Private Equity Law Review : New York Private Equity Lawyer & Attorney : Geoffrey Parnass : Corporate & Business Law

A trade secret is any information that derives its value by virtue of remaining secret and is in fact the subject of efforts to maintain its secrecy. A trade secret is a secret piece of information that provides a competitive advantage over those who do not know the information. A trade secret can be virtually anything: a formula, pattern, program, method, technique, process, sources of supply, customer lists, business and marketing plan, or new product under development. Once the secret is disclosed, it ceases to be a trade secret.

Trade secrets are a product of state law. There is no registration procedure for trade secrets and no formal procedure exists for filing an application with any governmental authority. Trade secrets can include matters that are patentable, and indeed many companies choose to rely on trade secret protection rather than patents for their inventions, as trade secrets are not publicly disclosed.

A trade secret must be generally unknown in the industry. Absolute secrecy is not required. The information must generate some independent economic value by virtue of being known only to the possessor. A company must take affirmative steps to keep the information secret, such as locked facilities, security measures, confidentiality agreements for employees, and other similar measures.

Trade secrets are not necessarily exclusive, as patents and trademarks are. It is possible for two companies to independently develop and protect the same confidential information. Trade secret law only entitles the owner to prosecute those who acquire the secret through unlawful or improper conduct.  Unlawful or improper conduct includes bribery, theft, fraud, electronic surveillance and breach of contract or company policies. 

It is perfectly lawful for a competitor to purchase a company’s product and tear it apart to see how it works, thereby discovering a trade secret independently. A competitor can use any trade secrets it finds in the course of such an examination, or at a trade show or in product literature. Patent protection should always be obtained if the possibility of “reverse engineering” by competitors is high. 

Trade secrets can last as long as the information remains a secret. The theft of trade secrets can be stopped through injunctions and the owner may also sue for actual damages, punitive damages, the competitor’s profits and attorneys’ fees. Trade secret litigation often poses the danger that the secret will be leaked to the public in spite of a court’s secrecy orders.

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Copyright law protects "works of authorship."  This means that there must be an author—a human being—and work created by the author. Works are typically thought of as pieces of literature, music, drama, choreography, photography, graphic arts, sculpture, motion pictures, videos, architecture, and computer software, although virtually any other work that is fixed in a tangible medium can be protected by copyright law.

To receive copyright protection, a work must be "original" and must be "fixed" in a tangible medium of expression. The originality requirement is easy to satisfy. A work is original for copyright purposes if it owes its origin to the author and was not itself copied. A work can incorporate preexisting material and still be original. When this happens, the copyright on the new work covers only the original material contributed by the author.

A work is "fixed" in a tangible form when it is made sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of time.  It makes no difference what the form, manner, or medium is.  An author can "fix" words, for example, by writing them down, typing them into a computer, dictating them into a tape recorder, or scratching them on a tablet. A live television broadcast is "fixed" if it is recorded simultaneously with the transmission. But a Homeric bard, reciting The Iliad around an ancient fire, does not fix his work in a tangible medium, and therefore is bereft of copyright protection.

The design of an object, such as furniture, is protected by copyright only if the design incorporates features that can be identified separately from, and are capable of existing independently of, the useful aspects of the article. For example, while the design of a basic chair is not protected by copyright, a chair that uses antlers as arms may qualify for certain protection.

Copyright protection arises automatically when an original work of authorship is fixed in a tangible medium. Registration with the Copyright Office is optional, though it is virtually essential in connection with litigation. The use of the copyright notice is optional for works distributed after March 1, 1989. Copyright notices generally take the following form: © followed by a date and name.

Exclusive Rights of Copyright Owner

A copyright owner has five exclusive rights in the copyrighted work:

1. Reproduction: the right to copy, duplicate, transcribe, or imitate the work in fixed form.

2. Modification: the right to modify the work to create a new work (also called the derivative right). A new work that is based on a preexisting work is known as a "derivative work."

