Deciding Between Patent Protection and Trade Secret Protection

The decision of whether to protect a new innovation by either filing for patent protection or retaining the innovation as a trade secret can be a difficult decision to make. This article explores some basic questions that need to be considered in making that determination.

Let’s first review the basics of patent and trade secret law to form a baseline understanding of those vehicles for protecting intellectual property.

The prevailing philosophy of patent law views a patent as a quid pro quo, whereby the inventor publicly discloses the invention in exchange for a limited monopoly right in that invention. The U.S. government has an interest in encouraging the disclosure of inventions and discoveries in order “to promote the progress of science and useful arts … ” (U.S. Constitution, Article I, §8). A patent confers on its owner the right to exclude others from making, using, selling, or offering to sell the patented invention in the U.S., or importing the patented invention into the U.S.

Three types of U.S. patents exist, namely, utility patents, design patents and plant patents. Approximately 90% of the patents issued by the U.S. Patent and Trademark Office (PTO) in recent years have been utility patents. Utility patents protect any new and useful process, machine, manufacture, or composition of matter, or a new and useful improvement thereof. Utility patents are enforceable for a period of up to twenty years as measured from the date of filing the application for a patent. After expiration of the patent, competitors can legally copy the product or process that is disclosed in the patent. 

The process of obtaining and maintaining a utility patent can be a significant investment in terms of both time and expense. To obtain a patent, an applicant must prepare patent application for examination by the PTO. A patent examiner at the PTO examines the claims of the patent application, and, if the claims are deemed to meet all requirement for patentability, the patent application will issue as a patent. Conversely, if the examiner does not allow any of the claims, then the patent application will not issue as a patent. Unless a request for non-publication is filed along with the patent application, the PTO will publish the patent application. Thus, if the examiner does not allow the patent application and the patent application is published, then the inventor will have disclosed the invention to the public without receiving any of the benefits of exclusivity. The silver lining in this predicament is that the inventor’s published patent application prevents competitors from later patenting that same invention because the inventor’s published patent application will be ‘prior art’ to any later-filed patent application.

If the examiner allows (i.e., approves) the claims of the patent application, then the patent application will issue as a patent. A claim of an issued patent is analogous to a property deed, i.e., it defines the boundaries of the invention. If a competitor’s product falls within the scope of a claim of a valid patent, the patent owner may bring suit to enjoin the competitor’s infringing activities. A patent litigation can be a costly and lengthy battle. 

Now let’s review the basics of trade secrets. A trade secret includes any information that is not generally known or reasonably ascertainable by the public. Common examples of trade secrets include customer lists, designs, instructional methods, manufacturing processes, formulas for producing products, or compilations of information. The holder of a trade secret can protect its confidential information through non-disclosure contracts, for example. Trade secret protection endures so long as the requirements for trade secret protection are met. The formula for the Coca-Cola^® soft drink is arguably the most famous example of a trade secret. The Coca-Cola company has no patent on its formula and has been very effective in protecting its secrecy for many more years than the twenty years of protection that a patent would have granted. 

Three general requirements for trade secret protection exist, namely, the public does not already know the trade secret, the trade secret confers some economic benefit on its holder, and the holder of the trade secret takes reasonable efforts to maintain its secrecy. The holder of a trade secret has the obligation to keep others from misappropriating and using the trade secret. The cost of maintaining a trade secret is generally defined by the cost of implementing reasonable safeguards to protect the trade secret from misappropriation by others. 

Unlike patents, trade secrets do not guarantee exclusivity. Independent discovery of the innovation extinguishes the trade secret. Also, others are free to independently reverse-engineer a product to discover, and thereby extinguish, any trade secrets associated with the product. Lastly, trade secret protection may be extinguished if the holder of the trade secret fails to take reasonable steps to keep the information secret. 

Several threshold questions may be helpful to guide the business decision of whether to file a patent application or retain an innovation as a trade secret:

1. Are you interested in licensing the innovation to others? Both patents and trade secrets may be licensed to others. A trade secret license may not be as attractive as a patent license because the term of a trade secret can end abruptly at any time, as noted earlier. In the same vein, patents are often employed to attract investment capital. Venture capitalists often require the existence of patent protection, as a result of the exclusivity benefits that patents offer, before investing in a new technology.
2. How susceptible is the innovation to reverse engineering? If another party, such as a competitor or a consumer, can readily test, disassemble, or otherwise analyze a product to determine its structure or its method of manufacture, then the product is not a good candidate for trade secret protection because the trade secret could not be fairly characterized as a “secret,” or will not remain secret for very long. 
3. What is the commercial life span of the innovation? If the innovation could become obsolete in less than three years, it may not be worthwhile to file a patent application because it ordinarily takes about three years for a patent to issue after the filing of a patent application. There are ways to accelerate examination of the patent application if it can be proven that another is infringing upon the claims of the patent application, however. Also, a patent holder can receive damages for infringing activities that occur between publication of the patent application and issuance of a resulting patent, subject to certain requirements. Patent applications are generally published 18 months after the earliest priority date of the patent application. 
4. Are employees privy to the innovation? Companies should consider the number of employees that are exposed to the innovation, the education and skills of those employees and the rate of employee turnover. Departing employees typically work in similar capacities for competitors. Highly skilled employees are more likely to recognize and understand the importance of a trade secret. Thus, a high turnover rate among employees exposed to trade secrets may tend to increase the risk that a former employee will reveal the trade secret to a competitor. Such circumstances may favor reliance on patent protection, which avoids the problem of employee disclosure to competitors. 
5. Is the innovation patentable? More particularly, is the innovation of the proper subject matter for patent protection? For example, is the innovation sufficiently non-obvious under the patent laws of the United States and/or the patent laws of foreign countries? 
6. Do you have the resources and willingness to enforce the patent against an infringer? If a competitor’s product falls within the scope of a claim of a valid patent, the patent owner may bring suit to enjoin the competitor’s infringing activities. A patent litigation can be a costly battle, and consume a significant amount of the patent owner’s time. 
7. How susceptible is the innovation to independent discovery? The answer to this question is heavily dependent upon the value of the discovery. Because market forces drive innovation, it follows that the more valuable the discovery, the more probable is its susceptibility to independent discovery. If the innovation is a solution to a known problem, or the innovation is the product of an industry standard, a commercial requirement, a government directive, or a well-known need of the market, for example, the innovation is more likely to have commercial value and be susceptible to independent discovery. In such cases, patent protection may be more desirable.

In sum, the decision of whether to protect a new innovation by either filing for patent protection or retaining that innovation as a trade secret may be a difficult one for independent inventors and multinational corporations alike. The choice between patent and trade secret protection is heavily dependent on a variety of business considerations.