Patents vs. Trade Secrets – Giving Your Business the Competitive Edge

Article originally appeared in Arizona BioIndustry Association Newsletter on 04/01/07

Patents vs. Trade Secrets – Giving Your Business the Competitive Edge

When your business develops or acquires information that is not known to your competitors, you may have more than one option for protecting it. Although federal patent law is the primary source of protection for inventors, an inventor may elect to forego patent protection and instead rely on the protection of state laws prohibiting the misappropriation of trade secrets. The decision whether to patent or keep a trade secret is an important one, and should not be made lightly.

What is a Trade Secret?
The Uniform Trade Secrets Act has been adopted by the majority of states, including Arizona. The UTSA defines a trade secret as information that both (1) derives independent economic value from not being generally known or readily ascertainable by proper means, and (2) is subject to reasonable efforts to maintain its secrecy. Examples provided by the Act include: formulas, patterns, compilations, programs, devices, techniques or processes.

Trade secrets generally fall into two categories. First, trade secrets may concern inventions or information that do not meet the criteria for patentability, and therefore can only be protected as a trade secret. Examples of this might include customer lists or ideas that are not sufficiently inventive to be granted a patent. The second category includes inventions that would also be patentable, in which case you must make a decision whether to patent the invention or to keep it secret.

What is a Patent?
A patent is a federal grant of exclusive rights given in exchange for the public disclosure of a new and non-obvious invention. In other words, obtaining a patent requires the inventor to fully disclose what might otherwise be treated as a trade secret, and, if it meets the statutory requirements, the government grants the patentee the exclusive rights to make, use, sell, offer to sell, or import the invention for almost twenty years. Almost any useful process, method, machine, or substance can be patented as long as it is truly new, not obvious in view of what has been done before, and not merely an abstract law of nature.

Advantages of Trade Secrets:
In at least two situations, trade secret protection is the clear winner. First, trade secret protection is the only option when the secret involves something that is not patentable. Second, trade secret protection may be favorable when the benefit of the technology is of very short duration. For example, if the invention will be obsolete in less time than it would take for a patent to issue (which can take several years), or if the competitive advantage is gained by being the first on the market. 

Another advantage of trade secrets is that trade secret protection is not limited in time. Thus, a trade secret may continue indefinitely as long as it continues to meet the definition of a trade secret. A classic example is the secret formula for Coca Cola. Had John Pemberton decided to patent the formula for Coca Cola when he invented it in 1886, the formula would now be free to be copied by anyone. Instead, Coca Cola remains a leader in the world’s soft drink industry based on its trade secret formula, over 100 years later. 

Other advantages of trade secret protection are that trade secrets have immediate effect, and there are no prosecution costs or maintenance fees in order to establish a trade secret or to keep it in force. Nevertheless, trade secrets may still be expensive to maintain because of the costs associated with keeping the information secret. These costs include physically restricting access to the grounds and buildings where the secret is kept or used, restricting information to individuals in the company who need to know, labeling information as confidential, protecting electronic forms of trade secrets via means such as encryption, firewalls, and password protection, and drafting contracts for employees, suppliers, customers, and others, which clarify the existence of trade secrets and the duty not to disclose them.

Advantages of Patent Protection
Patent protection is generally more secure than trade secrets because a patent protects your rights regardless of what anyone subsequently develops. For this reason, a technological breakthrough in a highly competitive area usually warrants patent protection. You would hate to read in a trade journal that someone else had patented your invention. Even worse, you would hate to be sued for infringing that patent, and possibly denied rights in your own invention! Each of these unfortunate scenarios is possible with a trade secret.

Patent protection is also more secure because the law of trade secrets does not prevent others from acquiring and using trade secrets, it merely prevents the acquisition by improper means. In other words, if someone were able to independently discover or reverse engineer Coca Cola’s secret formula, trade secret protection would not prevent them from making a competing identical product. Accordingly, if your invention is susceptible to reverse engineering, a trade secret is of little or no use. Patent protection, on the other hand, grants the right to exclude third parties making or using an invention for a limited time, period. Moreover, trade secret protection can be lost overnight if the secret is publicly disclosed, even if the disclosure was unintentional. For these reasons, potential licensees, purchasers, and investors are typically more willing to pay for technology that is patented, versus kept as a trade secret.

Whether to maintain your company’s information as a trade secret or to seek patent protection is a decision which depends on a host of factors, and one which you should evaluate with an attorney experienced in intellectual property law. The decision is extremely important, and must be considered on a case-by-case basis by examining various business, commercial, and legal considerations.

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