Patents vs. Trade Secrets

The advantages and disadvantages of protecting business ideas with patents and trade secrets.

Patents vs. Trade Secrets

1. Introduction

1.1. What is a Patent?

1.2. What is a Trade Secret?

1.3. Patent and Trade Secret Comparison Chart

1.4. Patents vs. Trade Secrets vs. Other Choices?

2. How to Make Practical Patent and Trade Secret Business Decisions

2.1. Begin With The End In Mind

2.2. What Good is a Patent?

2.3. What Good is a Trade Secret?

2.4. Can a Patent Become a Trade Secret?

2.5. Can a Trade Secret Become a Patent?

2.6. When are Patents the Better Choice?

2.7. When are Trade Secrets the Better Choice?

3. Real World Patent and Trade Secret Strategies

3.1. Real World Patent Strategies

3.2. Real World Trade Secret Strategies

3.3. Hypotheticals

4. Conclusion – Are there Other Choices?

Notes

1. Introduction

In a perfect world, businesses would be able to plan whether to protect their best ideas[1] with patents or with trade secrets. But businesses do not operate in a perfect world. They operate in the real world. And in the real world, businesses often have to make difficult decisions based on their circumstances. In this article, I’ll discuss the advantages and disadvantages of protecting business ideas with patents and trade secrets. I’ll also provide some real world strategies for those companies that have to make decisions under less than ideal business circumstances.

1.1. What is a Patent?

“If at first the idea is not absurd, then there is no hope for it.” –Albert Einstein

A patent is a limited monopoly granted by the government to inventors in exchange for public disclosure of how to make and use their invention. The Founding Fathers included patent (and copyright) protection in the Constitution. Article 1, Section 8 of the Constitution states that “The Congress shall have Power To … promote the Progress of Science … by securing for limited Times to … Inventors the exclusive Right to their respective … Discoveries.” So inventors are entitled to patent protection for their ideas. The hard part is convincing the United States Patent and Trademark Office (USPTO) that your idea satisfies the four requirements defined in patent laws, regulations, and procedures.[2]

In order to get a patent, your idea has to meet four basic requirements:

  1. First, your idea must be subject matter that Congress has defined (and the courts have interpreted) to be patentable. Machines, processes/methods, and compositions of matter are examples of patentable subject matter. Algorithms and laws of nature (e.g. E=mc2) are examples of subject matter than cannot be patented.
  2. Second, your idea must be new.
  3. Third, your idea must be useful.
  4. Fourth, your idea must be non-obvious.

While there can be disagreement about whether your idea is new or useful, most of the back-and-forth discussions between inventors and the USPTO concern the non-obvious concept of non-obviousness. When the USPTO rejects your idea as obvious, it puts itself in the position of one skilled in the subject matter of your idea and combines ideas from multiple prior art references (some would say in hindsight) to come up with your idea.

1.2. What is a Trade Secret?

“A secret is something two people can keep if one of them is dead.” –Ben Franklin

The definition of “trade secret” is not as simple as the definition of “patent.”[3] While patent law is based primarily on codified federal law, trade secret law is based primarily on state law, state law which is sometimes codified, sometimes not. The Uniform Trade Secrets Act (UTSA)[4] defines “trade secret” as follows:

“Trade secret” means information, including a formula, pattern, compilation, program, device, method, technique, or process, that:

(i) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and

(ii) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Massachusetts, which has not adopted the UTSA, defines “trade secret” as follows:

Anything tangible or intangible or electronically kept or stored, which constitutes, represents, evidences or records a secret scientific, technical, merchandising, production or management information, design, process, procedure, formula, invention or improvement.[5]

Under the UTSA, a trade secret, therefore, must have some value as a secret, and the company must make efforts to keep the trade secret a secret.