3. Distribution: the right to distribute copies of the work to the public.

4. Public Performance: the right to perform the work in a public place.

5. Public Display: the right to show the work in a public place.

Anyone who violates any of these exclusive rights is an infringer. A copyright owner can recover actual or, in some cases, statutory damages from an infringer. The federal district courts have the power to issue injunctions to prevent or restrain copyright infringement and to order the impoundment and destruction of infringing copies.

Under current law, the copyright term for works created by individuals is the life of the author plus 70 years. The copyright term for works “made for hire" is 95 years from the date of first "publication" (distribution of copies to the general public) or 120 years from the date of creation, whichever expires first. Works “made for hire” are works created by employees for their employers and certain types of works commissioned from independent contractors.

Exceptions to Copyright Owner's Exclusive Rights

The copyright owner's exclusive rights are subject to a number of important exceptions. These are:

1. Ideas. Copyright protects only the unauthorized taking of a protected work's "expression." It does not extend to the work's ideas, concepts, principles, or discoveries. Ideas that are inventions may be covered by patent law.

2. Facts. The facts contained in a work are not protected by copyright, even if the author spent large amounts of time discovering them. Copyright protects originality, not effort.

3. Independent Creation. A copyright owner has no claim against another person who, working independently, creates an exact duplicate of the copyrighted work. The independent creation of a similar work or even an exact duplicate does not violate any of the copyright owner's rights.

4. Fair Use. The "fair use" of a copyrighted work, including use for purposes such as criticism, news reporting, teaching, scholarship, or research, is not an infringement of copyright. The Copyright Act does not define fair use. Instead, whether a use is “fair” is determined by balancing the purpose and character of the use, the nature of the copyrighted work, the amount and substantiality of the portion used in relation to the copyrighted work as a whole, and the effect of the use on the value of the copyrighted work. Lots to litigate here.

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Trademarks are an important tool for companies that develop and maintain brand names. Well-known brand names are used to forge direct ties with consumers or a diverse distribution system. Brands reduce the marketing costs of companies as end users rely on the reputation for quality embodied in the brand.

A trademark is any word, name or symbol used by a manufacturer to identify and distinguish its products from those manufactured by others. A trademark identifies the source of the product rather than the product itself. For example, DELL® is a trademark for a generic product—the computer. The DELL® trademark indicates that the Dell Corporation is the source of the computer bearing the trademark, which serves to distinguish it from computers manufacturer by others.

Unlike patents, where the federal government is the only power that creates and enforces the rights, trademarks exist and can be protected under state and federal law. Also unlike patents, legal rights in a trademark are established only by using the mark in commerce. Finally, it is not necessary to register a trademark with the government to obtain legal rights, although federal registration provides a number of advantages. 

Federal Trademark Registration

Federal trademark registration gives a company the exclusive right to use the mark throughout the entire United States, even though the product may be sold only in one region. Federal registration plus five years of consecutive use is conclusive evidence that the mark is valid and that the owner has the exclusive right to use the mark in commerce. Finally, a registered trademark often deters others from using the same or a confusingly similar mark, as most companies search the register of federal marks when making a name selection.

A trademark must be distinctive. A distinctive mark is one that is unique when used with a particular type of goods. Distinctiveness is measured along a spectrum, from those that are fanciful (like EXXON for gas) and arbitrary (like APPLE for computers) to those that are merely descriptive (like YELLOW PAGES for phone directory). Marks that are descriptive, like TENNIS SHOE for tennis shoes, are not trademarks at all, since they merely describe the goods. In the middle of this spectrum lie suggestive marks, words that tend to reveal or hint at an attribute of the goods, such as COPPERTONE for suntan lotion. Marks can upgrade their status over time if they acquire secondary meaning as consumers grow to recognize the mark as identifying the source. Substantial expenditures on advertising and continuous use for a number of years can create secondary meaning.

