In January of this year, the United States Patent and Trademark Office (“PTO”) released two AIA-mandated reports.  The first report is titled “International Patent Protections for Small Businesses,” and it analyzes the value of foreign patents for startups.  Though hardly a sliver of the coming overhaul of the Patent Act, the report is an interesting study in one element of the AIA’s perceived role in stimulating a still-flagging economy.

A Quick Note on Methodology

One of the most striking passages in the report is the section discussing its methodology.  It is almost apologetic in tone, noting that the PTO had only four months and limited resources to complete the report.  Consequently, much of the analysis is based on data that was not meant to query small business patenting practices, and all of the public input was collected at two hearings.  It is, therefore, a broad overview of issues surrounding foreign patents as they relate to small businesses.

Stimulating Growth Through Patents

A primary purpose of the AIA is to reward innovation through sweeping changes in the patent process.  At the core of this goal is the promise of job creation, a process that is driven by new business.  As Tim Kane of the Kauffman Foundation noted: “…startups aren’t everything when it comes to job growth.  They’re the only thing.”  The PTO agrees, stating in the Executive Summary of its report that “small businesses are the primary driver of job creation in the United States, with young startup companies, which are by their nature small businesses, creating on average three million U.S. jobs per year.”

The PTO report points to evidence that there is a correlation between patenting and economic success among small high technology companies.  In spite of this apparent relationship between patenting and success, very few early startups participate in the patent process.  Not surprisingly, most patent activity among small businesses is concentrated in high technology sectors.  The reasons for the popularity of patenting among tech companies are rooted as much in the financial/investment life cycle common in that arena as they are in the reliance on patentable gadgetry, with executives stating that “patenting was important for capturing competitive advantage in the marketplace, preventing copying, improving success at attracting investment, and increasing the likelihood of being acquired by another company or having a successful initial public offering (“IPO”).”  In short, patents are important assets for tech companies.

An International Perspective

As the title of the report indicates, its primary focus is on the role of foreign patents in the success of small businesses.  Foreign patents for U.S. small businesses are rare – a fact that tends to hamper internationalization efforts.  One of the problems is that many small companies do not realize that the power of a U.S. patent only extends as far as this country’s borders.  A lack of understanding of international intellectual property laws can make it difficult for U.S. companies to connect with global partners.  Without local protection for their markets, international partners tend to shy away from collaboration and investment.  Furthermore, there is a very real risk of foreign companies copying and patenting inventions in their home countries, leaving U.S. companies in a weakened position globally.

Diplomacy and Education in Lieu of Financial Assistance

One of the biggest barriers facing small businesses that wish to acquire foreign patents is that of cost.  International patents are relatively expensive (particularly when factoring in attorney costs and translation fees), and patent expenses tend to occur early in a startup’s life cycle.  The report discusses the issue of expense at some length, but warns against government intervention in “private sector issues.”  Most of the companies whose input was collected at the two hearings voiced a preference for avoiding government grants or loans to fund foreign patent applications.  Instead, the report suggests that the government address the issue by two methods:

The first method is what it terms “diplomacy and harmonization,” which it posits could reduce foreign patent costs.  It relies on comments from several firms in a variety of industries, suggesting everything from delaying requirements for translations to assisting in negotiating down filing costs.  As evidenced most starkly by the shift from a first-to-invent to a first-to-file system, one of the goals of the AIA was to harmonize U.S. patent policies and procedures with those of other countries.  Other harmonization efforts – moving toward absolute novelty, protecting prior users, reducing subjective elements of the law – are part of the long-term implementation of the AIA.

The second method is an “aggressive” foreign patent education effort aimed at small businesses.  The notion is that informing small businesses of the value of foreign patents, as well as the “pathways and mechanisms” necessary to file, would result in increased patent activity.  It is suggested that the PTO should partner with the Small Business Administration (“SBA”) to expand the PTO’s Intellectual Property Awareness Campaign, leverage the SBA’s nationwide network of Small Business Development Centers, and scale efforts to reach more businesses.

What Now?

Will the PTO work with the SBA to reach more small businesses and educate them on the value of foreign patents?  Can they leverage diplomacy efforts with Patent Cooperation Treaty (“PCT”) countries to streamline the international patent application process?  Will these changes add up to increased globalization for domestic startups and a positive influence on job creation, or will the overall effect of the AIA be negative?  The real effects of the AIA remain to be seen, but change is clearly on the way.

Though many of the changes are procedural and legal, there will be at least one tangible manifestation of the AIA’s effect this year.  In an effort to expand capacity and reduce backlog, the PTO will open three (or more) satellite offices, with the first opening in Detroit on July 16, 2012.  At least two more offices will be open by September 16, 2014.  The most hotly anticipated change is, of course, the shift to a first-to-file system, which is scheduled to take place on March 16, 2013.  Until then, a host of other provisions will become active on a rolling basis.

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While Prometheus may have narrowed the scope of §101, it also left clues for how to successfully draft patentable health sciences process claims.  These clues are: (1) root the process in a physical transformation; and (2) frame a robust inventive concept.

1. Root the process in a physical transformation

Considering the last several decades of jurisprudence, the processes that were held unpatentable by the Supreme Court under §101 were all linked to another process. For example: in Benson, the claimed process identified the pure binary numeral value from a binary-coded decimal numeral for further computer processes (“The method of converting signals from binary coded decimal form into binary . . .”); in Flook, the claimed process identified values for an alarm process monitoring catalytic conversion reactions (“A method for updating the value of at least one alarm unit . . .”); in Bilski, the claimed process identified values for hedging payment processes (“A method for managing the consumption risk costs of a commodity . . .”); and in Prometheus, the claimed process identified values for a process of administering drugs (“A method of optimizing therapeutic efficacy . . .”).

