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Trade Secrets vs Patents: Which Approach is Right for You?

September 26, 2018

A company’s intellectual property is its number one asset. Protecting that property through patents, however, is expensive and doesn’t include certain types of content, including customer lists, which are crucial. A viable alternative is to classify intellectual property as a trade secret. The trade secret designation enjoys protection under US law and the associated costs are significantly lower.

Patents require companies to publicly disclose inventive properties. The protection they provide is also limited in time, usually lasting no more than 20 years, while trade secrets remain protected indefinitely. Many companies – like Coca-Cola, which does not hold a patent on its secret recipe – choose to protect their secrets rather than disclose them in a patent application.

The advantages of patent protection, however, are significant. Even though the protection period is limited, the safeguards it offers are considerably stronger. If independent invention occurs (through reverse engineering or otherwise), the original product, formula or process still enjoys patented protection.

Selecting whether a patent or a trade secret is the right methodology requires careful consideration, weighing the advantages and disadvantages of both options.

Patents vs. trade secrets

According to the Uniform Trade Secrets Act (UTSA), which protects trade secrets by permitting civil suits against disclosure of secrets through improper means, a trade secret is “information, including a formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value” by remaining unknown. Famous examples of trade secrets include the algorithm for Google’s search rankings, the recipe for KFC’s chicken, and the criteria for the New York Times’ bestseller list.

In contrast, a patent grants its holder the exclusive right to make, sell, or import a product or process for a pre-determined period, usually up to 20 years. The patent holders gain a monopoly on the invention. Some trade secrets are unique and inventive enough to warrant patent protection, but that would require disclosing the information publicly and spending considerable sums obtaining patent protection. Companies need to choose which path offers better ROI and fits within their overall risk strategy.

However, there are also secrets that do not qualify for patents because they are not sufficiently inventive to be granted exclusive rights or fall into areas not covered by patents, such as abstract ideas. In those cases, designation as a trade secret is the only way to protect the information or process.

Significant price difference

The most substantial advantage of a trade secret designation over a patent is cost. Patent applications are legal documents that must include great detail, which is often technical. Patents must be filed with the relevant patent offices, followed by a patent search and examination. If the patent is granted, you will also need to pay annuity fees to maintain it. The bottom line: drafting, filing and maintaining a patent requires professional involvement at every level. The process is expensive and time consuming.

A trade secret, however, does not need to be filed or approved. There are no filing fees, legal fees, or patent translation fees. It need only be designated as secret. The designation takes effect immediately, in contrast to a patent application, which could take years.

Although it’s not required, a company may choose to invest in protecting its trade secrets through non-disclosure agreements (NDA). But filing a UTSA claim in the event of stolen trade secret information does not require that an NDA was in place. A protection claim only requires that the claimant demonstrate that a reasonable effort was made to protect the information, and prove that the information was wrongly acquired. A “reasonable effort” could mean physically keeping people away from restricted areas or securing highly sensitive documents.

Additional advantages of trade secrets

With trade secrets, added value is often derived from the secrecy itself, in addition to what the secret is protecting. For example, a change in Google’s algorithm generates waves of buzz. Leaks of unreleased iPhones promote the product better than paid advertisements. People naturally gravitate toward the hidden and mysterious, providing intrinsic value in products that have a secret component.

Another big benefit of trade secrets is the indefinite period of protection, especially for companies with long-term interests. If Coca-Cola had filed for a patent when the company began selling classic Coke, its recipe would have been open to the public a long time ago. Competitors could have created generic versions of the drink that would be indistinguishable from the original.

Finally, when it comes to trade secrets, there are no government agencies regulating them or compliance procedures to follow. As long as the secret is kept from public knowledge, the company continues to benefit from it without any reporting requirements.

When patents are preferable to trade secrets

Choosing the protection of trade secrets over patents is not risk-free, however. While a patent will only remain in effect for 20 years or less, the protection it provides is considerably stronger. Trade secret protection only applies to unlawful breaches. It does not bar parties from legitimate duplication efforts such as reverse engineering in order to arrive at the secret independently.

Designating a trade secret does not prevent another party from independently developing its own version of the product, process, or formula. A rival company could even file a patent for the process and claim exclusive right to it, completely shutting out the original inventor.

Finally, a company must remain vigilant about protecting its trade secret at all times. Unintentional disclosure of a trade secret could upend the process and leave the company empty-handed. If company executives are lax about non-disclosure agreements, someone with access to the secret could reveal it. Once a secret is publicly known, it is no longer protected.

Choosing the right approach

Designating information as trade secrets or filing for patents are alternative strategies to protecting intellectual property; both offer advantages and drawbacks.

Patents, while they may be expensive and time-consuming to secure, provide extremely effective protection for a limited period: a company with exclusive use of a product or process will command the market for 20 years. It can build brand recognition and market leadership during that period in order to remain a top industry player even after the patent expires.

While a well-kept trade secret could theoretically be kept indefinitely, it’s important to recognize that it is perfectly legal to reverse engineer or copy a trade secret. A patent may only last 20 years, but during that era, the protection is stronger: independent invention is no defense in a patent suit.

In order to select the right option, a company must investigate two factors:

  • Is 20 years a sufficient period of protection?
  • During that period, is a competitor likely to reverse engineer or independently reproduce the product?

Think long-term before determining whether a patent or trade secret is right for you and be sure to make these determinations independently with regards to each product, process or formula.