Businesses that create a lot of intellectual property can face uncertainty about how to best protect their inventions from misappropriation by competitors. On the one hand the patent system provides a path to obtaining meaningful if constrained protections that competitors cannot ignore. On the other hand, choosing to treat an invention as a trade secret offers a significant benefit—secrecy—while imposing other limits on how the invention can be used. There are some useful principles to help businesses decide whether to pursue a patent or stick with the trade secret approach.
Patents offer an exclusionary but public defense
Someone who is unfamiliar with the way technology is developed could be excused for thinking that the chief goal of every innovator is to produce a big portfolio of patents. After all, a patent can be enormously valuable, whether as a source of licensing revenue or as a legal tool to prevent competition. But patenting an invention is not necessarily the right path in every case. When comparing patents to trade secrets, these features of patents stand out:
- Patents grant robust exclusivity. The big reason to pursue a patent is the right it grants to its holder to exclude others from making, using, selling, or importing the invention within the United States. Exclusivity can be a huge deal in cases where competitors are pursuing similar lines of research. The first competitor to obtain a patent for an invention can effectively bar the other from cashing in on the fruits of its work.
- Patents are public records. One of the major functions of a patent is to put the rest of the world on notice that the patent holder has been granted an exclusive right to the invention. The only way a patent can serve this notice function is by being publicly available. In practice this means that competitors are able to see exactly how the invention is put together. This can be a big gift to competitors, especially for inventions that are exceptionally hard to reverse engineer, like pharmaceuticals. (Bear in mind that patent applications may be kept confidential while they are under review.)
- Patents are time-limited. A patent’s exclusivity typically lasts for twenty years from its earliest filing date. Patents cannot be renewed. Once a patent expires, its invention falls into the public domain, where competitors may freely copy it or incorporate previously protected elements in their own inventions.
Trade secrets may offer long-term protection but without enforceable exclusivity
Unlike a patent, a trade secret doesn’t require a formal process to exist. Provided that an invention meets the applicable legal standards it will be treated by the courts as a trade secret. Trade secrets are protected by state law. Many states, including California, have adopted the Uniform Trade Secrets Act (UTSA), Cal. Civ. Code § 3426-3426.11. Under the UTSA trade secrets include information that a business routinely keeps secret to give itself a commercial advantage. Examples of trade secrets can include customer data, internal market research, and working methods. They also include un patented inventions.
To protect an invention as a trade secret a business needs to be mindful of the various ways a piece of information can lose its trade secret status. Whether something qualifies as a trade secret is a complex, fact-based question. Some of the factors that a court will use to determine if an invention is really a trade secret include the invention’s commercial value, the extent to which the business has taken steps to keep the information secret (through the use of nondisclosure agreements, enforcement actions, and so on), and the extent to which the business shares the information outside of its organization.
Protecting an invention as a trade secret has a number of salient features worth bearing in mind:
- Trade secrets can be perpetual. Unlike a patent, a properly defended trade secret can endure indefinitely. The secret formula for Coca Cola is probably the most famous example of a long lasting trade secret. So long as the invention qualifies as a trade secret, the business that owns it can sue others for misappropriation. The formula for Coke also serves as an example of why a business might opt for the trade secret route: if a process or invention is critical to a business’s revenue, disclosing it in a patent might be profoundly counter productive.
- Trade secrets do not confer exclusive rights. The biggest weakness of taking the trade secret approach is that a competitor can come up with the same invention, whether through independent development or by reverse-engineering the “secret” invention. Unless the competitor has genuinely committed an act of misappropriation, for example by hiring away a former employee who unlawfully discloses the invention’s details, the former owner of a trade secret may have little recourse. Worse, the competitor could potentially file a patent for the invention, leading to a risky legal showdown.
- Trade secrets require vigilance. Protecting an invention as a trade secret requires careful planning and rigorous enforcement of confidentiality policies to ensure that the invention doesn’t accidentally cease to be right fully called a secret. Businesses do this by restricting who has access to the invention, preventing disclosures through nondisclosure agreements, and other steps. One side-effect of the need for genuine secrecy is that the invention may be significantly harder to use in a context that reaches beyond the confines of an organization. For example, it may not be easy to use it in a joint partnership context without risking the loss of trade secret status.