In contrast to these process claims that were unpatentable under §101, the process claim in Diehr was patentable under §101. In Diehr, the patentable process was a computer code operating a machine that molded a rubber tire (“A method of operating a rubber-molding press . . .”).  Since the machine running the process made rubber, the process was rooted in a physical transformation.

Claim 1 of the ‘623 patent in Prometheus could be rooted in a physical transformation as follows:

Original claim 1:

“A method of optimizing therapeutic efficacy for treatment of an immune-mediated gastrointestinal disorder, comprising . . .”

Revised claim 1:

“A method of optimally administering a thiopurine drug for treatment of an immune-mediated disorder, comprising . . .”

In contrast to the original claim 1, the revised claim 1 process directly causes a physical transformation, i.e. the drug activity in the patient, by framing the claim as “administering” instead of “optimizing” a calculation.

2. Frame a robust inventive concept

The patent claims should create a robust “inventive concept,” which is the essence of the invention in a claim.  In Prometheus, the Supreme Court mentions “inventive concept” in quoting Flook, but, in addition, the inventive concept theme underlies the Court’s §101 patentability analyses.

In a process claim, an inventive concept should be drafted where, beyond the law of nature, the extra steps are sufficient in quality and are sufficiently integrated with the law of nature.  On the quality of extra steps, the Supreme Court stated that a patentable process should have additional steps beyond the law of nature that consist of more than “well-understood, routine, conventional activity already engaged in the scientific community.”

On the integration of extra steps, the Court stated that additional steps should be integrated into in a patentable process, so that “when viewed as a whole add [something] significant [to the law of nature] beyond the sum of their parts taken separately.”  On adding limitations to a patentable process, the claims should not attempt “to limit the use of the formula to a particular technological environment or [add] insignificant postsolution activity.”  Instead, a patentable process should explain “how the variables used in the formula were to be selected” and the claims should contain disclosures “relating to the chemical process at work so the other steps in the process [would] limit the claim to a particular application.”

In sum, a robust inventive concept will, beyond any law of nature, include additional steps that:

1. Are more than well-understood, routine activity.

2. Are integral to and limiting to the particular application.

Claim 1 of the ‘623 patent in Prometheus could be amended to have a robust inventive concept as follows:

Original claim 1:

“A method of optimizing therapeutic efficacy for treatment of an immune-mediated gastrointestinal disorder, comprising:

(a) administering a drug providing 6-thioguanine to a subject having said immune-mediated gastrointestinal disorder; and

(b) determining the level of 6-thioguanine in said subject having said immune-mediated gastrointestinal disorder,

wherein the level of 6-thioguanine less than about 230 pmol per 8×10^8 red blood cells indicates a need to increase the amount of said drug subsequently administered to said subject and

wherein the level of 6-thioguanine greater than about 400 pmol per 8×10^8 red blood cells indicates a need to decrease the amount of said drug subsequently administered to said subject.

Revised claim 1:

“A method of optimally administering a thiopurine drug for treatment of an immune-mediated disorder, comprising:

(a) administering a 6-thioguanine providing drug

wherein the administered dosage of the drug is adjusted to maintain the metabolite levels of 6-thioguanine between 230 pmol and 400 pmol per 8×10^8 red blood cells.”

The optimum values of metabolites to signal the therapeutic window were not known and, therefore, using the metabolite parameters to administer thiopurine drugs was a previously poorly-understood activity.  Additionally, the law of nature is minimized and more integrated into the revised claim 1, because the law is only a indirect subpart within the administering step, rather than a separate step from administering the drug.

Conclusion

The Supreme Court’s decision in Prometheus raised the bar in patenting health sciences process claims under §101.  However, Prometheus provides clues on how to successfully patent health science process claims under §101.  Two claim drafting rules can be deduced from Prometheus.  They are: (1) root the process in a physical transformation; and (2) frame a robust inventive concept.  More specifically, a robustly framed inventive concept will, beyond the law of nature, include additional steps that: (a) are more than well-understood, routine activity and (b) are integral to and limiting to the particular application.  Ultimately, patent drafters should be able to use techniques such as these to overcome §101 caselaw and patent processes in the health sciences.

The controversy of this Section arises for people like Lawrence Golan who previously enjoyed free access to these works without having to seek permission from copyright holders.  Others, like the Electronic Frontier Foundation, see even larger issues between private and public interests at stake with the upholding of URAA.  Accordingly, the petitioners challenged the constitutionality of the Section both under the Constitution’s Copyright and Patent Clause (Art. I, § 8, cl. 8 ) and under the First Amendment of the Constitution.  Although the Court ultimately upheld the constitutionality of Section 514, the majority and dissent opinions bring some interesting tensions to the foreground.

Legal Background

The International Context

The Berne Convention, which originally went into effect in 1886, is an agreement that governs the copyright relations between its member nations.  More specifically, the Berne Convention grants nationals of member nations copyright protection in other member nations for a minimum of the author’s lifespan plus fifty years, unless the copyright term has expired in the nation of origin or the nation in question.

Prior to 1989, the United States was not party to this regime.  In fact, before 1891, foreign works were not granted any copyright protection whatsoever in the United States.  When the United States finally became party to the Berne Convention, the Berne Convention Implementation Act of 1988 (BCIA) adopted minimal changes to the current copyright regime, including no retroactive protection for foreign works already in the public domain.  This level of implementation of the Berne Convention was not in compliance with Article 18 and other member nations were not pleased with the level of commitment from the U.S.  These nations demanded reciprocity if the United States expected their compliance, but, in the absence of any meaningful enforcement mechanism, nothing was changed.

However, 1994 brought the creation of the World Trade Organization (“WTO”) and the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”), both of which the United States joined.  Not only did TRIPS require implementation of the first 21 articles of the Berne Convention, but it also threatened WTO enforcement, which brought the risk of tariffs and cross-sector retaliation to noncompliance.  Accordingly, Congress enacted Section 514 of URAA to bring the United States into compliance with Article 18 and the rest of the relevant Berne Convention provisions.

