Do You Want to Keep A Secret? – Reliance on Trade Secrets as a Defense to Infringement

Historically, one of the criticisms of the United States patent system has been that even though it was designed to reward early innovators by granting patents to the first party to develop an invention, that reward was limited to the grant of a patent. If a company chose to treat its innovation as a trade secret instead of seeking a patent, it placed itself at risk in the event that a competitor subsequently developed the same innovation and obtained a patent on it. Because the company concealed the invention, its use of the invention did not amount to a public use that would prevent the competitor from obtaining a patent for the subsequent development.

Most foreign patent systems contain a provision called a “prior user right,” under which innovators who choose to protect their inventions through trade secrets are granted a defense to infringement of competitors’ patents for subsequently developed inventions. Under a prior user right, a company that develops an invention, such as a new manufacturing process used internally in its facilities or a new catalyst used to make an existing chemical compound, could treat that process or catalyst as a trade secret without risk that a competitor would later develop the same process or catalyst and obtain a patent on it and force the prior user to abandon use of the process or catalyst.

In contrast to the prior user right system, the United States patent system forced an innovator to choose to either seek patent protection and thereby publicize its innovation or treat the innovation as a trade secret, risking the possibility that a competitor later develops and patents the same innovation. In this manner, the United States patent system created a strong disincentive to relying on trade secret protection.

When the United States revamped its patent system in 2013 and enacted the America Invents Act, it gave companies a strengthened trade secret mechanism to protect their inventions. As amended, Section 273 of the Patent Code now grants a prior user right or, as the Patent Code calls it, a “defense to infringement based on prior commercial use.” The prior user right is not absolute but instead carries with it five important caveats that companies must be aware of in order to take advantage of the defense.

• The commercial use of the invention must have begun at least one year before the earlier of the filing date of the competitor’s patent or the first public disclosure of the competitor’s invention. Thus, although there is a prior user right defense, the prior use must be sufficiently prior in time in order to qualify for the defense.
• If a company abandons commercial use of the innovation and then subsequently reestablishes use, the company cannot rely on the pre-abandonment use of the innovation in its defense. It can only rely on continuous use of the innovation to establish a prior user right.
• The prior user right is not transferable except in the event of a sale of the business or the business unit to which the defense relates. Even then, the prior user right will be limited to those sites of the acquiring business where the prior user right would otherwise have been in effect. In other words, a company cannot through an acquisition obtain a prior user right to sites within its enterprise where no prior user right would otherwise exist.
• There is no prior user right with respect to patents owned by a university or other institution of higher education. The purpose of the prior user right is to protect a company against claims by competitors. If a university owns the rights to the subsequent innovation, no prior user defense is available.
• Finally, the burden on establishing a prior user defense is a steep one. Like most affirmative defenses under the Patent Code, a company asserting the prior user right defense must establish the defense by clear and convincing evidence. Moreover, if a company is found to have failed to show a reasonable basis for asserting the defense, a court shall deem the case exceptional for purposes of awarding attorney fees against the company.

Although there are limitations to use of the defense, the prior user right does provide protection to companies that choose to implement a trade secret program to protect its innovations. In addition to providing the safeguards necessary to maintain trade secrets, companies relying on the defense should also establish procedures to maintain documentation of first use of the innovation and documentation sufficient to establish continual use of the innovations thereafter.