1.3. Patent and Trade Secret Comparison Chart

Patents Trade Secrets
Who uses this strategy?
  • Gillette
  • Amazon.com
  • Kodak
  • Coca-Cola
  • What is being protected? Inventions. Anything you wouldn’t want your competitors to know.
    What’s the heart of the matter? The invention must be new, useful, and non-obvious. The trade secret must, in fact, be kept secret.
    How long does protection last? 20 years from filing and a minimum of 17 years. Indefinitely.
    How much does it cost? Approximately $5,000 – $30,000 per invention. Establishing procedures and keeping key employees.
    How long does it take to secure rights? Two to three years. As long as it takes to establish and maintain internal company procedures.
    How can my competitors defeat my rights?
  • Invent and file first.
  • Challenge the validity of my patent.
  • Design around my patent.
  • Invent and publish.
  • Hire away key employees.
  • Reverse-engineer my product.
  • Patent my trade secret!
  • How can I defeat my own rights?
  • Publicly use the invention for more than one year.
  • Sell (or offer to sell) the invention for more than one year.
  • Accidentally disclose a trade secret.
  • Fail to retain key employees.
  • Try to get U.S. and foreign patents and have patent application published by USPTO.
  • How can I make money from it?
  • By making and using products protected by the patent.
  • By licensing, which is common.
  • By selling the company.
  • By making and using products protected by the trade secret.
  • By licensing, but trade secret licensing is less common (and likely more complex) than patent licensing.
  • By selling the company, but be sure that the secrets convey. Sometimes trade secrets are treated as property, sometimes not. There should be tangible evidence of trade secrets.
  • 1.4. Patents vs. Trade Secrets vs. Other Choices?

    In many cases, businesses will make a conscious choice to protect their ideas with either patents or trade secrets. But in many cases, businesses are unaware that such a choice exists. And, of course, how one chooses to think about the issue will also depend on how the question is framed. Consider the following questions:

    • Should you protect your intellectual property with trade secrets or with patents?
    • Should you protect your intellectual property with (nonstandard mainly state-based) trade secret law or with (standardized Federal) patent law?
    • When should you protect your intellectual property with patents and when should you protect your intellectual property with trade secrets?
    • When should you consider applying for a patent on your trade secret?
    • Why wouldn’t you get a patent for your invention?
    • Should you patent your invention or risk having your trade secret misappropriated?

    The above questions are obviously designed to be pro-patent and anti- trade secret. But patent protection is not always the most appropriate course of action. Often times trade secret protection is the right choice. And although the title of this article may suggest that there are only two choices, there are more.[6]

    2. How to Make Practical Patent and Trade Secret Business Decisions

    2.1. Begin With The End In Mind

    “The Seven Habits of Successful People” by Stephen R. Covey teaches that we should “begin with the end in mind.” Ultimately, decisions about intellectual property are business decisions. And most businesses are in business to make money. Therefore, your decisions about intellectual property (and about all business decisions, for that matter) should consider the financial results you are trying to achieve.

    In business, you do not have to know all of the answers. You just have to know which questions will lead you to the answers. Therefore, beginning with the end in mind, ask yourself these questions:

    1. What event(s) prompted your company to act?
    2. What goal(s) are you trying to accomplish?
    3. When must the goal(s) be met?

    One could take the analysis a step further and consider the cost and likely outcome of each approach, analyze the probability of each contemplated outcome, construct a decision tree, and choose the statistically “best” approach.

    2.2. What Good is a Patent?

    The answer is, of course, it depends. The rights granted to inventors under the Patent Act include the right to exclude others from making, using, or selling your invention throughout the United States. Practically speaking, this means that you can use your patent offensively to request licenses from competitors (either through negotiations or litigation) or defensively to reject requests for licenses from competitors. You can’t stop your competition from infringing your patent rights, but you can sue them, and you may even be able to recover triple damages in court.[7]

    2.3. What Good is a Trade Secret?

    A trade secret, broadly speaking, is anything that you wouldn’t want your competitor to know and that you have taken steps to protect. A trade secret, as long as it is kept secret, gives you an advantage over your competitors. It is worth noting that trade secret rights are rarely litigated. Why? Because plaintiffs don’t want to expose their trade secrets in court.

    2.4. Can a Patent Become a Trade Secret?

    A patent is, by definition, public, so it can never be converted back into a trade secret.

    2.5. Can a Trade Secret Become a Patent?

    A trade secret can be the subject of a patent application. And if the patent application never matures into a patent, the applicant can fall back on trade secret protection, because U.S. patent applications are not published until a patent issues. However, in order to bring U.S. laws in more in line with patent laws from other countries, applicants who indicate an intent to file for both U.S. and foreign applications will have their applications published (and their trade secrets exposed) 18 months after filing.

    2.6. When are Patents the Better Choice?

    Patents are never your only choice. You can always choose trade secret protection.