Eldred v. Ashcroft

Before Golan, the major decision addressing Congress’ right to retroactively change the copyright status of copyrighted works was Eldred v. Ashcroft, 537 U.S. 186 (2003). Eldred addressed the constitutionality of the Copyright Term Extension Act of 1988 (“CTEA”), which extended the length of copyright entitlements by an amount of 20 years—for a total of 70 years—after a creator’s death.  The petitioners in Eldred, individuals and businesses that relied on once copyrighted works that had subsequently entered the public domain, challenged the validity of CTEA on similar grounds as those in Golan: violation of the Copyright Clause and violation of the First Amendment.

Even though Golan and Eldred cover somewhat different territory (the URAA at play in Golan referred to works already in the public domain while the CTEA in Eldred affected works that were concurrently copyrighted for a fixed term), there are several similarities between the two cases.  In both cases, the petitioners objected to retroactive application of the law (to unprotected foreign works in Golan and formally copyrighted works in Eldred).  Also, both cases rejected petitioners’ arguments that Congress was limited in its power to expand the scope of copyright beyond the pre-existing boundaries of the public domain.

In fact, for those familiar with Eldred, Golan seems like somewhat of a replay (particularly with Justice Breyer writing a dissenting opinion for both cases).  Some commentators have expressed dismay that the Golan decision does not seem to deviate in any meaningful way from Eldred.  Even though the petitioners in Golan took pains to distinguish their fact pattern from Eldred, Golan can be viewed as reinforcing the outcome of the Eldred decision, affirming Congress’s discretion to reach into the public domain.

The Opinion (delivered by Justice Ginsburg)

Copyright Clause Claim

The Copyright Clause of the Constitution states that “Congress shall have Power . . . [t]o promote the Progress of Science . . . by securing for limited Times to Authors . . . the exclusive Right to their Writings.”  In holding that the Copyright Clause allows Congress to apply copyright protection to works currently in the public domain, the Court pointed to three things: (1) the Court’s previous decision in Eldred on the meaning of ‘limited time’; (2) historical practice, and; (3) the meaning of promoting the “Progress of Science.”

On the first point, the Court recapitulated its argument in Eldred to say that the word limited should not be narrowly construed to mean that, once set, the time is permanently fixed or unalterable.  The petitioners’ concern was that removing works from the public domain erodes a fixed, predictable period and allows the term to be reset or renewed at the whim of Congress.  Furthermore, as in Eldred, the petitioners were concerned that altering the time could result in Congress granting copyright protection in perpetuity, at its whim.  The Court, however (as it did in Eldred), interpreted “limited” to mean “circumscribed in some way” and did not feel the need to speak on hypothetical misbehavior.  Distinguishing their case from Eldred, the petitioners claimed that work in the public domain has already enjoyed a limited time; however, the Court found the argument less convincing in Golan where the foreign works had enjoyed the limited time of “zero.”

The Court then proceeded to give examples of previous actions by Congress where works were pulled out of the public domain, notably pointing to the Copyright Act of 1790 and claiming that the First Congress “did not view the public domain as inviolate.”  However, one commentator has criticized this section of the opinion on the grounds that this historical evidence is unclear.  The Court also cited several private patent and copyright laws that removed works from the public domain to show a historical basis for this action.  But, the previous commentator notes that Congress’s repetitive actions do not necessarily imply constitutionality (especially when the contrary impulse can be found).

Finally, the Court responded to the main thrust of the petitioners claim that since Section 514 does not apply to new works, it does not “promote the progress of Science” by incentivizing creation.  The Court again referenced a similar argument and rebuttal in Eldred where it was determined that the Clause empowers Congress to create a regime that will serve those ends.  Thus, each individual provision does not have to incentivize the creation of new work in order to promote the progress of Science.  Furthermore, the Court held that promoting the “Progress of Science” involves dissemination as well as creation, and that compliance with international regulations could conceivably increase dissemination.

Free Speech Claim

Again pointing to Eldred, the Court held that there was no need for heightened review of Section 514 under the First Amendment because of the already existing “speech-protective purposes and safeguards,” provided by Copyright Law (namely the idea/expression dichotomy and the fair use defense).  While copyright inevitably restricts expression, the Court held that the absence of restrictions on the ideas behind those expressions was a “built-in First Amendment accommodation.”  Moreover, the fair use defense actually lifts the restrictions on copyrighted forms of expression in certain circumstances.

Finally, the court held that, rather than restricting the use of copyrighted works entirely, Section 514 merely adds additional costs to such uses, which are determined by the market.  Although the Court does concede that these costs may be prohibitive in some cases (i.e. with orphan works), the Court found this issue not to be exclusive to the collection of foreign works affected by Golan and best suited for resolution by the legislature.

The Dissent (Delivered by Justice Breyer)

Justice Breyer—joined by Justice Alito—focused his dissent on the Copyright Clause and what he sees to be its utilitarian objective.  The utilitarian approach is a normative theory used to justify Intellectual Property rights by calling for a system that balances the incentive to create new works with the limited access to information goods that the regime creates.  Breyer provided an in-depth history that supports a utilitarian understanding of the Clause, which suggests that it should be an essential component of analyzing Congresses authority to enact a provision.  Some commentators have even gone so far as to say that it is the most important component.

Breyer’s other arguments flowed from this basic premise.  For instance, he also argued that taking works such as “Peter and the Wolf” out of the public domain would actually hinder their dissemination through the imposition of fees and certain administrative costs involved with finding out whether a work has been “restored” and who its current copyright holder is.  Breyer conceded that these costs exist for the use of all works protected by copyright (to a lesser extent), but found these costs to be permissible when incentivizing the creation of new works.

