In this hoganlovells.com interview, Lance Bultena, Global Director of Thought Leadership for Mobility and Transportation at Hogan Lovells, and Celine Crowson, Partner and Head of IPMT Americas at Hogan Lovells discuss the difference between trade secrets and patents; the need for companies to ensure trade secrets are not leaked to competitors; the arbitration of trade secrets and patent laws in major global markets such as the US, China, and Europe; and the complexity of protecting innovation and inventions in a new era of artificial intelligence (AI).
What is a trade secret, and how does it differ from a patent?
Celine Crowson: A trade secret is something, such as an algorithm, data, or information, that is valuable, and not generally known. Keeping it secret is the real challenge in trade secret protection.
In the context of mobility and the automotive sector, consider AI and machine learning. Examples of trade secrets here might be the training data for autonomous driving systems that use AI or machine learning. How does the system distinguish between a person and a pilon in the middle of the road, or between a dark tunnel and a brick wall? Systems that rely on machine learning need to be trained. How the training is conducted, and the results of that training, are examples of trade secrets. So too are the software and algorithms a vehicle uses for autonomous driving. Other examples of trade secrets include the results of tests, customer lists, and employee training. The key thing is that the information, data, algorithms, or results, need to be kept secret to be protected.
A patent is a registered government document that you need to apply for, and you can protect some software, algorithms, and processes with patents. The difference between a trade secret and a patent is that when you file a patent, your innovation is published, and someone can innocently infringe upon that patent. A trade secret infringement, on the other hand, involves theft.
Lance Bultena: There’s a suite of intellectual property that any company needs to manage. It sounds as though patents and trade secrets need to be in that basket. Can trade secrets be registered with a government entity?
Crowson: They are not registered in the way that a patent or a trademark may be. Best practice for protecting innovations and valuable data information not protected by a patent or a copyright, is to archive or list the key trade secrets, software packages, information, and AI training protocols that are important to the company’s business, and then develop a plan to protect those innovations and that important intellectual property.
The challenge is to protect trade secrets when they’re not registered. The kind of information that we’re talking about is often widely shared within a company, but when an employee leaves that company and starts at a new company, they take this knowledge and information with them. It’s easier to download and steal software, for example, than it is to take a large device out of a factory. And reverse engineering is generally permitted from a legal standpoint, unless there’s a contract in place to prohibit this. Reverse engineering is free game, and that can ruin trade secret protection if others have access to innovations, or devices, or software that can be reverse engineered.
Those are some of the key challenges in protecting trade secrets, especially in such an innovative area where there are many new companies, high employee turnover, and information sharing. Companies really must get their house in order, starting first by cataloguing key trade secrets, and then taking specific steps to ensure that those trade secrets are protected.
How can companies ensure that intellectual property, and trade secrets, remain within a company and do not leave with employees who quit to go to a competitor?
Bultena: Mobility and transportation are shifting away from mechanical, and electrical engineering, to software, batteries, and new business models. We’re seeing people setting up companies, then going into a big enterprise, and then going into a different big enterprise – and that human capital walks out the door with them. This looks like an area of growth and concern, and companies big and small clearly need to focus on how to manage this, making it really clear to their employees. And, as an employee, I’d want to know what the rules are when moving on, to avoid potentially years of litigation!
Crowson: There are some basic things that a company can do in addition to standard practices, such as the use of non-disclosure agreements, or NDAs with respect to third parties. You should ensure that employment agreements contain confidentiality obligations, and assign intellectual property rights, including trade secrets, to the company. You should use confidential and proprietary labeling for materials, software, and other shared property. Such simple measures help you prove, when looking back several years, that a piece of information or data was a company trade secret and not something that was readily available. You should review your cybersecurity systems, and rules, and make sure that policies are up to date. And then, to the point about employees leaving, make sure they understand the rules, using severance agreements that require employees to return confidential or trade secret information and promise not to share anything. Some companies even write to the employee’s new company, warning them that someone is coming with confidential information and that the new employee should be screened from related areas of development.
Those are just some of the basic things that companies can do to help protect trade secrets when they’re not registered. In connection with joint ventures and partnerships, a raft of confidentiality obligations and other agreements need to be put into place to make sure that a company’s trade secrets are not inadvertently transferred when establishing a joint venture, for example.
Bultena: When we talk with innovative companies of any size, they’re concerned about how to secure revenue, and how to keep up with the latest developments. It’s easy for companies to forget the good housekeeping things that can be critical in the short term.
How does the protection of trade secrets differ in the U.S., Europe, and China?
Bultena: The U.S. and China are in a phase of rather aggressive competition, and this is certainly impacting the worlds of automotive, mobility, aerospace, and logistics. Is this also impacting trade secrets?
