In a case of first impression, OddzOn Products Inc. v. Just Toys Inc., the Court of Appeals for the Federal Circuit concluded that confidential information that is disclosed to an inventor is prior art and can be combined with other prior art to challenge the validity of a patent.

In reaching this conclusion, the court considered the language of the patent statute that a person shall be entitled to a patent unless, inter alia, the person did not himself invent the subject matter sought to be patented. The Court stated that "this is a derivation provision, which provides that one may not obtain a patent on that which is obtained from someone else whose possession of the subject matter is inherently prior" and noted that the statute specifically stated that the derivation provision did not constitute prior art "where the subject matter and the claimed invention, were at the time the invention was made, owned by the same person or subject to an obligation of assignment to the same person." The court commented that but for this exception, information that is obtained from someone else is prior art. The court also added that if the information is confidential, it is only prior art as to the person who had knowledge of the disclosure and it would not be prior art as to someone who did not have knowledge of the information.

Clients involved in collaborative projects should take note of this decision. It is foreseeable that if one party discloses confidential information to another party and the second party develops an invention from this information, the second party may be precluded from obtaining a patent for the invention because of the prior art effect of the initial confidential information if the first party cannot be named as an inventor. Clients involved in collaborative projects may wish at the outset to set up a joint organization to avoid the prior art effect of confidential disclosures.

This case also raises an interesting issue related to the duty of disclosure. In this case, the defendant argued that the confidential disclosure should have been disclosed to the Patent Office because it was material to patentability and therefore, the plaintiff's patent was invalid on the basis of inequitable conduct. The court declined to address this issue because it considered that prior to its ruling it was not clear that the plaintiff had an obligation to disclose the confidential information to the Patent Office. However, after this decision clients should consider whether confidential information is material to patentability and therefore, must be disclosed to the Patent Office. The Manual of Patent Examining Procedure includes guidelines on the submission of confidential information.