What's Your Winery's IP Worth?

How vintners protect valuable intellectual property

by Jane Firstenfeld
Chardonnay from Kendall-Jackson was the subject of a lawsuit in 1992, when K-J founder Jess Jackson alleged that he achieved residual sugar through a secret fermentation process that his winemaker took to a new employer.
Napa, Calif.—Every business has a duty to protect its own intellectual property (IP) and avoid infringing others’ rights. That was the message delivered at IP Issues in the Food and Beverage Industries, a two-day seminar presented by The Seminar Group in Napa, Calif.

    Editor's Note

    Read more about intellectual property in the Practical Winery & Vineyard section of Wines & Vines' November issue.
Robert B. Burlingame, counsel with Pillsbury Winthrop Shaw Pittman LLP, co-chaired the Oct. 16-17 event with Christopher J. Passarelli of Dickinson Peatman & Fogerty

Nowhere is the IP issue more apparent, critical and complex than in the food and beverage industries, where IP laws and principles often intersect with industry-specific regulations and practices.

Companies have various tools to protect IP, including trade secrets, patents, copyright and trademarks. When and how to apply these protections are decisions that ideally should be made thoughtfully and in advance. Each has its own requirements, and they are mutually exclusive: For instance, you can’t trademark or patent a trade secret.

Of course, legal advisors can help you make the proper choices.

Keeping secrets
Judith M. Schwimmer, vice president and legal counsel, manages IP assets and tests products for consistency and quality for Jackson Family Wines. Her presentation focused on trade secrets.

A trade secret, she specified, gives your company economic value by virtue of maintaining its secrecy. Examples might include designs, chemical formulas, manufacturing processes, computer programs, customer/vendor lists or recipes. Trade secrets by definition can not include patents, copyrights or trademarks, all of which are officially public.

Patents are reserved for novel, non-obvious inventions, and last for 15-20 years, she said. Trademarks require public disclosure and last for the duration of their use; copyrights for original works of authorship endure for 70 years after an author/artist dies or 95 years after original publication.

Trade secrets, on the other hand, can last forever—as long as they are kept. Disclosure is not allowed. Given that the other three protections all require publication, “It’s difficult for trade secrets to co-exist with patents,” Schwimmer pointed out.

The advantage is that, if you can keep them under wraps, trade secret protection is indefinite and generally inexpensive. The downside is that trade secrets are terminated if they are disclosed, either deliberately or inadvertently.

To maintain them, companies must establish and enforce strict internal policies. Trade secrets offer no protection against outsiders who might develop the same processes independently—conceivably, a competing company could create the same “secret” and then patent it.

Until 1979, trade secrets were protected with state-by-state common law tort. That year, most of the United States adopted the Uniform Trade Secrets Act (UTSA). (Not all states subscribe: New York and Massachusetts, for example, have separate but similar state regulations.)

The U.S. government added some teeth with the Federal Economic Espionage Act of 1996, which carries the threat of up to $5 million in fines plus fees and restitution for violation of trade secrets.

How can you get and keep rights to your trade secrets?
• Identify what is proprietary and valuable
• Determine if your secret is protectable (i.e.: not in the public domain)
• Restrict access
• Establish proper agreements with both employees and third parties who might have access to the information
• Educate employees about your policies and their responsibilities
• Pursue all known breaches of confidentiality.

Perhaps the most famous examples of trade secrets are (and remain) the original recipe for Coca-Cola and the 11 herbs and spices in Kentucky Fried Chicken (supposedly known to only two living people, who cannot travel on the same plane together).

Plugging leaks?
Keeping secrets is not a natural human trait; eventually (perhaps inevitably) information leaks out. Before opting for litigation, make sure who exactly knows the secret. Your business partners may not always know the law.

According to Schwimmer, most leaks happen when key people leave the organization. That’s when litigation starts. What to do?

Does your secret provide a significant competitive advantage or product differentiation? A marketing advantage?

“Federal courts go with narrow restraints; courts will not enforce overly broad non-compete agreements,” she said. “In California, these are very hard to enforce.”

To enforce trade secrets, be creative in drafting the non-compete wording in employment contracts. In general, Schwimmer said, in California a former employee can join a competitor but not reveal trade secrets.

