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.

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.