Patent or Trade Secret Protection: A Strategic Decision

A company’s intellectual property may well be one of its most important assets. Given this importance, companies of all sizes have already made the wise and necessary decision to “protect” their intellectual property. But this somewhat obvious decision is just the beginning. Next, a company must decide how to protect its inventions and ideas using the available legal tools, including patents and trade secret protection.
United States federal laws protect a patent owner’s right to prevent others from making, using, offering for sale, selling, or importing the invention in the United States while the patent is in force. The laws of the individual states protect the owner of a trade secret from the unauthorized disclosure or use of that secret as long as it is maintained. The focus of this article is on some of the factors to consider when choosing between pursuing patent or trade secret protection.

Type of Invention or Idea
In some cases, the decision to pursue patent or trade secret protection is actually no decision at all when the invention or idea cannot be patented or does not qualify as a trade secret. A patent may be granted only on inventions that are original, novel, and non-obvious for certain categories of subject matter (processes, machines, products, compositions, designs, and plants) or any related improvement. Given these restrictions, certain inventions or types of knowledge that do not belong to these specific categories might not be patentable. And even if an invention or idea does fit into these categories, if it is not considered by the Patent Office to be original, novel, and non-obvious, a patent will not be granted. In addition, there are several other restrictions that limit the circumstances when a person can obtain a patent, including if the invention was sold or offered for sale more than one year before eventually filing the patent application.

Generally, the types of inventions and information that can be protected by trade secrets are broader than that for patents. Trade secrets can be established for any formula, pattern, device, compilation of information, program, method, technique, or process that: (1) is used in business, (2) is not generally known to competitors, (3) provides a competitive advantage, and (4) is maintained as a secret. Unlike a patented invention, a trade secret need not be for a novel invention or idea. Given this broad definition of a trade secret, there are several unpatentable inventions and ideas that can be protected as trade secrets, including mathematical formulas, new uses for existing machines or compositions, sales and marketing plans, customer lists, vendor/supplier information, and quality control procedures. But, because of the requirement that a trade secret be maintained as a secret and not generally known to competitors, there are also certain patentable inventions that cannot be trade secrets. For example, if the details of an invention can be “reverse engineered,” i.e., discovered by analyzing publicly available information including samples of the invention, a trade secret cannot be established. Since products, machines, and compositions are more easily reverse engineered, methods and processes often make better candidates for trade secret protection.

Projected Longevity and Novelty of the Invention or Idea
Assuming that a determination has been made that a particular invention or idea can be protected either as a patent or a trade secret, another consideration is the projected longevity and novelty of the invention or idea. Generally, patent protection exists from the time after the patent is granted or issues until twenty years after the patent application was first filed (assuming the patent remains valid and enforceable), during which time a patent owner can prevent others from making, using, offering for sale, selling, or importing the invention in the United States. In exchange for this protection, the inventor is required to disclose the details of the invention to the public. On the other hand, there is no need to disclose the details of a trade secret and no time limit on the term of a trade secret as long as the secret continues to be maintained as a secret and not generally known to competitors.

Theoretically, since patent protection only exists after the patent issues, and it typically takes two to three years after the patent application is filed for a patent to issue during which time there is no patent protection, an invention that is something that will be obsolete within a few years might be better protected as a trade secret. Similarly, since patent protection only exists for twenty years after the patent was filed, an invention that is something that is likely to have significant value half a century from now should theoretically be protected as a trade secret. The most well known trade secret of the formula for Coca-Cola® fits this description as its owners made the decision to protect that formula over one hundred years ago. In reality, however, since there are very few inventions and ideas that have life spans that are guaranteed to be on either of the extreme ends of the time spectrum, most businesses pursue patent protection for the majority of their inventions and ideas to establish a monopoly here in the United States for at least the duration of the patent.

In addition to determining how long a particular invention may have commercial value, it is equally important to consider how long that invention will be novel. Since a trade secret can only be maintained as long as it is not generally known to competitors, trade secrets, unlike patents, do not offer protection against independent development of the invention. However, as mentioned above, obtaining a patent does require the inventor to disclose the details of the invention in the application submitted to the Patent Office, details that will typically be made available to the public within eighteen months of filing the application. So while it cannot legally copy the disclosed invention in the United States after the patent issues, a competitor can actually copy the invention anywhere in the world until the patent issues as well as outside the United States even after issuance unless you have obtained patent protection in those foreign countries. But if your invention is something that will likely be independently discovered by others or reverse engineered in the near future anyway, there are limited drawbacks to its disclosure in the patent application, and patent protection is advised over the use of trade secrets.

Even if it is determined that your invention will not likely be independently developed by others or be susceptible to reverse engineering, one must consider the practicality of being able to adequately protect against disclosure of the invention before choosing trade secret protection over patent protection. Factors to consider include the number of employees and outside third party vendors that require access to at least some portion of the trade secret information to perform their jobs and the ability to physically and electronically secure the trade secret information.

Financial Considerations
Regardless of what decision is made — patent, trade secret, some combination of both, or none — the effectiveness of the decision, like virtually all business decisions, will be evaluated based on the resulting or lack of financial rewards. For example, if the costs required to adequately protect against disclosure of the trade secret (physical security, legal costs, inefficiencies created by limiting knowledge of the idea to select employees, etc.) outweigh the financial benefit of maintaining the secret, that trade secret is obviously not worthwhile. Similarly, it may not be worth pursuing a patent if the costs associated with obtaining and maintaining a patent over twenty years outweigh any financial benefit. Unfortunately, this ultimate evaluation of the effectiveness of the decision can only be performed years after the decision had been made. Nevertheless, there are financial considerations that can be taken into account before a decision is made.

If a company is planning on pursuing licensing of the invention or idea to others, licensees are likely to pay a higher royalty for inventions that are patented. Similarly, if a company is planning on seeking to raise capital, venture capitalists and investors are generally more comfortable in investing in companies whose intellectual property is protected by patents rather than trade secrets. The main reason for the preference of patents over trade secrets by licensees and investors is the uncertainty associated with the life span of trade secrets, which hinges on the ability to maintain the secret and the failure of others to independently develop the invention.

Potential litigation strategy and associated costs also should be considered. In order to maintain a trade secret, it is necessary to immediately file suit to enforce the provisions of any non-disclosure or non-compete agreement whenever a violation by any current or former employee or by their new employers is suspected. Similarly, enforcing a patent against an infringing competitor may require expensive litigation that can drag on for years and potentially cost millions of dollars, which may be too great a price tag for a small to medium-sized company. However, having a strong portfolio of patents may well help a small to medium-sized company to avoid costly litigation as competitors are more likely to proceed cautiously in bringing their own patent infringement action in fear of the threat of significant counterclaims of patent infringement.

Conclusion
In the end, the decision of whether and how to pursue protection of intellectual property is unique to each business and each invention or idea involved. The considerations documented above as well as several others should be reviewed with competent legal counsel and business personnel familiar with these complex issues.

©2005 Wall Marjama & Bilinski LLP, Syracuse, NY