Recent developments in patent law have created a unique vulnerability for software developers choosing to keep their innovations as trade secrets rather than seeking patent protection. The three factors contributing to this perfect storm of risk include: the Supreme Court’s Alice Corp. decision (and ensuing mayhem in software method patents), the America Invents Act’s (AIA’s) “first inventor to file” rule, and the Supreme Court’s Halo Elecs., Inc. v. Pulse Elecs., Inc. decision. When considered in combination, these rules suggest that software developers may be better off keeping their innovations as trade secrets (instead of patenting them). However, such a course of action exposes the developer to potentially having their trade secrets challenged in a patent infringement action where they do not have a prior-invention defense, all while facing enhanced damages for willful infringement.
Alice in Softwareland
How have we arrived at this perfect storm scenario? The answer to this question lies in the exploration of why software companies are steadily moving toward trade secret (as opposed to patent) protection. The most significant factor is the Supreme Court’s Alice Corp. decision and the prevalence and effectiveness of inter partes review proceedings (IPRs). Just because the patent laws have become somewhat unfavorable to the software industry, however, does not mean that the sector has stopped innovating or creating new methods and tools. Software companies have just been keeping potentially patentable innovations in-house as trade secrets.
Many owners of software method patents have chosen to hold off on enforcing existing patents to wait and see if the pendulum of the patent law swings the other way. Statistically, owners of software method patents are not enforcing those patents or initiating any new lawsuits. For new methods and innovations, software developers have sought to maximize the value of their intellectual property by keeping innovations in the software tools and software methods as trade secrets.
In Alice Corp., the Supreme Court set out a two-part test for determining patent-eligibility. First, courts must evaluate whether the claims at issue are directed to an abstract idea. If they are, the next question is whether the claims include something “significantly more” than the abstract idea itself, in which case they are patent-eligible. Since the Alice Corp decision, district court judges and the Patent Trial and Appeal Board have found that numerous patents fail the Alice test and are not patent-eligible under Section 101 of the Patent Act.
The Alice Corp. decision has provided the framework for defendants to challenge the patent eligibility of a software method patent, and the introduction of the IPR process has provided defendants with the opportunity to challenge patents quickly and relatively cheaply—and at a lower standard. Software inherently lacks structure and, as a result, patents in the software space are method patents. Even truly innovative software methods are going to seem abstract, such that defending against an Alice Corp. patent-eligibility argument can be a challenge. Specifically, videogame developers have recently seen a lot of action in the courts relating to their software method patents. See i.e. Activision, McRO, Enfish, etc.
Last is First
The potential hidden pitfall created by the AIA is the possibility that a method invented in-house that a company chooses to keep as a trade secret instead of a seeking a patent, is at risk to becoming an infringing method if another person creates an equivalent method. For an innovation solving a known problem, that trade secret could become a liability if a competitor invents an equivalent technology and decides to patent it instead of keeping it as a trade secret. The harm comes from the fact that from the point of notice of the patent, the trade secret holder is potentially a willful infringer of the patent—despite having been the first to invent.
The question of how risky it is to not patent something and instead keep it as a trade secret largely depends on how common simultaneous invention is. The answer is: more common than you would think, especially where that simultaneous invention occurs in response to a clear problem that many stakeholders in an industry have tried or are trying to solve. The McRO voice-syncing case (currently pending) before the Federal Circuit is an example of how multiple companies created their own methods to solve the same problem. In that case, the plaintiff McRO owned a patent covering a method for animating lip motions to match inputted dialogue. Despite receiving its patent in 2001 and 2003, the Plaintiff McRO—a slightly-practicing entity (“SPE”)—sued every videogame developer and producer under the sun in 2012; those defendants had created their own method for automating in-game and cut-scene dialogue—the burdensome alternative being having programmers custom code all the dialogue. The ultimate outcome in this case will be instructive on the issue of simultaneous invention.
The next component of the perfect storm is the “first inventor to file” rule. Prior to the AIA, a company that held an innovation as a trade secret and did not seek to patent that technology, could use that prior invention as a defense to the infringement suit by challenging the validity of the patent. (This hypothetical assumes the innovation is novel and non-obvious). After the AIA, which changed the invention rule to be “first inventor to file” instead of “first to invent,” those innovators that keep an innovation in-house and do not seek a patent are effectively just losing the race to the patent office. If another inventor and potential competitor invents an equivalent technology and decides to patent that technology rather than keep it as a trade secret, that inventor owns the patent and the prior user does not have the defense of prior invention.
This change in the rule stands to make willful infringers out of many a software company that resists the counter-intuitive notion that a later inventor could exclude them from using an in-house trade secret technology. The temptation to continue using a trade secret technology once receiving notice of the patent will certainly be considerable. Treble damages for willful infringement will hardly ever be worth the risk.
Just recently, the Supreme Court lowered the standard for a court to find willfulness and award enhanced damages. See Halo Elecs., Inc. v. Pulse Elecs., Inc., and Stryker Corp. v. Zimmer, Inc. That decision cuts both ways with regard to our hypothetical scenario evaluating the merits of a trade secret versus a patent. Under the Supreme Court’s Halo v. Pulse decision, the question for enhanced damages is subjective, not objective, and the courts should look to the particular circumstances and exercise discretion.
A trade secret holder could thus find themselves stripped of their ability to use their own innovation, defending a patent infringement action without a prior invention defense, and facing enhanced damages for willful infringement.
For plaintiffs with software method patents, proving infringement is typically the easy part (the doctrine of equivalents means the solution does not have to be exact). Fortunately for defendants in cases involving software method patents, the very reason why they may have chosen not to patent a method is why they will likely win in court. The Alice Corps. decision, as well as subsequent courts’ application of Alice to situations involving more abstract methods, have sided heavily with defendants.
If you are a software developer with valuable intellectual property, it is dangerous to go alone. You need a legal expert in your industry that can help you decide how to stay diligent with your intellectual property, whether you patent it or keep it as a trade secret.