Publication of an algorithm prevents the algorithm from being a trade secret, right? Not necessarily. The Federal Circuit just reminded us that under certain circumstances that may not be the case.
Masimo Corporation and Ceracor Labortories, Inc. (collectively, “Masimo”) sued True Wearables, Inc. (“True Wearables”) and Dr. Marcelo Lamego alleging a number of causes of action, including misappropriation of trade secrets. Specifically, Masimo alleges that Dr. Lamego misappropriated Masimo’s TSS algorithm used for applications such as optimizing accuracy of oximeters, which estimate the concentration of total hemoglobin in the blood. This is sometimes referred to as determining oxygen levels in the blood.
To estimate the hemoglobin concentration, an oximeter is placed around a person’s finger and different wavelengths of light are emitted from LEDs. The oximeter then measures how much light the fingertip absorbs by determining the amount of light that emerges from the other side of the fingertip for each wavelength. Using different coefficients for each wavelength, the total concentration is calculated as essentially Ax + By + Cz + …, where x, y, and z are the absorption measurements and A, B, C are the weighting coefficients. “The coefficients are determined by optimizing the  equation to fit the results of blood tests conducted during a clinical trial.” However, the optimization cannot be done by hand because there may be up to 257 coefficients. Therefore, a computer algorithm is used to determine the optimal coefficients for a particular oximeter design.
Prior to founding True Wearables, Dr. Lamego worked at Ceracor and developed the TSS algorithm for calculating these coefficients, which is the alleged trade secret at issue. During an internal presentation, Dr. Lamego presented two different variations of the TSS algorithm. At some point after leaving Masimo, Dr. Lamego founded True Wearables where he developed the Oxxiom pulse oximeter and filed patent applications on certain aspects of its design.
The United States Patent and Trademark Office (“USPTO”) issued a notice of allowance for one of the patent applications, the ‘158 Patent Application, on January 11, 2021. Masimo alleges that the ‘158 Patent Application “contains one of the variations of the TSS that Dr. Lamego developed” while at Ceracor. Masimo moved for a preliminary injunction to prevent the ‘158 Application from becoming public when it issues as a patent, arguing the patent would improperly expose Masimo’s allegedly trade secret algorithm.
The District Court for the Central District of California evaluated the Winter factors to determine whether to grant the motion for preliminary injunction. See Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008). “Under the Winter factors, a plaintiff must show that (1) it is likely to succeed on the merits, (2) it is likely to suffer irreparable harm, (3) the balance of equities favors the plaintiff, and (4) the injunction is in the public interest.” Further, [i]n the Ninth Circuit, a court may enter a preliminary injunction ‘if the moving party demonstrates either a combination of probable success on the merits and the possibility of irreparable injury or that serious questions are raised and the balance of hardships tips sharply in his favor.’”
The district court found that the TSS algorithm was not generally known and Masimo would likely show that Dr. Lamego misappropriated the TSS algorithm, so Masimo was likely to succeed on its trade secret claim. The court also “found that the risk of irreparable harm and the balance of the equities” favored a preliminary injunction. Further, the court determined that a preliminary injunction would be in the public interest. Therefore, the district court issued an injunction.
On appeal, True Wearables and Dr. Lamego argued that the district court erred in determining that Masimo was likely to show that the TSS algorithm was a trade secret. Under the California Uniform Trade Secrets Act (“CUTSA”), “information is eligible for trade secret protection if it (1) ‘[d]erives independent economic value, actual or potential, from not being generally known to the public or to other persons who can obtain economic value from its disclosure or use,’ and (2) ‘[i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.’”
True Wearables argued the TSS algorithm is not a trade secret because an IEEE conference paper “disclosed an algorithm equivalent to the TSS and that [the paper] has been cited over 1,200 times.” Further, True Wearables’ expert testified that “variants of the TSS have appeared in statistics textbooks since the early 1960s” and that “an algorithm equivalent to TSS was ‘widely known and widely used by the statistic community prior to … the ‘158 [Patent] Application.’”
The district court was not persuaded, noting that while the IEEE article was “not obscure,” the publication did “not mean that the particular techniques described in them were ‘generally known’ to people who could obtain economic value from developing noninvasive blood content detectors.’” On appeal, True Wearables argued that the district court improperly deemed the publication irrelevant. However, the Federal Circuit disagreed, stating that ‘[t]he district court simply found that the [publication] did not conclusively show that the TSS was generally known among those who could obtain economic value from its disclosure.”
Dr. Lamego’s own practices and arguments to the USPTO were also contrary to his position that the TSS algorithm is not a trade secret. Masimo explained that “Dr. Lamego protected the TSS as a trade secret while working [for them],” including in an email to another employee describing TSS as ‘not known in the literature and … a trade secret.” Further, “[a]fter founding True Wearables, Dr. Lamego labeled a notebook including TSS and related material as containing trade secrets. And finally, “Dr. Lamego argued to the [USPTO] that the TSS was not ‘common knowledge.’”
The Federal Circuit upheld the issuance of the preliminary injunction, despite the IEEE publication, noting that “the evidence shows that TSS was known in the field of statistics, without evidence that the statistical principle had particular application to the plaintiff’s field or a related field.” Further, True Wearables’ expert’s “declaration did not tie the particular statistical information to the field of medical devices for measuring blood characteristics, or even any related field.”
The Federal Circuit noted that “[u]ltimately, the class of persons who could obtain economic value from the disclosure of the TSS may well be broader than just those entities who develop noninvasive blood content detectives…. However, based on the limited record developed in this preliminary injunction proceeding, the district court was not required to conclude that the fact that the TSS was known to at least some persons within the statistics community meant that it was generally known to persons who could obtain economic value from it.” Therefore, the Federal Circuit found that “[a]t a minimum, Masimo has raised a serious question as to the validity of its trade secret” and that was enough to justify the preliminary injunction.
As the case progresses, we will see whether True Wearables and Dr. Lamego are able to tie the prior publication to the applicable field. Regardless, this case is a good reminder that it is important in trade secret cases to show that prior publications can be tied to the applicable field to show the trade secrets would be generally known by those who could obtain economic value.