A company’s intellectual property is its number one asset. However, protecting that property through patents 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 disclose inventive properties publicly. Their protection is also limited in time, usually lasting no more than 20 years, while trade secrets remain protected indefinitely. Like Coca-Cola, which does not hold a patent on its secret cola-recipe, many companies 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, its safeguards 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.
Trade Secrets vs. Patents
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 a better return on investment and fits their overall risk strategy.
However, some secrets 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 and are 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.
However, a trade secret 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 a 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 susceptible documents.
Additional advantages of trade secrets
With trade secrets, added value is often derived from the secrecy itself and 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 with a secret component.
Another big benefit of trade secrets is the indefinite protection period, 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, no government agencies are 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, its protection is considerably stronger. Trade secret protection only applies to unlawful breaches. It does not bar parties from legitimate duplication efforts such as reverse engineering to arrive at the secret independently.
Designating a trade secret does not prevent another party from developing its own version of the product, process, or formula independently. A rival company could even file a patent for the process and claim an exclusive right, completely shutting out the original inventor.
Finally, a company must remain vigilant about protecting its trade secret. Unintentional trade secret disclosure 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.
While they may be expensive and time-consuming to secure, Patents 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 to remain a top industry player even after the patent expires.
While a well-kept trade secret could be secret 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 the protection is stronger during that era: independent invention is no defense in a patent suit.
To select the right option, a company must investigate two factors:
- Is 20 years a sufficient period of protection?
- Is a competitor likely to reverse engineer or independently reproduce the product during that period?
Think long-term before determining whether a patent or trade secret is right for you. Be sure to make these determinations independently regarding each product, process or formula.
Morningside equips the world’s leading organizations with a full suite of end-to-end intellectual property and language solutions. With over 4,000 clients in 55 countries, Morningside is globally recognized for its subject matter expertise and technology innovation in regulated markets such as IP, legal services, life sciences, and corporate compliance. Our IP management solutions and translation services ensure your ideas reach new markets and audiences seamlessly while allowing you to do more with your budget. Global 500 companies, international law firms, and regulatory bodies rely on Morningside as a trusted partner to make intelligent choices for their most valuable assets. www.morningtrans.com
Questel’s mission is to facilitate the development of innovation in an efficient, secure, and sustainable way. Questel is a true end-to-end intellectual property solutions provider to over 15,000 clients and one million users across 30 countries. We offer a comprehensive software suite for searching, analyzing, and managing inventions and IP assets. Questel also provides services throughout the IP lifecycle, including prior art searches, patent drafting, international filing, translation, and renewals. When combined with our IP cost management platform, these solutions deliver clients an average savings of 30-60% across the entire prosecution budget. www.questel.com