Trade Secret Or Patent Protection

The factors involved in selecting patent protection or trade secret protection involve trade-offs between the two types of protections.  The decision to seek patent protection or trade secret protection should be based upon the differences between the two types of protection and their respective advantages.  Subject matter protected by a trade secret must be kept secret, whereas subject matter protected by a patent must be disclosed to the public.  The protections are incompatible so that an election to seek either trade secret or patent protection should be made.

Trade secret protection exists until the secret becomes known in the industry.  Therefore, a trade secret may exist in perpetuity as long as it remains secret. After a trade secret is publicly disclosed, however, trade secret status is destroyed permanently.  When trade secret information enters the public domain, competitors may then utilize it.

Strict Requirements For Patent Protection
Patent protection has more demanding requirements than trade secret protection.  Patent protection has a more limited subject matter requirement and the subject matter must be novel and non-obvious.  The combined standards of novelty and non-obviousness are difficult to satisfy and constitute dominant reasons for denial of patent applications.  In reviewing patent applications, the patent examiner objectively applies the novelty and non-obvious requirements, often making those requirements difficult to achieve.

A patent application clearly explains how to make and use an invention.  The application is printed when the patent is issued so that the innovation becomes public.  Since patent applications are treated as confidential by the PTO, it is possible to apply for a patent and still maintain the underlying information as a trade secret during the patent application process.  If the patent is subsequently denied, the trade secret may remain and the owner’s competitive advantage may be maintained.

If the PTO grants a patent, the owner may elect to reject the patent and continue to rely on trade secret protection.  In short, provided the owner keeps the invention secret, a patent applicant can apply for a patent as well as maintain the invention as a trade secret during the patent processing period which usually takes approximately two years.  The final decision regarding which method of protection to implement can be deferred until the PTO renders its decision to award the patent.

Definition of Trade Secret
The Uniform Trade Secret Act (UTSA) defines a 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 subject of efforts that are reasonable under the circumstances to maintain its secrecy.

In short, a trade secret is confidential information which is valuable to a company because it provides a market advantage over competitors who do not possess the secret.

Legal Requirements of Trade Secrets
Trade secrets are governed solely by state law.  The UTSA is an attempt to provide uniform treatment of trade secrets among the states.  However, states are not required to adopt the UTSA, and many states that have adopted it have changed its provisions.  Accordingly, each state has differing trade secret laws.

The creation and maintenance of trade secrets include several legal requirements: 
(a) subject matter;  (b)  secrecy;  (c)  value;  (d)  novelty;  and  (e)  affirmative steps.

Secrecy and affirmative steps are the more restrictive requirements.      A wide spectrum of subject matter may qualify for trade secret protection. The subject matter must be novel, however, the trade secret novelty requirement is not as strict as the patent novelty requirement.  For trade secret protection, the subject matter must also be secret, valuable to the company, and the company must make efforts to maintain its secrecy.  Unlike patent requirements, the company may define the secret, its value and the affirmative steps taken to maintain secrecy.  A company may define its own trade secrets and satisfy the trade secret requirements more readily than it may satisfy the objective judgment of the patent examiner to meet the patent legal requirements.

The table below compares the legal requirements for the two types of protection.

Comparison of Requirements of Trade Secrets and Patents

Trade Secrets Patents

Secrecy required

No comparable requirement

Subjectively valuable to owner

No comparable requirement

Affirmative steps must be taken to maintain secrecy

No comparable requirement

No comparable requirement

Non-obviousness.  High objective standard

Trade secret novelty.  Some novelty required

High objective degree of novelty required

No comparable requirement

Utility.  New and useful.  Readily met

Broad subject matter.  Extensive variety of subject matter

Restrictive subject matter.  Limited to processes, machines, compositions of matter and improvements

Owner may subjectively determine its trade secrets

Objective standards are applied by examiner to determine patentability

Availability of Patent Protection
The owner must determine whether patent protection is available for the subject matter initially.  If it does not satisfy the requirements in terms of subject matter, novelty, non-obviousness, and utility, patent protection will not be obtainable.  However, trade secret protection may be available.  Subject matter which has been used publicly, offered for sale, or published in a printed publication for over one year will not qualify for patent protection.  If the activity has occurred less than one year before the filing date, the owner's foreign patent rights may be lost.

In contrast, public usage, offers for sale, and publications may not preclude trade secret protection, provided the activity did not expose the subject matter to the public.  For instance, a company may sell its product made from a secret formula without exposing its trade secret.

Trade secrets and patents may be licensed to third parties.  An important difference between trade secret licenses and patent licenses is that patents may only be licensed for the 20-year life of the patent.  However, trade secrets may be licensed for an indefinite duration, even if the secret is later discovered by a third party or by the general public.