A trademark must not cause confusion with a pre-existing mark. Conflicts may arise where two marks will be used in the same market for related products or services. Similar trademarks that are used on very different products can generally be registered, unless one of the marks is very famous. The following factors are used to determine whether one trademark is confusingly similar to another:

1. Whether the marks are similar in appearance, sound, and impression.

2. Whether the products to which the marks are attached are similar.

3. Whether the channels of trade in which the goods are distributed overlap.

4. How consumers purchase the goods.

5. The fame of the prior mark.

6. The extent of any actual confusion among consumers

A federal trademark owner has the exclusive right to use the mark on the specified products throughout the United States. The right can last forever, but it can be lost if the mark is no longer used or if the mark becomes generic. Marks can become generic if the owner is not vigilant about enforcing the mark against obvious infringements. The trademark owner can sue the infringer to stop the conflicting use and may also recover damages, profits, court costs and attorneys’ fees.

Federal trademark protection is secured by filing an application with the Patent and Trademark Office. Trademark examiners review the application and the database of prior registrations to determine whether to grant the application. Although federal registration provides certain advantages, only actual use of the mark grants enforceable rights.

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A patent is often compared to an agreement between an inventor and the United States government. The government gives the inventor the exclusive right to practice the invention for a period of time, generally 20 years. In return, the inventor discloses all the details of the invention to the public through the patent application process. The inventor gets to exploit the invention for 20 years without competition. After that, the invention can be freely used by the public. 

Patents are usually applied for by individuals and then assigned to the companies that support the research and development. Manufacturers typically seek utility patents, which cover the useful or functional aspect of an invention. The legal rights awarded to an inventor are spelled out in a formal document issued by the United States Patent and Trademark Office. In addition to sections describing the invention and the way it has solved problems hitherto unsolved, the patent document spells out the exact protection of the invention, in the same way that a deed describes the metes and bounds of a piece of land.

Patents can also be granted for the design of a product. Design patents are granted to protect designs that are new, original and ornamental. An element of a product that is predominantly functional, such as the blades of a propeller, cannot receive a design patent, since it is not primarily ornamental. Design patents last only fourteen years and are generally easier to obtain than utility patents, although their coverage is generally less powerful.

A patent is only granted to inventions that are novel and not obvious to one skilled in the field in which the invention exists. An invention is not novel if it is already known, or the invention was already patented or appeared in a printed publication before the date of invention. The rules on novelty are quite technical and it is important to conduct a thorough search of the prior art before filing a patent application. Unless an investor is familiar with the procedures for conducting these searches, they should be conducted by experienced patent attorneys.

An invention must not be “obvious” to someone skilled in the field in which the invention exists. An invention may be novel, but if it is an obvious variation of known technology, it will not receive a patent. To make this assessment, the patent office or the court (if the patent is challenged) must imagine a hypothetical person skilled in the relevant art, and ask whether the invention would have been obvious to that person. This assessment is very fact intensive and open to dispute, and the requirement is responsible for a good deal of litigation.

Finally a patent must disclose in clear and complete terms how one with ordinary skill in the technology field could make and use the invention. This is part of the bargain with the federal government. If the disclosure is incomplete or too obscure, leaving the public without the ability to practice the invention when the patent expires, the patent will be denied or invalidated by a court. 

The owner of a patent has the right to exclude others from making, using or selling the invention. There is no requirement that the patent owner actually use the invention in order to exclude others. As with a piece of land, the owner can elect to let it sit fallow and still keep others from trespassing. But unlike land, the patent gives the owner the right to keep others from producing products that are “equivalent” to the invention. This keeps others from making a trivial change to an invention just to avoid infringement. A product is considered equivalent if it performs substantially the same function, in substantially the same way, to achieve substantially the same result as the invention. 

Patents issued today are granted a 20-year period of protection from the date the application is filed with the federal government. The owner must pay maintenance fees to keep the patent in force. Under patent treaties with other countries, the patent can be registered in foreign jurisdictions and protected or licensed there. If someone infringes a patent, the owner can sue in federal court and obtain an injunction, monetary damages and an award of attorneys' fees.

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