In contrast, Breyer argued that Section 514 does not provide a monetary incentive to produce new works but just makes the industry richer based on existing works.  Furthermore, Breyer contended that while a richer industry could theoretically result in the distribution of pre-existing work that would otherwise have not been released, no firm focused on creating future revenue would make such a decision.  Even from an international reciprocity standpoint, Breyer interpreted the legislation as a means to create a private, rather than public, benefit, which was not in the spirit of the Clause.

Implications

While commentary lamenting the narrowing of the public domain abounds, the Golan decision can also be viewed as another step in a broader trend towards American IP law compliance with international conventions and away from the cultural imperialism of yesteryear (the switch from a “first to invent” to a “first to file” system in US Patent Law is another indication of such a trend).  But, some commentators still view the decision as an unconstitutional increase of Congress’s legislative powers for the purpose of compliance with treaty.  They maintain that compliance with a treaty is not a constitutional justification for an expansion of Congressional power and that it gives foreign governments power over our legislative process.  Along those lines, certain commentators raise the issue of whose interests are being represented with this retroactive inclusion of copyright protection—echoing Justice Breyer’s concern about the private vs. public benefit.

Furthermore, others are worried about how far-reaching the implications of this decision will be, predicting that there will be domestic pressure to restore copyright protection to works that lapsed from failure to comply with notice and renewal requirements. Conversely, perhaps this decision provides an opportunity to critically re-examine various aspects of our current copyright regime.  For instance, some hope that this decision will prompt a closer look at how courts can utilize the fair use defense to find a fair balance.  Others have suggested that this decision might prompt consideration of something like an “orphan works” defense.  Parties could assert this defense to bar statutory damages of infringement if they were unable to locate the copyright holder of a given work after a diligent search.  A defense of this sort could mitigate some of Justice Breyer’s complaints about the effects of URAA.

Also, as the majority opinion suggested, perhaps the legislature will now have to pause to address the high fees, administrative costs, and rates of piracy that the current regime might incur—though, judging by the Congressional impetus behind Eldred and Golan, this might be an overly optimistic outlook.

New Jersey Joins the Ranks of the UTSA

On January 9, 2012, Governor Chris Christie signed into law the New Jersey Trade Secrets Act (S-2456/A921), which covers issues of trade secret misappropriation previously dealt with under common law. The statute aligns closely with the UTSA but differs in some significant ways. First, the statute specifically incorporates the protections of the common law stating that application of the statute shall not “be construed to deny, abrogate or impair any common law . . . right, remedy or prohibition.” One interpretation of the statute predicts that application of this section of the statute will protect proprietary and/or confidential information that does not meet the statutory requirements of trade secret, but was none the less protected under common law.

Second, the statute demands that New Jersey courts “shall preserve the secrecy of an alleged trade secret by reasonable means” including sealing of court records and allowing for in-camera hearings. This provision of the New Jersey statute runs counter to the public interest in access to court records put forth by the Supreme Court in Nixon v. Warner Communs., Inc., 435 U.S. 589, 597 (1978), that has led some litigators to promote arbitration. In Nixon, the Court stated that the judiciary recognizes “a general right to inspect . . . public records and documents, including judicial records and documents” although the Court explained that this right could be denied “where court files might have become a vehicle for improper purposes.” This right to inspect public records seems to directly clash with the New Jersey statute’s favoring of record sealing to protect what secrecy remains as to the alleged trade secrets. However, New Jersey courts may find that court records revealing a trade secret constitute a “vehicle for improper purposes” such that the courts may deem record sealing appropriate.

On the whole, New Jersey’s new statute parallels the UTSA and furthers the UTSA’s promotion of uniform trade secret protection from one state to the next. Time will tell if the statute’s unique variations limit the nationwide uniformity the UTSA intended.

California— Reverse Engineering With a EULA Not “Improper Means”

Across the country, a Federal District Court recently handed down a convincing interpretation of California’s own version of the UTSA, Cal. Civ. Code § 3426.1, in Aqua Connect, Inc. v. Code Rebel, LLC, No. CV 11-5764-RSWL (C.D. Cal. Feb. 13, 2012). While a ruling by the Federal District Court is not binding as to interpretation of state trade secret law, the California state courts may nevertheless find the court’s ruling to be persuasive authority in future cases.

In Aqua Connect, the court addressed whether Code Rebel violated the California trade secret statute when the company downloaded a trial version of Aqua Connect, Inc.’s software and reversed engineered to software to sell a version of its own in violation of the End User License Agreement (“EULA”). Reverse engineering is commonly defined, including by New Jersey’s recent UTSA adaption, as “starting with the known product and working backward to find the method by which it was developed.” Specifically the court had to determine whether Code Rebel’s actions constituted “misappropriation” by deciding whether the statute’s requirement of use of the “plaintiff’s trade secret through improper means” had been met.

Although the California statute finds that reverse engineering by itself, cannon constitute “improper means,” the court had to determine if breach of a EULA could convert reverse engineering into an “improper means” such that Code Rebel would be liable for misappropriation.

The Aqua Connect court found that mere presence of a EULA did not convert reverse engineering into an “improper means.” Instead, the court suggested that “reverse engineering must be combined with some other improper action in order for it to form the basis of a cognizable misappropriation claim.” Accordingly the court held that Aqua Connect had failed to state a claim because it did “not allege that the [] trial software was obtained through unfair or dishonest means” as the software had been provided to Code Rebel by Aqua Connect itself.

Aqua Connect also argued that the EULA created a “duty to maintain secrecy” that Code Rebel had breached thus opening itself to liability under the California statute. The court rejected this argument because California courts have refused to find that such a duty arises from a form license agreement. Having rejected both of Aqua Connect’s arguments, the court dismissed the claim without leave to amend — “find[ing] that no additional facts can be alleged to support a legally cognizable misappropriation of trade secret claim.”