Breach of contract or unfair competition may work in your favor if you seek legal remedies including injunctive relief or punitive damages for your loss.

“It’s not that easy to sue, and few suits are successful,” Schwimmer said. Nevertheless, she estimated that trade secrets in the United States have a value of $200 billion per year, a sum that has doubled every 10 years for the past 30 years.

If you get to court and seek discovery, you will have to publicly disclose the trade secret: It’s a double-edged sword. If a former employee caused the leak, businesses owners are almost twice as likely to prevail in court as when the secret is revealed by a third party (e.g., a supplier).

Schwimmer cited a case familiar to her and the wine industry. In 1992, Kendall-Jackson Chardonnay was wildly popular among consumers.

K-J’s original winemaker moved on to a competitor; K-J founder (and attorney) Jess Jackson sued and won on grounds that the Chardonnay formula belonged to the company, not the winemaker, although residual sugar, retained by a “secret” fermentation process, was widely known within the industry.

“Innovation is a top business goal and a competitive advantage,” Schwimmer said. To guard innovations, she recommended, audit your company, identify trade secrets, train employees and respect the trade secrets of third parties. Establish processes to restrict access to valuable information and investigate breaches of confidentiality.

Patently obvious
Every would-be inventor is familiar with the concept of patents, which allow the patent holder to make, use and sell his invention for 20 years from the initial filing date. John R. Wetherell, Ph.D., from Pillsbury Winthrop Shaw Pittman LLP, presented details of the process and its benefits.

Patent protection proffers the inventor a “negative” right: the right to prevent others from using the process or device during the patent period. The theory behind them is that patents encourage investment by creating a barrier to competitors. When it expires, society then benefits from free access, Wetherell explained.

Patent holders may develop cross-licensing agreements allowing others to use the patented invention. Patents protect against reverse engineering, and because they are published in public records, there is no requirement to maintain secrecy.

Once a patent is issued, Wetherell said, it can serve as a marketing tool to consumers. A patent that is merely “pending,” on the other hand, may create “fear, uncertainty and doubt,” otherwise known as FUD.

Patents are licensable assets, and thus can be used to generate revenue through venture capital and/or financing.

What is patentable?
In the United States, according to Wetherell, “just about anything can be patented” except for purely mental processes, laws of nature, mathematical algorithms alone, nebulous concepts or ideas or statements of intended results without teaching the public how to apply them.

Examples of wine industry patents include methods of fermentation and purifying compounds from plants; machines like fermentors and fractionators; articles of manufacture such as synthetic stoppers or improved wine glasses.

Other candidates include compositions of matter, i.e., drugs isolated from plants, absorbents for undesirable chemicals, DNA encoding useful traits of grapes and transgenic plants.

It may seem as if there is little left to be invented, and in fact, Wetherell said, “Most patents these days are for improvement on existing patents.”

Patent requirements are:
• utility: The invention must be useful
• novelty: It must be previously unknown
• non-obvious
• adequate description must be provided
• must not be a mere curiosity, illegal or immoral.

“If it’s something in the public domain, you don’t deserve a patent,” Wetherell stressed. That means it cannot have been published in “prior art,” aka: any type of published research or description in academia or any media anywhere in the world.

For this reason, discovery of “prior art” makes patent litigation expensive.

The definition of “non-obvious” in the patent application is partly subjective, in regard to the “level of ordinary skill” in the “art” (e.g., mechanical engineering or chemistry).

Objective indicia supporting the patent include commercial success, a long-felt need for this new thing, the failure of others to effectively achieve it, unexpected results or synergy and, Wetherell said, “disbelief by others.”

The successful patent will include enablement—clear, complete disclosure not requiring undue experimentation by others. It must also be teachable.

Sound complicated? That’s why there are patent attorneys. Wetherell recommended, “File a patent application before any public disclosure.”

Upcoming IP reports will cover trademarks and copyrights and regulatory considerations from other legal experts.

Posted on 10.29.2014 - 11:16:30 PST
If you would like more information on this seminar please visit The Seminar Group's website. There is a course materials book and a CD recording of the seminar available

Danielle Bingham