Trade Secrets and Copyrights

Trade secret law and patents protect certain types of ideas. Copyright law prevents copying of the specific expression of an idea; however, it does not protect against someone expressing the same idea in a different way. Because of the cost and difficulty of obtaining patents, most software-related companies use trade secret and copyright law--coupled with contracts and license agreements--for protection.

Patents

Scope. Patents generally cover inventions, meaning technology. Algorithms (mathematical formulas) are generally not protectible unless part of a process. This makes patent protection for software problematic.

Term. The protection lasts the life of the patent (usually 17 years) and applies even if someone independently makes the same invention.

Criteria.

  • Novelty. The invention must not be known, already invented or used by others in the U.S., or patented or described in any publication anywhere in the world.
  • Utility. The invention must be useful; this is usually not an issue.
  • Non-obviousness. The hardest hurdle to overcome. Very roughly, the invention must not be obvious to a practitioner of ordinary skill who has comprehensive knowledge of the field.

Drawbacks. One problem with patents is that, upon issuance, the owner loses any trade secret rights. Perhaps half of all patents attacked in court are found invalid, and patent litigation is very expensive.

Trade Secrets

Scope. Generally, any information that meets the criteria can be a trade secret.

Term. Trade secret protection lasts forever unless it is independently discovered, reverse engineered or becomes public knowledge.

Criteria.

  • Competitive Advantage. The information must give the owner an advantage over competitors who do not know or use it.
    (1) However, the advantage may be prospective.
    (2) Other confidential information that does not constitute trade secrets can be protected by contract or license.
  • Not Generally Known. The information must not be widely available.
    (1) There is no protection if the information is readily ascertainable by proper means by competitors.
    (2) However, if only a few competitors know it and are maintaining secrecy also, the information may still constitute a trade secret with respect to others.
  • Kept Confidential. The owner must take reasonable steps to maintain secrecy.
    (1) Confidentiality agreements with employees, customers and potential business partners are recommended.
    (2) Physical security may consist of passwords, restricted access, locks on doors and file cabinets, numbered copies, document sign-out sheets, marking information "Confidential," etc.

Drawbacks.

  • Trade secret law does not protect against independent discovery or reverse engineering. Contract or license provisions can fill this gap with respect to customers.
  • Protection may be lost if the information is disclosed to a government agency as part of a permit, registration or license process. However, many federal agencies have procedures which, if followed, will provide trade secret protection.
  • Any unprotected disclosure may lead to the loss of the trade secret.

Examples. Trade secrets may include formulas, processes, patterns, software designs, customer lists, customer preferences and internal business and marketing plans.

  • However, a customer list may not constitute trade secret if the information can be assembled from legitimate sources. Customer preferences are easier to protect. ii. Employee compensation figures, operational information and procedures, and internal financial statements may not qualify in some situations, but again may be protected by contract.

Confidentiality Agreements.

  • Generally, the coverage should be specific without disclosing the trade secrets themselves. Coverage that is overly broad or vague may not be enforceable.
  • Inserting non-competition clauses into confidentiality agreements with employees may invalidate the entire agreement, since non-competition clauses are generally invalid in California.
  • California law generally invalidates clauses that try to transfer invention rights from an employee to the employer where the employee made the invention on his/her own time and did not use the employer's equipment or facilities and the invention does not relate to the employer's business. (Labor Code Sections 2870-2872.)
  • Employee agreements should be signed at the time of hiring; agreements with third parties should be signed prior to disclosure. If a third party refuses to sign, a fall-back strategy is to inform the third party that the information is confidential and mail a confirming letter, prior to the disclosure if possible.

Copyrights

Scope. Copyright covers original works of authorship fixed in any tangible medium.

Term. For works created prior on or after January 1, 1978, the basic rule is the life of the last-surviving author plus 50 years. With works for hire, the term is 75 years from publication or 100 years from creation.

Criteria

  • Originality is required, but this essentially means independent creation, not novelty. This is usually a problem only with databases and forms.
  • The work must be fixed in a tangible medium; saving it on diskette or a hard drive is sufficient.
  • The right exists upon creation, but registration is required to bring an infringement action and it broadens the remedies available.
    (1) If registration occurs prior to the infringement, the owner can recover statutory damages ($500 to $20,000 per infringer, up to $100,000 if willful) and, in the discretion of the court, attorneys fees.
    (2) Generally, copies of the work must be filed-- which can cause the loss of trade secret protection. However, the Copyright Office allows the filing of only a portion of the work upon request, so that trade secrets can almost always be protected. iv. Copyright protection will not apply where there are only a few ways of presenting the idea (for example, spreadsheet layouts).

Drawbacks

  • Copyrights cannot protect ideas. However, there still may be protection even if the other party paraphrases a work if that other party follows the "structure, sequence and organization" of the work.

Ownership

  • Employees. The work for hire doctrine states that the employer owns the rights if the employee creates a work within the scope of his/her employment.
  • Independent Contractors. Danger! Without a written agreement, an independent contractor generally owns the work, and the commissioning party merely has a license to use it. Even using the term "work for hire" in an agreement with the contractor or stating that the commissioning party is the owner may be insufficient for software-related work: an assignment clause should be used.
  • Joint Works. Where two or more parties contribute to a work, they own it jointly. Each can use it internally without payment to the others. Each can also license it to third parties, though any exclusives license requires the consent of each owner. Any profits must be split equally among the owners, regardless of how much each contributed to the project. This can, of course, be changed by agreement.
  • Derivative Works. Derivative works are those that are based on another party's work, but have original additions. Generally, the author of the derivative work cannot use or license it without permission from the underlying owner--but the underlying owner has no rights to the new portions of the work without obtaining permission.

Copyright Notices.

  • For works created after March 1, 1989, (the effective date of the Berne Convention for the U.S.) copyright notices are not technically required. However, they are still desirable to prevent claims of "innocent infringement."
  • "Copyright 1996 Bruce E. Methven. All rights reserved."
    (1) A "c" within a circle–©–may be used in place of "Copyright," but a "c" within parentheses–(c)– is not sufficient. On your website, the html code to display the copyright symbol is ©.
    (2) "All rights reserved" is optional but recommended. iii. Use the first year the work was created; using later years may invalidate the protection. If substantial changes are made in later years, those years may be included as well: "Copyright 1993-1997" or "Copyright 1992, 1994, 1995."

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Methven & Associates
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Copyright 2004 Bruce E. Methven, All Rights Reserved.

The foregoing article constitutes general information only and should not be relied upon as legal advice.