Playing Your Cards Right: Trade Secret Or Patent? – Trade Secrets & More Latest News Here

In most cases, the proper Intellectual Property (IP)
protection for an invention is a patent. But there are times when
you might want to consider a trade secret instead. Ultimately, the
choice comes down to whether you need to show your hand or keep
your innovations close to your chest.

Many factors must be taken into account when determining how to
protect a new technology you have developed: from the
invention’s licensing potential to the pace of development and
level of competition in the industry. Thoroughly understanding the
relative strengths and weaknesses of trade secrets and patents is
necessary before choosing one or the other to safeguard your
IP.

What is the difference?

Trade secret

A trade secret is a piece of confidential information regarding
a product, service or commercial process that is known only to a
limited number of people. Oftentimes, it is kept secret through a
binding civil contract such as a non-disclosure agreement (NDA) or
other confidentiality agreement. To be considered a trade secret,
not only must the owner take reasonable steps to maintain the
information’s confidentiality to a limited number of people,
but it must also derive commercial value from the fact that it is
not known to the public.

The most “famous” trade secret is almost certainly the formula for Coca-Cola,
first devised by Atlanta-based pharmacist John Pemberton more than 130 years ago. His
original “temperance drink,” created during a brief
period of prohibition in Georgia, boasted of “the valuable
tonic and nerve stimulant properties of the coca plant and cola
nuts.” Pemberton and his son sold the patent for the tonic in
1888 to fellow druggist Asa Griggs Chandler, who tweaked the recipe
together with Frank Robinson. In response to mounting controversy,
however, the formula was again modified to substitute coca leaf extract for cocaine
in the first years of the 20th century. Many competitors have
offered similar soft drinks since, as most of Coca-Cola’s
ingredients are publicly disclosed, but the
exact recipe is still a very closely guarded secret.

Perhaps the oldest trade secret is the recipe for Chartreuse. The herbal liqueur
has been commercially produced by Carthusian monks in the
Chartreuse mountains of France since 1737, based on a 1605 formula.
Other notable examples include the formula for WD-40 lubricating
oil, The New York Times bestseller list’s criteria and the Big Mac sauce recipe from
McDonald’s.

Patent

A patent, by contrast, is a legal right to exclude others from
exploiting an invention for a period of time — be it a
machine, manufactured object, technological method or industrial
process. These grants are issued by a national or regional
authority and recognize the patentee as the legal owner of the IP
in question. An invention must also meet certain criteria to be
accepted by a patent examiner. In all jurisdictions, these
requirements include novelty, industrial applicability and
non-obviousness (also known as an inventive step). Jurisdictions
vary on standards regarding what subject matter is eligible for a
patent, for instance, under what circumstances software may be
patented.

As part of the patent application process, the invention is
fully disclosed by means of an abstract, description, claims
regarding its functions and drawings illustrating those operations.
This record of the subject matter is then archived by the patent
office and made publicly available through its database —
usually 18 months after filing.
International databases such as PATENTSCOPE, overseen by the World
Intellectual Property Organization (WIPO), also contain patent
details and may be accessed publicly as well as via private patent
search engines.

This publicity is one of the key differences between patents and
trade secrets. The latter would lose some — or all — of
their value if they were publicized and could no longer be defined
as trade secrets.

Is patent protection stronger than a trade secret?

Since a government or intergovernmental office awards patent
protection, it is regulated by the law of the pertinent
jurisdiction and enforced accordingly. Under the relevant
legislation, patent owners have clearly defined rights to take
legal action against those who infringe on their patents.

Trade secrets, meanwhile, are not issued nor overseen by IP
offices. They often do not have the same level of protection as a
sui generis IP right. That being the case, specific laws do exist
offering protection for trade secrets, for example, the Uniform Trade Secrets Act and
the Defend Trade Secrets Act in
the United States and the EU’s Trade Secrets Directive.
However, the ways in which these laws are interpreted and applied
can differ widely: In the United States, state laws can conflict
with their federal counterparts, with the former usually taking
precedence. Whereas in the EU, one court might think “reasonable steps” were
taken by a trade secret owner to protect their information (as
required by the Directive), while another might consider those
efforts insufficient. Although more and more trade secret
protection is being awarded by various courts nowadays, there is
still some uncertainty surrounding the burden of proof for meeting
requirements and the calculation of damages.

