovator to proceed with the discovery and exploitation of his invention."

Do you agree?   Does this rationale apply to technical inventions that are useful but fail to meet the strict standards of patent law?  for totally unpatentable innovations, such as advertising campaigns and business and marketing plans?  for product pricing decisions?

What about inventions of "dubious" patentability?  What are the court's reasons for declining to find a conflict as to them?  Is the Court most concerned about overburdening the PTO with a flood of dubious patent applications?  Or is there more economic heft to the Court's analysis?  What would be the consequences of a patent-it-or-lose it rule for innovations that appear promising but are of "dubious" patentability?  How would such a rule affect (1) investment in research and development, (2) use of the results, both during the patent application process and after putative rejection of the patent application, and (3) licensing and consequent use of the invention by third parties?

The Court last examines the case of inventions believed to be patentable.  Is it right in suggesting that this is the most sensitive category?  Is it right in concluding that no inventor in her right mind would accept less than patent protection if she could get it?  Or is Justice Douglas, dissenting, right in saying that the potentially indefinite duration of trade-secret protection might provide an attractive alternative to a patent, and that this very case might be an example?  Does Justice Marshall's concurrence provide a simple path through the thicket when he says that Congress intended the patent laws to encourage disclosure, not to coerce it?

8.  In the following passages, the Kewanee Court provides an interesting analysis of the economic consequences of wiping out trade secrecy:
    "Another problem that would arise if state trade secret protection were precluded is in the area of licensing others to exploit secret processes.  The holder of a trade secret would not likely share his secret with a manufacturer who cannot be placed under binding legal obligation to pay a license fee or to protect the secret.  The result would be to hoard rather than disseminate knowledge.  Instead, then, of licensing others to use his invention and making the most efficient use of existing manufacturing and marketing structures within the industry, the trade secret holder would tend either to limit his utilization of the invention, thereby depriving the public of the maximum benefit of its use, or engage in the time-consuming and economically wasteful enterprise of [*487] constructing duplicative manufacturing and marketing mechanisms for the exploitation of the invention."
416 U.S. at 486-487.  Does this rationale have force?  This passage appears in the Court's discussion of the first category of inventions, those believed not to be patentable.  Does it apply more broadly to the other two categories of inventions as well?

What about the risk of overinvestment in secrecy?  The Christopher court addressed that risk, saying " To require DuPont to put a roof over the unfinished plant to guard its secret would impose an enormous expense to prevent nothing more than a school boy's trick."  How does/should this risk affect the analysis of each of the three categories of inventions analyzed in Kewanee?

9.  In analyzing the category of known-patentable inventions, the Court considers the administrative effects of "partial pre-emption," i.e., precluding trade secrecy only for patentable inventions.  Is the Court right in concluding that such an arrangement would be legally and administratively unworkable?

Most patent cases involve two issues: (1) whether the patent is valid and enforceable; and (2) whether, if so, it has been infringed.  Although infringement is generally the more fact-based analysis, determining the validity of the patent normally requires careful interpretation of the claims and often close analysis of the "prior art."

Wouldn't all these complexities of patent litigation appear in almost every trade-secret case if the Court had endorsed a scheme of partial pre-emption?  That result might be beneficial for lawyers' incomes, but would it be beneficial for the economy as a whole?

10.  The majority opinion in Kewanee is of interest because of its close analysis of policy and its careful parsing of the three categories of inventions and their likely influence on business planning and on the economics of research and development.  Indeed, it is an important opinion quite apart from its result, because it explains, with all the authority of the Supreme Court, some of the economic underpinnings of trade secrecy.

Yet the Goldstein decision was premised primarily on congressional intent.  From the perspective of the result alone, which opinion is more satisfying—the majority's careful and exhaustive analysis, or Justice Marshall's observation that congress intended to encourage, not coerce, disclosure?  Which is more consistent with the thrust of Goldstein?

11.  One way to analyze a decision's correctness is to examine the consequences of a contrary decision.  Suppose for a moment that the Kewanee Court had decreed entire pre-emption of trade secrecy, regardless of the category of the invention.  What would be the consequences of that ruling for investment in technical innovation?  in nontechnical innovation, for example, in advertising and marketing?  for licensing?  for patent protection and patent attorneys?  Would such a ruling promote more or less innovation generally than the Kewanee Court's decision?

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