This decision reinforces the California statute’s rejection of reverse engineering as an “improper means” of acquiring a trade secret. However the case suggests that should foul play be involved in how the product or software is acquired by a defendant, reverse engineering might be converted into an improper means warranting liability under the statute. The decision also suggests that companies implementing EULAs as a means of trade secret protection should think twice as the agreement likely does not create liability on its own.

Virginia Supreme Court — Trade Secret Misappropriation Regardless of Competition

Virginia — another state having adopted the UTSA, Va. Code. §§ 59.1-336 — recently addressed the issue of whether or not a trade secret must be used by a competitor of the trade secret holder in order to be liable for misappropriation. The Virginia Supreme Court in Collelo v. Geographic Services, Inc., Nos. 101411, 101421 (Va. Jan. 13, 2012) held that the Virginia statute does not require proof that trade secrets were used for competition against the trade secret holder.

In Collelo, Mr. Collelo left his old employer (GSI) to work for a company (Boeing) that had been and continued to purchase services from GSI. Collelo performed the same work for Boeing that he had when Boeing had been a client of GSI. As a result, Boeing relied on GSI less for the services Collelo had provided. The trial court had reasoned GSI could not bring a claim against Boeing because Boeing “is not doing and has not been doing the same work as” GSI.

The Virginia Supreme Court looked to the wording of the statute — materially similar to the UTSA — finding that it only requires: (1) proof of a trade secret, (2) misappropriation of the trade secret by someone who had reason to know that the secret was acquired by improper means, and (3) proof of actual damages caused by the misappropriation. In particular, the court held that a non-competitor to the plaintiff’s market for the trade secret could meet these requirements as long as the secret was acquired by improper means and use of the secret caused actual damages to the plaintiff. The court held that a party which does not compete with the trade secret holder can meet these requirements. Boeing had utilized the trade secret to reduce its need for GSI’s services, thus potentially causing actual damages through its use of the trade secret. As such, GSI could succeed on its trade secret claim as long it could actually prove that it sustained damages through this reduction in services.

Although trade secret misappropriation generally involves a competitor discovering and implementing an originator’s trade secret, this decision suggests that the UTSA applies more broadly than traditionally thought. As long as harm can be attributed to use of a trade secret gathered by improper means, a strict reading of the language of the UTSA provides for misappropriation liability and recovery for a trade secret holder.

Broader Implications of These Progresses

Trade secrets have thus far lacked the nationwide protection awarded to other areas of intellectual property law — patents by 35 U.S.C. §§ 101-05, copyrights by 17 U.S.C. §§ 101-22, and trademarks under the Lanham Act. The UTSA and its state-by-state adaptations attempt to overcome the lack of federal protection for trade secrets and limit forum shopping. Consequently, decisions by the forty-six states that have adopted some form of the UTSA tend to influence the application by the other states so long as the state has not varied its UTSA adaptation too much from the original.

Accordingly, the California and Virginia decisions discussed above will likely have implications outside of the state whose law the court applied. As a result of the Virginia Supreme Court’s decision in Collelo, other states might see an influx of non-traditional trade secret cases involving use by non-competitors. However, this sort of influx seems unlikely as most companies in the position of GSI would likely have employees such as Mr. Collelo sign non-compete consulting agreements to prevent similar defections.  Furthermore, software and other companies across the country that traditionally rely on EULAs to prevent trade secret misappropriation during beta testing must consider the California district court’s ruling in Aqua Connect.

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The Post Grant Review Process

PGR is a process where a third party can challenge patent claims within nine months of their issuance using evidence on a broad range of grounds, such as subject matter, novelty, nonobviousness, enablement and written description. 35 USC § 321(b),(c).  PGR can only affect pharmaceutical patents issued at least a few years from now, as it only applies to those pharmaceutical patent claims with effective dates on or after March 16, 2013. § 329(f).  The Director will accept a third party petition for PGR if “the information in the petition, if such information is not rebutted, would demonstrate that it is more likely than not that at least one of the claims challenged in the petition is unpatentable” or if “the petition raises a novel or unsettled legal question that is important to other patents or patent applications.” § 324(a),(b).  If the petition satisfies either of these burdens, the proceedings between the petitioner and patentee are held before the Patent Trial and Appeal Board (“PTAB”). § 328(a).  Before the proceeding, the parties undertake a limited discovery, and during the proceedings they can present a wide variety of evidence, including presenting and cross-examining witnesses.  § 322(a), § 326(a)(5).

In a PGR, the petitioner is only required to prove unpatentability by a preponderance of the evidence. § 326(e).  During the PGR process a patentee can amend his claim once as a matter of right. § 326(a)(9), (d)(1).  The proceedings before the PTAB are limited to 1 year, and extendable to 18 months only for good cause. § 326(a)(11).  Ultimately, the parties can settle or the PTAB can confirm, narrow, or cancel contested claims. § 328(b).  Appeals are heard by the Court of Appeals for the Federal Circuit (“CAFC”). § 141.  A party cannot petition for a PGR if infringement litigation is underway, but any civil claims filed on or after the PGR petition are automatically stayed. § 325(a).  The petitioner is estopped from raising future “claims on any ground that the petitioner raised or reasonably could have raised during that PGR.” § 325(e)(1).  But there is an important exception to this estoppel effect.  The petitioner can still bring patent invalidity counterclaims in subsequent litigation, as they are independent of PGR estoppel. § 325(a)(3), (e)(2).  Many of the further details of the PGR process are uncertain as the PTO has yet to issue the regulations for PGR.

