A recent decision from a California federal district court should make patent prosecutors and their clients more alert when looking at recent prior art references: they may refer to patent applications filed by competitors who have gained improper access to trade secrets. The district court held that knowledge of such a patent application started the three-year clock on asserting a theft of trade secrets claim, resulting in a loss of rights.

In 2011, Elite Semiconductor filed a U.S. patent application claiming an advance in defect diagnosis in semiconductor manufacturing. In 2013, an office action cited four prior art references, including one in a 2011 patent allocation filed by Chenmin Hu. Elite’s patent counsel advised Elite’s CEO of this development in May 2013, providing him with a detailed analysis comparing the Hu application to Elite’s own technology. The claims in the Elite application were modified and a patent issued later that year.

Chenim Hu was the CEO of Anchor Semiconductor, but the patent application was never assigned to Anchor and was abandoned by 2019. Iyun Leu, the CEO of Elite, professes to never have heard of Chenmin Hu in 2013, and to have been unaware that Mr. Hu was the CEO of a competitor.

Neither Mr. Leu nor his patent counsel investigated Mr. Hu’s affiliation. The matter was treated as a technical patent drafting matter, the Elite patent claims were amended, a patent (the ‘013 patent) issued, and life went on.

In 2016, Elite learned that Taiwan Semiconductor Manufacturing Corporation (TSMC) was using a product that practiced the claims of ESI’s ‘103 patent. A two-year dialogue ensued in which ESI sought to settle the matter by means of a patent license. The investigation associated with that dialogue led Elite to Anchor Semiconductor as the supplier of a potentially infringing product. In 2019, Elite realized that Mr. Hu was the CEO of Anchor.

Its suspicions aroused, it began to suspect that a former employee had passed on to TSCM or Anchor the source code that was central to the Elite invention. It then analyzed the Hu patent application and concluded that it spelled out Elite’s trade secrets in detail. Elite filed suit against Anchor in 2020, alleging theft of trade secrets.

Both California and federal trade secrets statutes have a three year statute of limitations. The running of the statute is delayed (tolled) until the victim has discovered – or ought to have discovered - the theft. Elite’s 2020 lawsuit was commenced much more than 3 years after the alleged 2011 theft of source code, but Elite contended that the statute of limitations should have been tolled until 2019 when, as a result of its lengthy discussions with TSMC, it began to suspect that Anchor had improperly gained possession of its source code.

The judge disagreed. He ruled that, had Elite exercised reasonable diligence in 2013 when it had an opportunity to review the Hu patent application cited as prior art against it, Elite would have begun an investigation that would have led it to conclude that its trade secrets had been stolen. The judge was not impressed by the fact that Hu never assigned his patent application to Anchor. Had Elite been diligent, he said, it would have made the connection.

The judge said that it is not necessary for a victim to have unassailable proof of the trade secret theft in order to start the running of the limitations period. It is enough for there to be a suspicion of the theft.

The judge granted summary judgment to Anchor on the basis of the statute of limitations, saying that the three-year clock started in May 2013, when Elite’s CEO received the Hu patent application and an analysis from Elite’s patent counsel detailing the similarities between the Hu application and the Elite technology.

Elite has appealed this decision to the 9^th Circuit Court of Appeals. If the decision is upheld, it will highlight the need for patent applicants and their counsel and to be alert to the possibility that prior art patent applications may be a sign of theft of trade secrets. Diligence may require investigating the links between named inventors and competitors, even if they are not evident from the patent wrapper. Failing be alert to this possibility may result in a loss of rights.