For example, in the famous Listerine case, the inventor licensed the secret formula to a company.  After many years, the formula became public knowledge.  When the licensee attempted to terminate the payment of royalties, the court ordered the licensee to continue paying for the use of Listerine as long as it marketed the product.  The court held that a licensee which enters into a contract is bound by it, notwithstanding that the secret is discovered by a third party or by the general public.  The court held that a person who discovers a secret formula or trade secret by legitimate means is entitled to use it.  In practical terms, most trade secret licensees do not enter into licenses with an indefinite term, although the term may be longer than the term of a patent.

Trade Secret Subject matter
The scope of subject matter protectable as a trade secret is considerably broader than and encompasses any subject matter protectable by patents, copyrights, and trademarks.  Hence, trade secret protection includes patentable subject matter (e.g. machines, processes, articles of manufacture), and compositions of matter, copyrightable subject matter (e.g. company literature, compilations, and software), and subject matter registrable as a trademark (e.g. names for future products and future campaign slogans).  Examples of subject matter which may be protected by trade secrets include:
(a)  engineering blueprints and patterns;
(b)  drawings and data;
(c)  computer software;
(d)  market research studies; 
(e)  operating and pricing policies;
(f)  processes;
(g)  customer lists; and
(h)  sources for raw materials.

The subject matter must be generally undiscovered in the industry.  The UTSA requires that the subject matter not be "generally known" or "readily ascertainable by proper means."  However, absolute secrecy is not required.

Nature of Subject Matter
The nature of the innovation may determine whether patent protection or trade secret protection should be pursued.  Trade secret protection is inappropriate for subject matter which may be easily discovered from examination of the product, or easily reverse engineered.  Competitors would purchase the product and quickly discover and utilize the new innovation.  These kinds of products require patent protection.

In contrast, trade secret protection may be utilized for inventions which are not easily discoverable or reverse engineered.  For example, process inventions may be better protected under trade secret laws because they are difficult to reverse engineer.  The process may be used secretly for periods longer than the 20-year patent period.

Rapidly Changing Technology
Trade secret protection may be more appropriate than patent protection for rapidly evolving technology.  Technology that will become obsolete within a period of less than 2 years will not be useful by the time a patent is issued due to the lengthy period in securing protection through the Patent and Trademark Office (PTO).  If broad patent claims cannot be drafted to cover both the subject technology and the improved evolving technology, keeping the technology as a trade secret may be a more efficient use of capital than investing in a patent.

For instance, in the area of rapidly emerging technology, processes change rapidly as the body of knowledge expands.  If the subject matter of protection may be protected broadly, the subject matter may be protected with patents.  However, if the subject matter is a new fabrication process for a specific use that will probably become obsolete in 12 months, trade secret protection may be appropriate protection.

Trade Secrets Only Protected Against Improper Taking
In connection with improper means, an example may illustrate how conduct which may be otherwise lawful, may be improper under certain circumstances.  Assume that a manufacturer constructs a new manufacturing plant to produce a certain product.  The plant layout constitutes a trade secret essential to efficient production.  The manufacturer is careful to prevent observers from witnessing the construction.  However, a competitor uses a photographer in an airplane to take aerial photographs during construction showing the structural layout of the plant and the competitor thereby determines how the product was manufactured.  Although taking pictures from an airplane is not ordinarily unlawful, courts have held that doing so over a competitor's new plant solely for the purpose of discovering a competitor's trade secrets may be improper under such circumstances.

Trade secret protection does not prevent a competitor from discovering the trade secret through “proper means”.  A competitor may purchase a product and reverse engineer the product by disassembling the product to determine how it functions.  The competitor may utilize any trade secrets gleaned from the reverse engineering.  Proper means to acquire trade secrets include discovering the secret through independent research and development, reverse engineering a competitor's product, observing the product in public use or on public display and obtaining the secret from published literature."

Independent Invention by Another Person
A patent prevents other inventors who subsequently and independently discover the same innovation from making, using, or selling it.  However, a trade secret does not prohibit independent inventors from using and selling the innovation.  Furthermore, a subsequent inventor may even obtain a patent for the invention and block the original trade secret owner from making, using, or selling the secret innovation.

Scope of Intellectual Property Rights
Patents provide exclusive protection, whereas trade secret protection does not.  A patent carries with it the right to exclude others from making, using, or selling the invention in the United States.  The patent prevents any persons who subsequently and independently invent the same invention from making, using, or selling it.  On the other hand, a trade secret prevents others from stealing a company's proprietary secrets.  A trade secret does not prevent another person from independently discovering the invention or reverse engineering the product to learn the trade secret.

