When David Almeling took me to task for my views on the prior commercial use defense under the America Invents Act and its impact on trade secrets, I invited him to present his view on my blog. David and his colleague, Darin Snyder, the Chair of O’Melveny & Myers IP and Technology Litigation Practice group, have taken me up on that offer and provided the following post responding to those (such as Gene Quinn of IP Watchdog and to a less apocalyptic extent, me) who believe that the prior commercial use may shift the balance between patents and trade secrets.
David, Darin, and their colleagues at O’Melveny & Myers have been powerful voices in the trade secret community over the past five years. Perhaps most notably, in 2009 and 2010, David and Darin wrote two groundbreaking articles for the Gonzaga Law Review that were the first serious empirical analysis of trade secret litigation in state and federal courts over the past 50 years. These two articles concluded, among other things, that trade secret cases were growing exponentially in federal courts and steadily growing in state courts; that written agreements were essential to establishing adequate trade secret protection; and that the vast majority of trade secret disputes arose in relationships in which the plaintiff knew the defendant reasonably well (i.e., former employee, business partner).
I am really pleased to have David and Darin’s contribution, even if we don’t agree on the value of the prior use defense.
The New, Improved Prior Use Defense: The Same Patent vs. Trade Secret Calculus
By: David S. Almeling & Darin W. Snyder
As lawyers who litigate both patent and trade secret cases, we are often asked to address the merits of each strategy. Should a company protect its intellectual property by seeking a patent or by keeping it a trade secret?
Lawmakers added a new factor to that calculus in September 2011, when President Obama signed the Leahy-Smith America Invents Act (“AIA”), the most significant reform to patent law in half a century. Among its many provisions, the AIA expanded the prior use defense: once limited to business method patents, it now covers all patents. With this broader defense, a company sued for patent infringement can argue that it was already using the asserted invention — and is thus entitled to exploit it — provided the company’s use meets certain conditions. 35 U.S.C. § 273.
Some attorneys view this development as reconfiguring the balance between patents and trade secrets. Those attorneys encourage companies to scrap their time-tested IP strategies and embrace trade secrets as their go-to protection. As they see it, if a company can keep its use secret, and then rely on that prior use to defend itself against an infringement claim, why risk disclosing confidential information in a patent application?
We don’t. We view the prior use defense as limited and insufficient to warrant major changes in how companies manufacture or protect their manufacturing activities. Even in cases where the prior use defense might be attractive, it can still impair a company’s defense strategy and complicate its defense burdens. No company should assert it lightly. Instead, companies should think of the defense as a specialized tool — the toothpick in a Swiss Army knife — to be summoned only in narrow circumstances.
The Prior Use Defense Is Limited and Risky to Assert in Litigation
Our doubts about the defense’s value are many. Let’s start with five.
Only a defense. The prior use defense is, by its terms, just that: a defense. Unlike a patent, which a company can assert offensively to exclude a competitor from using an invention, this defense works only when a company is accused of infringement. We’d rather bring a patent sword to an IP fight than a prior use shield.
Imperils noninfringement strategy. A company that advances the prior use defense likely does so at the expense of a noninfringement defense. By arguing that it was already using the patented invention, the company essentially asserts what a noninfringement defense would require it to refute. When comparing the respective burdens of proof — the defendant must prove prior use by clear and convincing evidence while the plaintiff must prove infringement by a preponderance of the evidence — the company should argue noninfringement when both arguments are equally viable.
The defense is static. It expressly “extends only to the specific subject matter for which it has been established as a commercial use.” 35 U.S.C. § 273(e)(3). If a company’s prior use differs from the accused subject matter, a finding of infringement is still possible. The defense thus presents little value to manufacturing activities that change frequently. And the long lag between the activities that would constitute a defense (i.e., at least a year before the patent’s filing) and the company’s assertion of the defense (i.e., potentially years after the patent’s issuance) also undermines its usefulness. Before relying on this defense, companies should ask themselves: Will this manufacturing process be unchanged five or ten years from now? Given the pace of innovation, we expect the answer to be no for all but the most mature technologies in the most mature industries.
Requires continued use. If a company has “abandoned” use of the asserted invention, the company “may not rely on activities performed before the date of such abandonment in establishing a defense . . . with response to actions taken on or after the date of such abandonment.” 35 U.S.C. § 273(e)(4). For companies that have stopped or will stop using the invention, this limitation is dispositive. And for companies that use the invention only intermittently, such as for seasonal manufacturing or one-off orders, this limitation raises significant concerns about what constitutes “abandonment.”
Discovery burdens. Because the defense raises factual questions not present in standard patent cases, a company that asserts prior use will add to its already heavy discovery burdens. Was the company “acting in good faith” when it commercially used the subject matter? Did the company establish a commercial use for the specific accused subject matter? Did the company “abandon commercial use” of the invention at any time? And since this defense is new, courts are likely to permit broad discovery in the absence of case law to limit that scope.
The Prior Use Defense’s (Limited) Value
Still don’t believe the defense’s value is limited? Look at its impact on every country that has it — including the United States. The prior use defense for business method patents was established here in 1999, yet it has led to only two reported decisions. PB Farradyne, Inc. v. Peterson, No. 05-03447, 2006 WL 132182, at *5 (N.D. Cal. Jan. 17, 2006); Sabasta v. Buckaroos, Inc., 507 F. Supp. 2d 986, 1004-05 (S.D. Iowa 2007). In neither case did the defendant successfully use the defense to defeat a claim of patent infringement. And while most first-to-file countries feature a prior use defense, there has been little relatively litigation of the defense.
Despite its limits, the defense is not entirely superfluous. If a company were using an invention claimed in another’s patent, then that company might be left without an invalidity argument (because the activity was secret) or a noninfringement argument (because the invention was, in fact, being used). In these rare cases, the company’s best defense could be prior use.
In short, the prior use defense does little to alter the current trade secret vs. patent calculus. Companies can and should continue to patent their manufacturing activities as they always have, and they should approach the defense with caution. Rather than an all-purpose fix, it’s more of a fallback — a complement to a company’s IP strategy, not an overhaul.
David Almeling is a counsel and a member of the Intellectual Property and Technology Practice within O’Melveny’s Litigation Department. David represents clients in intellectual property litigation, with a primary focus on patent and trade secret litigation. He also represents clients in trademark, copyright, and unfair competition matters. David frequently speaks and publishes on issues concerning trade secret law and patent law. Most recently, he was lead author on two articles (coauthored with Darin and others) that presented the largest-ever statistical analysis of trade secret litigation in state and federal courts. David graduated from Duke University School of Law.
Darin Snyder is a partner and the worldwide Chair of the Intellectual Property and Technology Practice within O’Melveny’s Litigation Department. Darin has over 20 years experience litigating major civil and criminal matters involving intellectual property and technology-intensive business sectors. The Daily Journal named Darin among the top 75 Intellectual Property litigators in California in both 2010 and 2011. The Legal 500 has acknowledged Darin for his work in patent, copyright, and trade secret litigation, repeatedly recognizing his excellence in trade secret litigation and quoting clients who call him “[o]ne of the West Coast’s biggest names in the area.” Darin graduated from the Law School at the University of Chicago.