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Admonition To Members Of The Healthcare Industry: Don’t Give Trade Secret Protection The Short Shrift!

While traditionally healthcare businesses have tended to look to patent protection, it would behoove them to also think about trade secret protection to protect their valuable inventions.  Given the financial strains on businesses from the COVID-19 pandemic, some businesses may find trade secret protection a cost-efficient alternative to the patent process. Trade secret enforcement also potentially can yield hundreds of millions, sometimes even over a billion, dollars for the trade secret holder.[1] Further, patent protection is not always available.[2]

Potential Trade Secrets In The Healthcare Industry

While the definition may vary somewhat across jurisdictions, a trade secret generally is information that derives independent economic value from not being known; and is subject to reasonable efforts to maintain its secrecy.

In the healthcare industry, potential trade secrets include formulas or techniques to develop pharmaceuticals, biosimilars, drugs, vaccines, or medical devices; code for a medical technology software; testing results; and patient analyses.

An important category of potential trade secrets particular to the healthcare industry is negative research (also known as negative “know-how”).  Negative research is information about what does not work.  In the healthcare industry, substantial resources are often devoted to producing negative research (e.g., testing, clinical trials).  A competitor easily could love to get its hands on your negative research.  Access to the negative research could save the competitor substantial expense by not going down the wrong path that you went down.  In turn, the competitor could potentially attract your customers by having the ability to offer its end product at a much lower price than yours (because the competitor’s R&D expenses were much less than yours).

Masimo Corp. et al. v. Apple Inc. (United States District Court, Southern District of California, Case No. 8:20-cv-00048) is another recent example of trade secret litigation in the healthcare industry.  There, a medical device maker, Masimo Corp., sued Apple alleging that Apple poached key employees and misappropriated trade secrets for use in the Apple Watches.  Masimo contends that Apple engaged in the wrongful conduct after Apple approached it to discuss collaborating on technology which can track heart rate, blood oxygen levels and other health indicators by measuring how light passes through body tissue.  Masimo and Apple ultimately did not go forward with the collaboration.  This case presents a common circumstance giving rise to a trade secret misappropriation claim – a potential collaboration or other relationship that does not go forward.    A party to such discussions where confidential information is disclosed to evaluate the potential relationship should take care to protect its confidential information from misuse and to limit the other party’s ability to assert unwarranted misappropriation claims if the discussions fall apart.

Trade Secret Protection As A Potential Alternative To Patent Protection

The below chart highlights some of the key differences between patent and trade secret protection, and the potential significance to healthcare companies in opting between trade secret protection and patent protection.

PATENT

TRADE SECRET

TAKEAWAY

Invention

Information

If it is not a patentable invention but is just valuable information, consider trade secret protection.

Trade secret protection can protect information that patent protection cannot.  Trade secrets can include subject matter typically covered by patents such as inventions, technologies and improved processes that may be patentable, but can also include other non-patentable information such as customer information, marketing, pricing/discount information, vendor contracts and other information.

Disclosure required and tangible form of ownership

Secrecy required

If you can’t keep the information secret (e.g., because it is subject to reverse engineering), consider patent protection.

Also, consider that inventions that are on the cutting edge may evolve over time and initial disclosures in patent applications may capture nuances from which competitors can benefit.

In addition, once a patent application publishes, other entities can piggyback and create blocking materials regarding the particular invention.

Monopoly but limited duration (20 years)

No monopoly but no time limit

If the invention/information has the potential to be materially valuable beyond the monopoly period afforded by patent protection, consider trade secret protection.  But, if the value is the ability to prevent your competitors from practicing the invention in the coming years, consider patent protection.

Must be novel, non-obvious,  and patentable subject matter (not an abstract idea, law of nature, or natural phenomenon).

Must derive economic value from being kept secret and the subject of reasonable efforts to maintain its secrecy

If the invention may not satisfy the patent-eligibility requirements, consider trade secret protection.

Healthcare companies should consider trade secret protection for early stage research.  Patent claims are limited to a written description in the initial patent application but the full import of a development may not be understood immediately.  As a result, broad, early-development claims may be rejected as merely being laws of nature or unpatentable ideas.

Healthcare companies must carefully consider how to protect their intellectual property.  Trade secret protection often may be available and attractive.