The patent claims filed with the PTO circumscribe the intellectual property rights.  The owner is strictly entitled to the invention as defined in the claims.  On the other hand, a trade secret is not limited to a set of claims.  The owner may claim virtually any matter as a trade secret, provided the trade secret is valuable, not generally known to the public, and precautions are taken by the owner to keep it secret.  Hence, the trade secret owner has more flexibility in defining its intellectual property.

Marketability of the Product
If the technology is not readily marketable, the owner may not seek patent protection immediately.  Technological innovations that are far ahead of their time relative to current market products may outlive the life of the 20-year patent before a commercial market is available for the product.  The marketplace often lags behind new technology for various reasons.  New technology is often initially too expensive and cheaper alternatives may be available.  Supporting products or parts which are essential for the operation of new technology may not be adapted.  End users may lack sufficient knowledge to use the new technology without significant training.

If the product is not readily marketable, the developer may maintain the new technology as a trade secret and continue developing and improving the technology.  When the product becomes marketable, the developer can then seek patent protection.  However, there are dangers in waiting if others may be able to obtain patents before the developer because the secret invention may not prevent patentability of another person's invention.

Breakthrough Technology
If the innovation represents a technological breakthrough, patent protection is desirable.  Patent claims may be broadly based and may cover broad features of this pioneering technology.  With extensive claims, technology developed by others based upon the owner's patented pioneering technology will most likely infringe the owner’s patent rights.

There is value in obtaining the initial patent on pioneering technology.  However, if the innovation is a mere improvement in a popular field of technology, patent protection may not be as valuable.  In such cases, trade secret protection may offer more economical protection.

Value & Novelty
The subject matter must generate independent economic value by virtue of not being generally known to competitors.  The subject matter has value if competitors could obtain economic value if they had knowledge of it.
Courts often require minimum level of novelty before the subject matter is afforded trade secret protection.  To satisfy the trade secret novelty requirement, subject matter must not be readily available in the industry.  The level of trade secret novelty is not as high as the novelty required for patents.

Examples of Trade Secret Cases
One of the most famous trade secrets is the recipe for Coca-Cola.?  The example of Coca-Cola  shows the potential value of trade secret protection.  The owner of the formula has maintained it as a trade secret for over 100 years.  If Coca-Cola Corporation had patented its formula, many companies would have copied the formula several decades ago after the expiration of the patent.  The maintenance of the Coca-Cola formula as a trade secret has allowed the company to become an enormous company with world-wide sales.

Rights May Not Be Exclusive
Contrary to patents, copyrights, and trademarks, trade secrets do not provide exclusive rights.  Under certain circumstances, more than one company may possess the same trade secret concurrently.  For instance, the following situation involving two food companies may serve to illustrate the principle.  Assume that there is a widely used method for making a certain food product which requires cooking specific ingredients for a specific time period and temperature.  Also, two companies independently discover that the product will be more consistent and have a longer shelf-life if an additional ingredient is added and the temperature is adjusted.  Both companies obtain significant value from the improvements and both take positive steps to maintain secrecy of the improvements.  Since the improvements are not known in the industry, both manufacturers may properly own rights to the trade secret.

Others May Patent Technological Trade Secrets
Trade secret laws do not prevent others from independently inventing the secret technology and then securing a patent on that technology.  Another person may obtain patent protection covering the innovation.  There is the possibility that the owner could be excluded from using technology that it maintained as a trade secret.

Risk of Losing Intellectual Property Rights
The risk of losing trade secret rights is higher than the risk of losing patent rights.  Trade secret rights may be forfeited through accidental disclosure.  Unintentional disclosure by an employee may make a company’s trade secret available to the public.  Independent discovery or reverse engineering  may also end trade secret protection.

A patent may be lost only if it is held to be invalid or is rendered unenforceable.  After a patent is granted, it is presumed valid.  The presumption may be rebutted in court or through special re-examination proceedings in the PTO.

Duration of Propection
A patent is valid for 20-years by means of the payment of maintenance payments.  A trade secret is maintained by implementing secrecy precautions, provided that it is not independently discovered.
In contrast, after a trade secret has been released to the public through unintentional disclosure or reverse engineering, trade secret protection is lost permanently.  Although the lifespan of an trade secret is virtually impossible to determine, some experts estimate that the average life of a trade secret is only approximately three years.

How To Gain Trade Secret Protection
Unlike patent, copyright, and trademark protection, there is no formal procedure for registering a trade secret with a government agency.  The owner must take affirmative steps or efforts that are reasonable under the circumstances to maintain secrecy. Specific policies should be implemented and procedures designed to prevent loss of a trade secret.  The owner must establish that specific precautions were implemented to protect the trade secret.

