When a business develops valuable information not known to its competitors, it is often faced with a difficult and important decision: whether to disclose that information and seek federal patent protection, or to maintain the information’s confidentiality relying instead on state trade secret protections. While both options require a nuanced analysis of the subject business and its particularized needs, this article provides several guiding principles to aid the decision-making process.
As an initial matter, it is important to understand the high-level differences between patents and trade secrets. On one hand, you have the patent: what is oftentimes considered the gold standard for invention protection. A patent is a federally granted legal monopoly given in exchange for public disclosure of an invention. If successful, the patent lasts for 20 years from its filing date and prohibits all others from reverse-engineering and/or independently developing an infringing product. After the conclusion of the 20-year term, however, the patented invention is dedicated to the public. Trade secrets, on the other hand, are just that — secrets. Further,unlike patents, trade secrets are protected under state law and theoretically may last into perpetuity. Trade secret law, however, does nothing to prevent competitors from reverse engineering or independently developing the product or invention.
The obvious case for trade secret protection is where the subject information is not publicly known, but is otherwise nonpatentable. However, where both patent and trade secret protection are available, the below factors are instructive.
Generally speaking, patents are far more expensive than trade secrets. However, that cost comes with the added benefit of being considerably easier to enforce than trade secrets. Patent registration is a complex, lengthy and formalized process often costing tens of thousands of dollars and requiring the assistance of specialized legal counsel. That said, however, patents are comparatively more straightforward to enforce because the patent application process leaves behind a detailed record supporting the dates and details of an invention and the scope of its enforceability.
Unlike patents, trade secrets are informal and do not require any specific form or application. Thus, establishing trade secret protection is essentially free. Nonetheless, preventing the secret’s disclosure — an essential element of maintaining a trade secret — may still prove expensive. For example, a business may need to take actions such as restricting physical access to the secret information, limiting disclosure to only certain employees, labeling certain information as confidential, encrypting data, employing firewall and password protections, and drafting various contracts for its employees, customers and suppliers defining the trade secret and prohibiting its disclosure. Further, enforcing trade secrets can be problematic because it requires analysis of comparatively vague legal issues, such as whether the defendant had access to and acquired the trade secret improperly.
Another advantage to trade secret protection is that it is immediately effective and may last into perpetuity, while patent registration — and therefore full patent protection — often takes upward of two years, or more, to complete. For this reason, companies whose products have a very short commercial lifespan (less than two years), such as many software products, may prefer trade secret protection over patents.
Likewise, because patent protection lasts for only 20 years from the date of filing for the patent, companies will often choose trade secret protection when its products have a very long commercial lifespan, such as product formulas and manufacturing methods. By way of example, Coca-Cola Company has successfully protected its famous Coca-Cola beverage formula as a trade secret since 1886. Interestingly, had Coca-Cola decided to patent its formula, the protections would have expired over 100 years ago.
Reverse Engineering, Independent Discovery and Public Availability
Another relevant consideration is whether the product or information is likely to be reverse engineered or independently developed. If so, patent protection is generally favored, especially where the invention is likely to be regularly displayed to the public. Remember, trade secret law provides no protection against a competitor viewing, analyzing, reverse engineering and duplicating a product. Such conduct, however, presents a cut-and-dried case for patent infringement.
Conversely, however, for inventions that are kept internally and not incorporated into a publicly available product — again, think manufacturing processes and unique formulas — trade secret protection may be best because there is little fear that a competitor will be able to independently ascertain the secret information. This is further bolstered by the unlimited duration of trade secret protection.
Business Strategy Considerations
Generating capital is an important activity for all businesses and two key strategies — bringing on investors and licensing technology to other entities — support patent registration because both generally require disclosing the subject information or invention.
For example, a company seeking investors will likely need to disclose the company’s intangible assets. While nondisclosure agreements provide some level of protection, the cost and difficulty of maintaining a trade secret necessarily increases each time the subject information is disclosed. Licensing technology also requires disclosure, therefore, patent registration is typically better suited for companies seeking to generate capital by licensing their technology to other entities.
Further, it is worth noting that investors often prefer patents over trade secrets because they are better-defined and offer more predictable and reliable protections.
There truly is no one-size-fits-all analysis for determining whether patent or trade secret protection is best for your business. That said, however, an important first step is to ask yourself: what is the end goal for the technology? Do not take this question lightly. Remember, in order to maintain trade secret protection, the information must be kept a secret. Thus, by disclosing the technology and filing for a patent, you are generally giving up your right to trade secret protection. Moreover, there is no guarantee that the patent application will ultimately be granted, leaving open the possibility that your highly valuable asset may be left with no protection at all.
Accordingly, if there is any doubt about whether you should disclose or keep the information a secret, consulting with an expert intellectual property attorney is likely your best bet.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.