Utility of PGR in Challenging Pharmaceutical Patents

Because of the many beneficial attributes of PGR, it is a particularly useful way of challenging pharmaceutical patents.  First, the petitioner can invalidate the patent on nearly every ground that is available in litigation, including subject matter, novelty, nonobviousness, enablement and written description. § 321(b).  Second, the parties can use a broad range of evidence, such as witness depositions, in the proceeding. § 322(a), § 326(a)(5).  This is an advantage over Inter Partes Review, which offers fewer grounds to contest claims.  Third, the PGR process only requires an initial “more likely than not” standard to initiate review followed by a “preponderance of the evidence” standard for invalidity.  § 324(a), § 326(e).  Both of these standards constitute a much lower burden than the “clear and convincing evidence” standard used for invalidating claims in litigation.  Fourth, the proceeding can extend, at most, to 18 months. § 326(a)(11).  In contrast, patent litigation typically does not even begin until two years after the initial filings, and it can stretch on years thereafter.

Fifth, the petitioner is not estopped from asserting invalidity counterclaims in later infringement litigation. § 325(a)(3), (e)(2).  The limitation of the PGR estoppel is that after a PGR proceeding a petitioner will not be able to initiate a declaratory judgment infringement action based on “claims on any ground that the petitioner raised or reasonably could have raised during that PGR” against the contested claims. § 325(e)(1).  Traditionally, accused infringers assert both an invalidity affirmative defense and an invalidity counterclaim.  And in fact, an invalidity counterclaim is more useful than an invalidity affirmative defense because, in contrast to an affirmative defense of invalidity, a counterclaim against a patent claim persists even after a patentee revokes the infringement action for that patent claim.  In instances where some courts invalidated an invalidity counterclaim (while sometimes upholding the invalidity affirmative defense), the courts have held that the accused infringer did not plead invalidity with sufficient specificity in the counterclaim.  However, with the benefit of the knowledge gained from a PGR proceeding, a petitioner should not have trouble later pleading an invalidity counterclaim with sufficient specificity in future infringement litigation on that patent.  Finally, unlike in litigation, a patentee’s claims could be narrowed at the end of the PGR. § 328(b).  Therefore, even if the petitioner doesn’t succeed in invalidating a claim outright, it may still be able to narrow the claims to the point they are no longer valuable to the patentee.

The Problem of the Nine Month Time Limit on Filing a PGR Petition

The primary problem of PGR with respect to pharmaceutical patents is that the 9-month window for PGR will have elapsed on many of the critical patents before the drug candidate is tested in clinical trials. § 321(c).  Of the clinical drug candidates that pharmaceutical companies file an Investigational New Drug (“IND”) Application for, only 20% of these drug candidates reach the point where the pharmaceutical company files a New Drug Application (“NDA”). Although the patents on the active ingredients may have issued early on, methods of treatment and formulations may be patented after the NDA is filed.

Generic pharmaceutical companies must, therefore, challenge pharmaceutical patents that may have a less than 1-in-5 chance of applying to a future valuable FDA-approved drug.  These challenges should be performed strategically by assessing IND information, clinical trials information, publicity related to any drug candidates and the potential weakness of the claims in a patent at issue.  The generic drug companies could also petition for PGR as a group, effectively spreading the cost of a PGR among the mutual potential beneficiaries and limiting free-riding. § 325(d).  A further advantage of PGR is that these invalidity issues can be challenged long before any Abbreviated New Drug Application (“ANDA”), thus settling expectations among the industry many years in advance.

Empirical Data from EPO Opposition Proceedings

The generic drug manufactures should also consider the results of Oppositions at the European Patent Office (“EPO”).  PGR is analogous to European opposition proceedings, but with some procedural and substantive differences (p.143). In a 2004 article, Hall and Harhoff discussed empirical data on the EPO opposition proceedings. They found that approximately 8% of patents at the EPO issued between 1980 and 1995 were opposed.  This suggests that at the EPO, patent challengers must find the Opposition practice useful.  The cost for a 2004 EPO opposition proceeding ranged from around $15,000 to $50,000.  This cost is about two orders of magnitude less compared to US patent infringement litigation, which generally costs between $2.5 to $5 million where there was between $1 and $ 25 million at risk. PGR proceedings may cost even less than the EPO Oppositions, as the EPO proceedings typically last at least a couple of years as opposed to the 1 year limit for PGR proceedings. § 326(a)(11).  Ultimately, the outcome of the EPO oppositions is that approximately one third of the claims are revoked, one third are narrowed, and one third are unchanged.  The PGR outcomes may be similar to these results as the EPO evidentiary standard of “balance of the probabilities” is analogous to the US “preponderance of the evidence” standard.

Conclusion

Post Grant Review could be a useful tool to challenge pharmaceutical patents.  PGR has the advantages of: (1) challenging the claims on a broad range of grounds and evidence; (2) it requires relatively low evidentiary standards; (3) it is generally limited to 1 year; (4) the petitioner is not estopped from later using invalidity counterclaims at trial; and (5) the patent claims can be productively narrowed, even if they are not invalidated altogether.  The primary difficulty of using PGR to challenge pharmaceutical patents is the nine month post-issuance filing limit.  This limit would frequently require petitioners to challenge patents using PGR before they know whether a pharmaceutical drug will originate from the patent.  This filing limit makes PGR more risky and expensive, but the advantages of using PGR to challenge the pharmaceutical patents outweigh these risks.  Finally, data on EPO Oppositions suggests that PGR will be useful, cost-effective, and that petitioners could ultimately amend or revoke two-thirds of contested patent claims using PGR.

The report announced the Administration’s new four-element online privacy framework, which is designed to augment already existing privacy protection laws. The first, and perhaps most critical, element of the new framework is a Consumer Privacy Bill of Rights (“CPBR”). The framework also consists of a multistakeholder process “to specify how the principles in the [CPBR] apply in particular business contexts, recommendations for effective enforcement, and a commitment to increase interoperability with international privacy protections.”