    If your product can be reserve engineered, then patents are preferable. If reverse engineering reveals something that you had been protecting as a trade secret, then the subject of your trade secret is no longer secret and hence no longer a trade secret. In this case, patent protection is preferable.

    If you believe that your invention is likely to be invented by a competitor, then it makes sense to pursue patent protection. The worst case scenario would be for you to choose trade secret protection, have your competitor independently come up with the same invention, patent it, and then require you to pay a licensing fee for your own invention!

    If you need to publicly disclose your idea, then patents are preferable. For example, you may have a software invention that your sales force needs to demonstrate, describe, and offer to sell. When you file your patent application, you have “patent pending” status and do not lose any of your pending rights by publishing and offering to sell your invention. In this case, it may be easier to file for a patent, rather than try to have each and every prospective customer sign a nondisclosure agreement.

    If the subject matter of your invention is patentable, if you have the budget to pursue (prosecute) a patent application, and if you expect to be able to extract the most value from your invention during the course of the patent’s 20-year term, then pursue a patent.

    2.7. When are Trade Secrets the Better Choice?

    Trade secrets are the only choice when your idea is not patentable.

    Trade secrets are the only choice when your invention was, but no longer is, patentable (for example if you have publicly used the invention for more than one year or you have sold (or offered to sell) the invention for more than one year).

    Trade secrets are the better choice when the life of your product is substantially shorter than the 20-year life of a patent. If you expect to make the most money from your product in a year or two, then by the time your patent issues (usually in two to three years), the product’s value will be near zero, and your patent will be essentially worthless.

    Trade secrets may be the only choice when you don’t have $5,000 to $30,000 per invention to pursue patents. It doesn’t make much sense to say that patents are the better choice if you don’t have the money to pursue them.

    3. Real World Patent and Trade Secret Strategies

    3.1. Real World Patent Strategies

    First, be aware of the “statutory bars” that can prevent you from ever getting a patent on your invention. These include publishing your invention and selling (or offering to sell) your invention. Once these events have occurred, you have a one-year grace period in which to file your patent application.

    Second, be aware of your competition. Are they working on the same technology, and are they likely to file for a patent on it?

    Third, keep good records of invention. The United States uses the “first to invent” system. Most of the rest of the world grants patent priority to the first inventor to file a patent application. Filing is important in the United States as well, but if a dispute arises, invention notebooks and the like will be used to determine which inventor invented first.

    Fourth, file at the right time. You obviously don’t want to file too late (see the statutory bars above), but you also don’t want to file too early. One common mistake that inventors make is to file a Provisional Patent Application (PPA), which is a relatively easy and inexpensive way to get “patent pending” status without having to spend $5,000 to $30,000 for a Regular Patent Application (RPA). But if you file your PPA and are unable to turn your idea into money in the next year, then you will have lost the benefit of the earlier filing date. Furthermore, if you also publish or sell (or offered to sell) your invention while your PPA is pending, then you’ll still have to file your RPA within one year of those events. In other words, by filing your RPA too soon, you can inadvertently prevent your invention from getting patented. Having a patentable invention is great, but you also have to convince others to pay money for it.[8]

    Fifth, quit your day job. It’s 10% inspiration, 90% perspiration. In order to succeed as an entrepreneur, you have to commit to it 100%.

    3.2. Real World Trade Secret Strategies

    First, identify your trade secrets.

    Second, establish procedures for keeping your trade secrets confidential. All employees should sign employee agreements on their first day of employment. You should also make sure you are paying your employees more than enough to keep them from jumping ship.

    Third, communicate regularly the importance of protecting your trade secrets.

    Fourth, if you are filing for a patent on a trade secret, initially elect not to file for foreign patents. This way, your trade secrets will not be automatically published by the USPTO 18 months after you file, and if your patent application ultimately fails, you can fall back on trade secret protection for your idea.

    3.3. Hypotheticals

    For the sake of argument, let’s assume that Company A has completed its business plan, has developed a prototype of its first product, and is now trying to decide whether to protect its ideas with patents or with trade secrets. What should Company A consider? Would your answer change if the company had ten products instead of one? If the product were a consumer product or a business product?