Should healthcare companies elect to implement trade secret protection, they should consult with counsel and be proactive to protect the secrecy of their trade secrets before any misappropriation occurs, and to develop a detailed plan in place in the event of a breach. A few basic potential “best practices” for consideration include:

  1. Identify the company’s trade secrets as well as who will have access to the trade secrets.

  2. Determine how the trade secrets are to be safeguarded by the company (e.g., confidentiality provisions in employment agreements, non-disclosure agreements for third parties, and other technical or network protection measures (i.e., computer passwords, encrypted e-mails, firewalls, etc.). Consider whether there are particular danger areas and how to address them.

  3. Implement and enforce the protection measures. Anyone who has access to the trade secrets should agree to hold them in trust for the company even after their relationship with the company ends.

  4. Develop an action plan should misappropriation be threatened or perceived. Time will be of the essence.

This article is not an unequivocal statement of the law, but instead offers some potential issues to consider with counsel.  This alert is provided for information purposes only and does not constitute legal advice and is not intended to form an attorney client relationship. Please contact your Sheppard Mullin attorney contact for additional information.


FOOTNOTES

[1] For example, in April 2011, a California jury awarded St. Jude Medical Inc. a record $2.3 billion verdict (Pacesetter Inc. v. Nervicon Co., California Superior Court, Los Angeles County, Case No. BC424443). The case involved trade secret theft by a former employee seeking to capitalize on the misappropriated information with his competing medical device company, Nervicon. Although the unprecedented award was later revised downward, massive awards in cases of trade secret misappropriation are a trend.

[2] See, e.g.Cleveland Clinic Foundation v. True Health Diagnostics, LLC, 859 F.3d 1352 (Fed. Cir. 2017) (finding patent-ineligible claims to a correlation between blood levels of a certain enzyme and athersclerotic disease, where the patentee did not invent any biological techniques or statistical methods). For inventions related to surgery, the acceptance rate for patent applications was 48.5% in 2006, whereas it has dropped to 36.3-38.6% since 2015 and for inventions related to dentistry, the acceptance rate for patent applications was 46.5% in 2006, whereas it has dropped to 28.9-41.4% since 2015. See https://developer.uspto.gov/visualization/allowance-rate-uspc-class.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 190

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About this Author

Partner

Ms. Edelson’s practice emphasizes intellectual property, unfair competition, and injunctions. She has broad experience in all phases of state and federal litigation, including pre-trial development, discovery and motion practice, trials, writs, and appeals. She also counsels businesses on protecting their proprietary rights and information outside of the litigation context.

Ms. Edelson is a recognized expert in trade secret law and is a co-editor and an author of the treatise, Trade Secret Litigation and Protection in...

310-228-3734
Kazim A. Naqvi Intellectual Property & Litigation Sheppard Mullin Century City, CA
Associate

Kazim Naqvi is an associate in the Intellectual Property and Litigation Practice Groups in the firm's Century City office. He is also a member of the firm’s Trade Secrets Team.

Areas of Practice

Kazim prides himself in doing whatever it takes to achieve his clients’ business goals in an efficient manner.

Kazim's practice focuses on a variety of commercial litigation and class action matters, including intellectual property, breach of contract, business tort, real estate, and entertainment issues. Kazim represents clients in a variety of industries, including the entertainment, aerospace, automotive, energy, retail, financial, medical technology, food and beverage, and travel industries, among others. He has particular experience in litigating trade secret issues under state and federal trade secret laws, as well as counseling clients on how to protect their sensitive and proprietary information and technology.

Kazim has experience handling several stages of litigation, including drafting and responding to pleadings and dispositive motions, taking depositions, appearing in court to argue substantive motions, and drafting and negotiating settlement agreements. He has experience representing Fortune 50 Companies, non-profit companies, small companies and individuals in state and federal courts, the court of appeals, as well as in alternative dispute resolution through mediations and arbitrations.

Prior to joining the firm, Kazim was an associate at another AmLaw 100 firm. Kazim graduated from Loyola Law School, where he was the President of the Iraqi Refugee Assistance Project, and an Editor of the International and Comparative Law Review.

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C. Dylan Turner IP Lawyer Sheppard Mullin
Associate

Dylan Turner is an associate practicing Intellectual Property in the firm's Silicon Valley office.

Areas of Practice

Dr. Turner practices intellectual property law including assisting in patent procurement and litigation. He has a broad base of technical experience, with a focus on the chemical and pharmaceutical industries. Dr. Turner earned his J.D. from Northwestern University School of Law, where he served as Executive Editor on the Journal of Technology and Intellectual Property. While in law school, Dr. Turner completed independent research in...

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