This post includes a dissection of each of the four elements of the Administration’s new framework, followed by a discussion of initial reactions to the framework.

Consumer Privacy Bill of Rights

The first element of the Administration’s new privacy framework is a comprehensive Privacy Bill of Rights. The CPBR is designed to set forth “individual rights and corresponding obligations of companies in connection with personal data.” The rights are fundamentally based on Fair Information Practice Principles (“FIPPs”), which were developed by the United States in the 1970s and have since achieved international recognition. The Administration’s new CPBR seeks to apply FIPPs to the current environment of the Internet, in which data processing about individuals is “far more decentralized and pervasive” than ever before. To accomplish this, the Administration seeks to carry FIPPs forward in two ways: by “affirming a set of rights that inform what they should expect about companies that handle personal data,” and by “emphasiz[ing] the importance of context” in the application of such rights. The CPBR holds that consumers have the right to the following:

1. Individual Control: “Consumers have a right to exercise control over what personal data companies collect from them and how they use it.”

This right states that companies should provide consumers with the “appropriate control” over the data they share with others and how companies “collect, use, or disclose” the personal data they collect. The amount of control options that a website presents should be a function of both how much information a company collects, as well as the sensitivity of the information. Consumers also have the responsibility to “evaluate their choices” and to “take responsibility for the ones that they do make.”

1. Transparency: “Consumers have a right to easily understandable and accessible information about privacy and security practices.”

This right states that companies should provide clear descriptions of “what personal data they collect, why they need the data, how they will use it, when they will delete it, and whether and for what purposes they may share personal data with third parties.” This information should be made available at times and places where it is must useful for the consumer to gain a meaningful understanding of privacy risks and the ability to exercise self-control.

1. Respect for Context: “Consumers have a right to expect that companies will collect, use, and disclose personal data in ways that are consistent with the context in which consumers provide the data.”

This right states that companies should “limit their use and disclosure of personal data to those purposes that are consistent with both the relationship that they have with consumers and the context in which consumers originally disclosed the data.” Should a company decide to use or sell such information for purposes outside of the established context, the company should be especially transparent about its use of the data by “disclosing these other purposes in a manner that is prominent and easily actionable by consumers at the time of data collection.”

1. Security: “Consumers have a right to secure and responsible handling of personal data.”

This right states that companies should “assess the privacy and security risks associated their personal data practices” and in turn “maintain reasonable safeguards” to prevent loss of data, unauthorized access or modification, and improper disclosure.

1. Access and Accuracy: “Consumers have a right to access and correct personal data in usable formats, in a manner that is appropriate to the sensitivity of the data and the risk of adverse consequences to consumers if the data is inaccurate.”

This right states that companies should use “reasonable measures to ensure they maintain accurate personal data” and should “provide consumers with reasonable access to personal data that they collect” as well as the “appropriate means and opportunity to correct inaccurate data or request its deletion or use limitation.”

1. Focused Collection: “Consumers have a right to reasonable limits on the personal data that companies collect and retain.”

This right states that companies should “collect only as much personal data as they need” to accomplish the purpose of the website. Companies should also “securely dispose of or de-identify personal data once they no longer need it.”

1. Accountability: “Consumers have a right to have personal data handled by companies with appropriate measures in place to assure they adhere to the Consumer Privacy Bill of Rights.”

This right states that companies should be “accountable to enforcement authorities and consumers for adhering to these principles.” Companies also should “hold employees responsible for adhering to these principles.” To achieve this, the report advises that companies should “train their employees to handle personal data in a matter consistent with these principles” and, where appropriate, “conduct full audits.” For companies that disclose personal data to third parties, the report states that they should, at a minimum, “ensure that the recipients are under enforceable contractual obligations to adhere to these principles.”

Multistakeholder Process to Develop Codes of Conduct

To implement the principles enshrined in the CPBR, the Administration recommends and encourages that a broad coalition of actors come together under the direction of the Department of Commerce’s National Telecommunications and Information Administration (“NITA”). The Administration views the multistakeholder processes as a way for interested parties to develop and then adapt codes of conduct that “protect consumers’ privacy as technologies and market conditions change.” Such open and transparent processes are extolled by the Administration because they “provide the flexibility, speed, and decentralization necessary to address Internet policy changes.” The Administration specifically calls out “individual companies, industry groups, privacy advocates, consumer groups, crime victims, academics, international partners, State Attorneys General, Federal civil and criminal law enforcement representatives, and other relevant groups” to be a part of the multistakeholder process.

The report defines the multistakeholder process it envisions in terms of three principal stages. The first stage of the process is deliberation. With the assistance of NITA stakeholder groups are to identify “markets and industry sectors that involve significant consumer data privacy issues.” NITA will then work to enlist the participation of stakeholders to “develop an enforceable code of conduct.” Once interested parties are convened, NITA is responsible for ensuring that stakeholders work together to resolve any differences that may arise. A code of conduct that “reflects the agreement of all stakeholders” is then ready for companies to consider adopting.

The second stage of the process is adoption. The report states that once a code of conduct has reached completion, companies to which the code is relevant may choose to adopt it. The Administration relies on Section 5 of the FTC Act to make a company’s public commitment to adhere to a code of conduct enforceable.

The third stage of the process is evolution. The Administration states that a key goal of the multistakeholder process is to “enable stakeholders to modify privacy protections in response to rapid changes in technology, consumer expectations, and market conditions.” The report states that individual stakeholders can at any time decide that a code of conduct is no longer relevant. In addition, NITA can also come to the conclusion that a code is in need of revision and seek to re-convene stakeholders in a new deliberation process. The report emphasizes that a code of conduct is a voluntary agreement that may not be revised directly by the federal government.