The world’s major economic jurisdictions, including the
United States, EU, Japan, China, United Kingdom and India, have
laws forbidding practices that represent unfair competition. The
misappropriation (or otherwise unethical acquisition) of trade
secrets may be cited as an act that violates the standards of fair
competition. Nevertheless, any lawsuit filed for accessing or
disseminating a trade secret without authorization still bears
juridical risks in virtually any court.

In a nutshell, there is a much more sharply defined path to
legal relief for a patent owner when their rights are infringed
upon than there is for the owner of a trade secret. The strongest
case would be if the secret were well defined and subject to an NDA
or other similarly binding contract when it was leaked or otherwise
disclosed. Exposing a trade secret in this way would be grounds for
a breach of agreement suit. Criminal charges could also be filed if
hacking or unlawful entry was involved in obtaining secured
information. That said, this does not happen particularly often and
can still be hard to prove in court.

When does trade secret protection make sense?

There are certain situations when trade secret protection is
worth pursuing. The first and most obvious is when an inventor or
organization simply does not want to make any public
disclosure of a product’s components, ingredients or
design. A patent filing would not be viable in this case because
the application would eventually be published while its examination
was pending. This leaves trade secrecy as the ideal route. As the
aforementioned examples of Coca-Cola, Chartreuse and Big Mac sauce
illustrate, food recipes lend themselves well to trade secrets.

Inventors or organizations may also want to consider trade
secret protection if they believe the costs of filing, gaining and
maintaining a patent are not justified for a particular creation.
This can be particularly common in segments of industry where
products have short market life cycles, for instance, in mobile app development.

It is worth noting here that contracts requiring the
confidentiality or non-disclosure of trade secrets can last
indefinitely as long as they are upheld by all involved parties.
Conversely, patent protection inevitably ends — typically
after a maximum of 20-25 years, assuming steady renewal payments
and any applicable extensions. That said, the term limitations, or
lack thereof, for NDAs or confidentiality agreements can vary from
nation to nation or even state to state. Therefore, it is essential
for IP professionals to be aware of even the most minor
distinctions between relevant IP laws in the jurisdictions where
they or their clients do business.

Key considerations for protecting an invention

The following matters should be considered when choosing the
best protection strategy for a particular invention:

Patent eligibility

Can the invention be patented under the laws of the relevant
jurisdictions? Pursuing patent protection would be fruitless if the
subject matter does not meet all the appropriate criteria.

Risk of misappropriation

How likely is it that the product in question would be
counterfeited? Would publicizing it via a patent application
decrease or increase this risk? Also, is the industry competitive
enough that trade secret misappropriation is something that more
unscrupulous players might be willing to attempt?
How feasible would it be to prove any violation, for instance, in
the case of an industrial process?

Ease of duplication or reverse engineering

How easy would it be to replicate the invention, either entirely
or substantially enough for counterfeit to be a significant
concern?

Also, can the invention easily be reverse-engineered? Reverse
engineering does not violate trade secret protection unless
information used in the process was wrongfully obtained. This
undertaking also does not usually infringe upon patent rights
unless the reverse engineer then attempts to file a patent
application for one or more elements of a currently valid
patent.

Chances of obsolescence

Will the invention become obsolete in a short span of time? For
example, the product life cycle of software and apps is often five
years or less. In such cases, a patent may not be worth the trouble
— even in jurisdictions where software patents are
attainable.

Market value

Both trade secrets and patents can be immensely lucrative if
they are licensed to third parties. However, the disclosure of the
trade secret in a license contract bears higher risks.
Organizations must consider all of the above factors to decide what
would ultimately be most beneficial to their bottom line.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.