    4. Conclusion – Are there Other Choices?

    Your Company Your Competitors
    Pro-Patent Anti-Patent
    Pro- Trade Secret Anti- Trade Secret

    Until now, this article has focused on the advantages and disadvantages of adopting policies that favor either patent protection or trade secret protection for your company’s ideas. But if you are thinking outside of the box, you will see that there are two other options that have not been discussed (at least not directly) in this article.

    First, you could adopt a strategy that was anti-patent from your competitors’ perspective. In other words, you could actively try to publish (perhaps in a related patent’s abstract) ideas that you don’t want your competitors to patent. Your publication will prevent applications filed a year after your publication from receiving a patent. In fact, there are special interest groups dedicated to doing just this.

    Second, you could adopt a strategy that was anti- trade secret from your competitor’s perspective. I am not suggesting that you adopt any strategy that is illegal, but you could, for example try to hire away your competitor’s key employees. Note that while courts generally will uphold employee confidentiality agreements, they are less likely to uphold employee non-compete agreements that prevent individuals from making a living. In general, courts favor an individual’s right to make a living over a company’s desire to have a former employee not work for a competitor.

    Whatever method you adopt to protect your ideas should be thoroughly tested. When you draft a patent, you should put yourself in your competitors’ shoes and try to “design around” your patent. If you succeed, you should re-draft your patent application. When you create a trade secret policy, you should put yourself in the position of an employee who is committing corporate espionage. If your company’s policies allow the employee to avoid signing a confidentially agreement as a condition of employment (and on day number one) or if your trade secret policy can otherwise be circumvented, you should re-write it.

    Ultimately, protecting your best ideas is a process, not an event. But it is a process that does not exist in a vacuum. It is a process that is affected by other events. And it is a process that must evolve as your business evolves to remain competitive.


    Notes

    [1] A quick note about terminology is necessary. In order to simplify the following discussion, I’ll use the term “idea” to refer generally to some intangible business property that can be protected by either patents or trade secrets. Strictly speaking, “ideas” are not patentable. Ideas must mature into “inventions” or “discoveries” in order to be patentable. And “trade secrets” generally include more than just ideas. Trade secrets can include customer lists, product launch plans, formulas, and the like. So I am framing the issue as whether to protect business ideas as inventions (via the application of patent laws) or as secrets (via the application of trade secret laws). Get the idea?

    [2] The patent laws are in Title 35 of the United Sates Code (35 U.S.C.). The patent regulations are in Title 37 of the Code of Federal Regulations (37 C.F.R.). The patent procedures are in the USPTO’s Manual of Patent Examining Procedure (M.P.E.P.).

    [3] And while one could argue that the definition of “patent” is “simpler” because it is based on standardized Federal law, getting a patent is a non-trivial task.

    [4] In cases where important laws vary from state to state, the National Conference of Commissioners on Uniform State Laws (http://www.nccusl.org/) creates model codes based on generally accepted legal principles defined by courts. The Uniform Trade Secrets Act is one such model code. The UTSA has not been uniformly adopted by all 50 states. While 42 states have adopted the UTSA in some form, six have not (New Jersey, New York, Pennsylvania, Tennessee, Texas, and Wyoming), and two others (Alabama and Massachusetts) have trade secrets statutes that are not modeled after the UTSA. See, for example, the trade secret statute for Massachusetts, M.G.L. Ch. 93 Sec. 42 et seq. (http://www.state.ma.us/legis/laws/mgl/93%2D42.htm). And while 84% of the states have adopted the UTSA, some of the most populous states have not. Based on 2000 census data (http://www.census.gov/), the 42 states that have adopted the UTSA account for only 72% of the nation’s population.

    [5] M.G.L Ch. 266 Sec. 30. Note that the definition of “trade secret” appears in the criminal section of the Massachusetts General Laws.

    [6] If you search on Google (http://www.google.com/) for “trade secret attorney,” you’ll find about 14 web pages. If you search on Google for “patent attorney,” you’ll find about 46,600 web pages. What does this tell you?

    [7] A full discussion of patent remedies vs. trade secret remedies is beyond the scope of this article.

    [8] So if you file your PPA on January 1, 2003, begin talking to prospective clients on January 18, 2003, your PPA will expire on December 31, 2003. If you fail to convert your PPA into and RPA before December 31, 2003, you could still file an RPA on your invention, but you’d have to do so by January 17, 2004 (within one year of when you offered to sell your invention), and then your filing date would be January 17, 2004, not January 1, 2003.

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