Notably, a code of conduct related to the “Do Not Track” mechanism has been created through a procedure similar in nature to the Administration’s ideal multistakeholder process. Following efforts spearheaded by the Digital Advertising Alliance, the FTC and the Commerce Department, all four major Internet browser developers and many of the leaders of the online advertising business agreed to implement ‘do not track” policies. Such policies will allow individuals to tell websites (via an HTML header) that they do not want their web browsing activity “tracked,” that is, reported back to third-party services that collect the information for advertising and other purposes.

Recommendations for Effective Enforcement

The third element of the new privacy framework consists of establishing enforcement mechanisms that ensure privacy commitments made by companies are meaningful. The Administration first explains that under current law the FTC has authority to enforce the commitments of companies to adhere to codes of conduct developed through the multistakeholder process. Nonetheless, the Administration recommends that Congress pass legislation that adopts the CPBR and grants the FTC and State Attorneys General specific authority to enforce each of its elements.

Beyond its appeal for statutory codification, the Administration further recommends that Congress create a provision that gives the FTC the authority to grant a “safe harbor” (defined as forbearance from enforcement of the statutory CPBR) to companies that follow a code of conduct that the FTC has reviewed and approved.

The Administration stresses that a federally enacted CPBR should “provide a national standard for protecting consumer data” that creates “certainty for companies and consistent protections for consumers.” The Administration thus requests that Congress ensures that any enacted legislation preempts inconsistent state laws.

The Administration also voices support for preserving existing sector-specific federal data privacy laws that effectively protect personal data. Such existing privacy laws generally establish legal obligations that are tailored to the sensitivity of the data associated with a specific industry, such as healthcare or banking. To avoid “duplicative regulatory burdens,” the Administration supports exempting companies from any newly enacted privacy legislation, to the extent that “their activities are subject to existing Federal data privacy laws.” However, activities within such companies “that do not fall under an existing data privacy law” would still be covered by the new privacy legislation recommended by the Administration.

Finally, the Administration recommends the adoption of a national standard that requires companies to notify consumers of unauthorized disclosures of personal data. While almost all states currently have independently-created security breach notification laws, the creation of a single standard would eliminate a significant burden on companies that have to comply with the current patchwork of state laws.

Promoting International Interoperability

The Administration emphasizes that establishing a workable and meaningful privacy policy in today’s world requires an international mindset. To this end, the fourth element of the Administration’s new framework embraces the goal of “increased international interoperability as a means to provide consistent, low-barrier rules for personal data in the user-driven and decentralized Internet environment.”

The Administration states that the two principles that underlie its approach to achieving interoperability are mutual recognition and enforcement cooperation. The Administration states that mutual recognition depends on the existence of effective enforcement and well-defined accountability mechanisms. To achieve this, the Administration recommends the international adoption of multistakeholder processes because of their ability to develop scalable and flexible codes of conduct that “simplify companies’ compliance obligations.” Enforcement cooperation, in turn, will ensure that countries are able “to protect their citizens’ rights when personal data crosses national boundaries.”

Critical Reception to the Framework

While the Administration’s privacy framework is still in its infancy, the framework appears to have been met with subdued optimism. Time states that the most “remarkable” element of the new framework is that it has not been greeted with outrage from Silicon Valley companies, who have previously opposed similar privacy legislation efforts led by the California State Senate. However, Time also posits that one of the main reasons why technology companies have so far been optimistic about the new framework is because it is “just a policy outline” that “will be sent to a Congress that isn’t likely to touch it anytime soon.”

Technology companies also appear to view the framework as an opportunity to participate in ongoing discussions about the future of privacy legislation. This is perhaps because of the framework’s focus on multistakeholder decision making processes, which encourage the full involvement of all affected parties. Participating in such privacy discussions allows companies to “be at the table and help shape solutions,” says Jules Polonetsky, director of the Future of Privacy Forum. Technology companies can therefore ensure that the ultimate legislation adopted can be feasibly implemented. At the same time, companies that take part in this privacy discussion can reassure their users that privacy is an issue that they pay attention to and take seriously.

Technology public interest groups have also expressed general optimism towards the framework. The Electronic Frontier Foundation has stated that it believes the Administration’s “user-centered approach to privacy protection” is a “solid one.” The Center for Democracy and Technology “welcome[d] the Administration’s unveiling,” stating that it supports the report’s “call for the development of consensus rules on emerging privacy issues to be worked out by industry, civil society, and regulators.”

Some commentators, however, have expressed concerns about the new privacy framework. A Forbes op-ed authored by Adam Thierer highlights that “no matter how well-intentioned regulation proposals may be, they can often have unforeseen, unintended consequences.” The author expresses concern that a government-led approach to establish privacy protection will result in a “heavy-handed, innovation-killing model of information control on the Internet.” Other commentators have lamented the fact that technology companies will be able to exert so much influence in the future of privacy legislation, calling the framework : “toothless” and “misguided,” while others argue that it doesn’t focus on the most pressing issues.

Conclusion

While it is too early to tell for certain, President Obama’s new privacy framework appears to usher forward a new discussion about digital privacy rights. The process of ultimately adopting new online privacy norms will likely entail significant efforts by interested parties both on and off Capitol Hill. It is encouraging that the Administration’s framework has sought to ensure that this process involves a wide variety of affected parties in a transparent, inclusionary process. By incentivizing technology companies to come forward and participate in the creation process, the resulting legislation should provide additional consumer protection without stifling the development of future activities on the web.

It should be noted, however, that in order for the Administration’s proposed framework to truly work as intended, all of the parties involved must remain diligently committed to privacy reform for the long term. This will require an effort by consumers to become more knowledgeable and aware of their online privacy rights and expectations. Clear and easy to understand privacy policies and proposals, such as the Administration’s new CPBR, will be essential in making this a reality.