Anticipate This!™ | Patent and Trademark Law Blog

Some Finer Points Regarding Trade Secret Law (No. 3)

Posted in Practice Commentary by Jake Ward on March 4, 2007

JW Note:  This discussion is continued from earlier posts (see No. 1 and No. 2) on the relationship between patent law and trade secret law. 

A TS holder’s options for restricting an ex-employee’s use of the TS is limited.  

In most businesses, employees represent a large risk with regard to maintaining trade secrets (TS).   To combat this risk, the use of explicit legal contracts that attempt to limit an ex-employee’s use of trade secrets are commonplace.  However, the legal and practical effectiveness of such agreements are generally acknowledged to be limited.  Although reasonable contracts may serve to clarify what information is trade secret, and provide an employer a basis for a remedy in case of misappropriation, excessive restrictions may impinge on an employee’s ability to find work or can create an oppressive work environment.

There are at least three types of contracts that are typically used to help businesses protect trade secrets: 1) confidentiality/non-disclosure agreements; 2) covenants not to compete; and 3) invention assignment contracts.  Often, these agreements are included as clauses in a generic “employment contract” that is signed when the employee begins employment.

1) Confidentiality or Non-disclosure Agreements:

          A confidentiality or non-disclosure agreement (NDA) is a contract that can be used to protect trade secrets.   An NDA requires that trade secret information disclosed to an employee during the course of business be kept a secret, for example, by requiring the employee to keep the information confidential.   If a person has signed an NDA and uses the trade secret without authorization (TS misappropriation), the employer may sue for damages and stop the unauthorized use. 

          Practically speaking, however, it is often difficult to ascertain whether a former employee has kept trade secret information confidential in the course of new employment.  This is particularly true when the trade secrets are not copies of information but are experiential in nature.  Thus, the practical effectiveness of confidentiality contracts can be difficult to ensure.

2) Covenants Not To Compete:

          Another method for preventing disclosure of trade secrets is the covenant not to compete (non-compete agreement).  Such covenants protect trade secrets when an employee leaves the business.  By requiring an employee to sign a non-compete agreement, the employee must agree not to work for a direct competitor for a certain amount of time after leaving your company.  The theory behind this type of agreement is that the trade secret will become less valuable with time, and therefore the agreement limits a competitor’s access to the trade secret while its value is highest to the business.

          A serious problem with non-compete agreements is that they run counter to a strong public policy, namely freedom to follow one’s profession.  Courts generally use a “reasonableness” test in deciding whether a noncompete agreement is legal.  For example, the terms of a non-compete agreement must be reasonable as to the duration, geography, and scope of the activity.  Courts will also look at whether the restraint is unduly harsh and oppressive in curtailing the employee’s legitimate efforts at a livelihood.  In many cases, a one-year restriction is generally acceptable.  Acceptable agreements also often specify a list of competitors the employee may not join, as opposed to broadly preventing the employee from participating in a particular industry.  Third, adverse consequences for third parties, even if the restraint is narrow in scope, are also considered by courts in determining whether to enforce such contracts.

3)  Invention Assignment Contract:

          Although most courts will deem trade secrets developed within the scope of employment to belong to the employer, having the relation memorialized by an Invention Assignment Contract clarifies trade secret rights and makes both the employee and the employer aware what information belongs to the employer.  Such a contract also may recite explicit obligations to turn over all copies of trade secret information upon termination of employment. 

Using explicit contractual measures to protect one’s trade secrets is undoubtably wise.  These agreements are good evidence that reasonable security measures have been taken to protect trade secrets, and make the employee aware that confidentiality is expected and that there will be consequences if the trade secrets are improperly disclosed.  For example, contracts make available breach of contract and trade secret liability actions to employers. 

However, one should be aware that such agreements have limits, as described above, and the best way to protect TS from leaving a business may be to: 1) ensure that only limited persons have access to critical TS information, and 2) bolster loyalty with these employees by keeping them happy (preventing employee turn-over and subsequently limiting the transfer of TS to competitors).

Hakim v. Cannon Avent Group, PLC, et al.

Posted in Opinion Commentary by Jake Ward on March 4, 2007

Failure to retract arguments made during prosecution of the parent application resulted in a narrow construction of claim terms in the patent issued from the child application.

(Fed. Cir. 2007, 05-1398)

 cup 

Hakim originally sued Avent in District Court (W.D. La.) asserting infringement of Hakim’s United States Patents No. 6,321,931 (the ‘931 patent) and No. 6,357,620 (the ‘620 patent) by Avent’s leak-resistant drinking cups.  The district court granted Avent’s motions for summary judgment that the ‘931 patent is not infringed, based on the claim construction that limited the ‘931 claims to a sealing mechanism that includes a flexible valve material or diaphragm having a slit.  On appeal, the CAFC affirmed.

The technology at issue relates to drinking cups that prevent the spilling of liquid if the cup is tipped over. Hakim’s patented cups have a valve through which fluid can pass when suction is applied by a person by way of a drinking spout, whereby the valve closes to seal the cup when a person is not drinking.  Avent’s accused drinking cup has a valve with a flexible diaphragm having a central opening, but the opening is not a slit that opens and closes, but simply a hole in the diaphragm. The diaphragm rests against a plastic mount that has a conical head that seals the hole. Upon suction by a person seeking to drink, the diaphragm is lifted off the conical head, exposing the hole and permitting fluid to flow from the cup to the drinking spout.

During the initial prosecution of the ‘931 application, the presence of the slit in the flexible valve material was emphasized as distinguishing all of the claims from the cited references.  The broader term “opening” was subsequently introduced to claims when Hakim filed a continuation application after receiving a notice of allowance for claims wherein the word “slit” appeared instead of “opening.”  The continuation claims were allowed without any comment or rejection by the examiner.

In construing the claims of the continuation patent, the district court held Hakim to his arguments in the parent application that the invention included the presence of a slit in the flexible material.  The district court stated: “Because Hakim did not retract any of his arguments distinguishing the prior art, he is held to the restrictive claim construction he argued during prosecution of the patent.” (Emphasis mine).  Hakim argued, however, that he informed the Examiner that the new claims in the continuation were broader than those previously allowed, and that when the Examiner allowed the new claims without rejection, there is a presumption that the Examiner had assured himself of the patentability of the new claims.   The CAFC disagreed.

Hakim had the right to refile the application and attempt to broaden the claims.  However, an applicant cannot recapture claim scope that was surrendered or disclaimed. The district court did not err in holding that the examiner’s action in allowing the continuation claims without further prosecution was based on the prosecution argument in the parent.  Although a disclaimer made during prosecution can be rescinded, permitting recapture of the disclaimed scope, the prosecution history must be sufficiently clear to inform the examiner that the previous disclaimer, and the prior art that it was made to avoid, may need to be re-visited.

Accordingly, the CAFC held that the district court correctly ruled that the word “opening” is properly construed to mean the sealing mechanism provided by the slitted diaphragm.