Crowson: It is, and this is particularly noticeable when it comes to the contracting piece, when a U.S. company is doing business in China, say, through a partnership. Chinese companies can be more flexible than they were years ago. Previously, Chinese law always had to apply, but now it’s more common to see New York arbitration rules apply. For that reason, it’s important that on the contracting front, one is engaged with confident Chinese counsel to help make sure the agreements don’t inadvertently transfer intellectual property. Until recently, a technology transfer was almost always required in a deal with a Chinese company, but that’s no longer the case. U.S. companies now often have more leverage in China than they think.
The other area of development, with respect to trade secrets, is that certain tribunals or jurisdictions in the United States are developing a body of law regarding trade secrets. One such organization is the U.S. International Trade Commission, or ITC, which is a bipartisan, independent agency of the U.S. federal government. If there is a trade secret misappropriation in China, and products are made incorporating that misappropriated trade secret, and then there is an attempt to import those products into the United States, the ITC believes it can take that up as a violation of U.S. intellectual property rights, and stop those products coming into the country. It’s basically an exclusion order, and the administrative agencies, and the courts try to have an extra territorial reach to protect trade secrets. In some regards, that’s broader than what they can do with patents. You need to have a U.S. patent for an exclusion order to apply at the ITC, for example. But with trade secrets, they’re trying to get at situations where there’s a trade secret misappropriation abroad, say in China, and prevent that importation of products into the U.S.
So, when planning a trade secret protection strategy, it is important to be aware of some of the remedies and jurisdictions in the U.S. that can help with trade secret violations that occur abroad.
Bultena: All the more reason for good housekeeping! The ITC was recently involved in a dispute between some well-known battery manufacturers in South Korea. This dispute was watched very carefully by those in the automotive world, and as a result, many more people are aware of the work of the ITC. What are the equivalent agencies in Europe and China?
Crowson: In Europe, the European Court of Justice is very active in intellectual property issues, especially those involving competition or antitrust laws.
In China, much of the enforcement is carried out in a system similar to our district court system. A client recently asked whether they can enforce their trade secrets and property rights in China. The response of our partner, Katie Feng, was that yes, they can, especially at the federal level, but also in the provinces—and most of that is done through a district court, effectively a court of first instance.
There’s plenty of action around trade secrets, and the courts and administrative agencies are gaining considerable experience. If the trade secret has been protected in the ways that we’ve talked about, and kept secret, there are good avenues for enforcement. Trade secret infringement involves bad actors. You can’t instantly infringe a trade secret—there’s a theft, and that’s something that courts and agencies are equipped to deal with.
Bultena: Clearly, in this area, global scale is essential. Technology goes global because of the size of the investments, so for an international market, you need to protect trade secrets on an international basis and work across jurisdictions. The potential here is exciting.
As AI becomes ever more powerful, how do we protect trade secrets that involve AI, and how do we apply patent law to something that may have been invented by AI?
Bultena: In other contexts, explainable artificial intelligence has become an issue, particularly in Europe and some other jurisdictions where we don’t necessarily know how the system comes to its conclusions. At the beginning of this conversation, we talked about the need for a trade secret to have some economic value, and to be something that is not generally known. But the word “known” is interesting here. Say I have an AI system, but I don’t know how it comes to its conclusions, is that a problem with regard to trade secrets? Or do you protect the trade secrets through the data input and the general software approach?
Crowson: How the AI comes to its conclusions could be an issue for trade secrets if it’s difficult to identify what the trade secret is. Protection of trade secrets typically starts with logging or tracking the trade secret as an asset to be protected, and in AI that can be difficult. Moreover, if an artificially intelligent system is outputting data or information in a way that’s perceivable by others, there may be a giveaway of trade secrets in that output.
The question you raised here also brings up issues in connection with patenting. If the AI system is coming up with things that are new, discovering new relationships, perhaps even inventing something, who owns that trade secret or invention? Courts in the U.S. and in Europe have recently ruled that an AI system cannot be the inventor, so it cannot be the owner of a trade secret or an innovation. Here, what was being tested was whether IP arguably created by the AI system makes the AI the innovator/inventor. Courts and patent offices are not going that far with machines, yet. They’ve decided that the developed of a trade secret or the conceiver of an invention must be human. We’ll see how that develops.
Bultena: With the U.S. and China competing over quantum computing, this could be an exciting area, especially as this has the potential to change everything from drug testing to the design of new products and facilities. It seems that artificial intelligence will be an interesting area of practice for some time to come.
Authored by Celine Crowson and Lance Bultena.