Trade secret rights are more difficult to monitor than patent rights.  A patent sets forth the intellectual property which is protected.  The patent owner may inspect comparable products or components in the marketplace to determine whether a competing product infringes a patent claim.  For process patents, policing is a more complicated because the owner is unable to discover the exact process which created the competing product.  However, patent law makes a presumption that the patented process is infringed if the court determines that the product was probably made using the patented process and that the patent holder made a reasonable effort to determine the process which was used.  In addition, a process patent protects against any competing product sold in the United States, irrespective of where the product was manufactured.

A trade secret is typically not defined in detail.  Attempting to determine if trade secrets are being used by another company to make competing products is difficult.  Moreover, even if trade secrets are utilized, it may be difficult to establish that the competitor misappropriated trade secrets from the owner.

Cost of Obtaining and Maintaining Protection

Patents are much more expensive to secure and maintain than trade secrets.  The expenses in obtaining include PTO fees, attorneys' fees, and engineering costs in documenting the invention and coordinating with patent attorneys during preparation of the application.  After a patent is issued, the owner must pay issuance fees and maintenance fees before the 3-1/2-, 7-1/2-, and 11-1/2-year anniversaries following the issuance date to maintain the patent.

The expenses involved in obtaining and maintaining trade secret protection include the costs of establishing and implementing company policies to guard trade secret information.  Trade secrets are typically less expensive if the owner takes affirmative steps to maintain the secrecy of the innovation.

Enforcement Costs
If an infringing company refuses to take a license, or the patent owner chooses not to license, enforcement against an infringer typically requires litigation.  Enforcement of patent rights is quite expensive.  The complexities of patent law and the technology itself and the substantial discovery result in lengthy and expensive litigation.  A defending party generate sizable legal expenses in disputing the validity of the patent and challenging the infringement claim.

Trade secrets are ordinarily less expensive to enforce.  Some experts estimate that litigation for a complex technology trade secret case may be half as costly as a comparable patent litigation.

Affirmative Steps
A company must take intentional, affirmative steps to keep the subject matter secret.  The UTSA requires that a company make efforts which are reasonable under the circumstances to maintain secrecy.  Positive actions must be taken to ensure secrecy.  In other words, the owner must implement precautions beyond normal operating procedures.  Subject matter will not constitute a trade secret unless active steps are taken even though the subject matter is unknown to any other person.

These steps include preventing access to facilities, protecting confidential records, restricting access to proprietary documents and forbidding employees from disclosing proprietary information.

Legal Remedies For Theft
A patent owner may obtain an injunction to stop infringing activity.  The patent holder may sue to recover lost profits and may be entitled to damages equivalent to reasonable royalties.  Moreover, if the court determines that the infringing company has knowingly and willfully infringed the patent, the court may require the defendant to pay attorneys' fees and treble the actual damages.

In a trade secret action, after the trade secret owner has proven the existence of the trade secret, threatened or actual theft of the trade secret may be enjoined.  The trade secret owner may sue for damages resulting from the actual loss caused by unlawful obtaining of the trade secret.  Contrary to patent owners which receive a reasonable royalty award against infringers, there is no statutory minimum award for trade secret owners.

When a competitor obtains a trade secret unlawfully, the trade secret owner may seek an injunction to prevent the competitor from using it.  The trade secret owner may also bring an action to recover actual damages, punitive damages, the competitor's profits, and attorneys' fees.  During trade secret litigation, courts typically impose a secrecy order in order to prevent the trade secret from being revealed to the public.  There is a risk, however, that the trade secret owner may forfeit the trade secret, notwithstanding efforts by the court to maintain secrecy during trial.

In addition to patents, copyrights, trademarks, and trade secrets, know-how is another form of intellectual property.  Know-how encompasses the knowledge of how to do as well as how to not do something.  Know-how includes all of the information developed by a company through its successes and failures, which assists in operating the company.

Know-how can be defined quite broadly.  Know-how is the origin of tangible ideas, innovations, and discoveries.  It is the basis upon which companies create intellectual property portfolios consisting of patents, copyrights, trademarks, and trade secrets.  Know-how encompasses all subject matter that may be protected by patents, copyrights, trademarks, and trade secrets.  Know-how includes technological innovations, ideas, processes, concepts, formulations, estimates, experimental results, current research and development efforts, the selection of certain designs and selection of materials.  Know-how also includes failed experiments and unanticipated results of experiments.  It embodies employee experience, product team experience, management policies, accounting methods, and internal procedures for improved efficiency.

Trade secret protection has virtually no subject matter requirement The UTSA defines proper trade secret subject matter as information "including a formula, pattern, compilation, program, device, method, technique or process.”

Trade secret protection protects against those who acquire the trade secret through improper means.  Improper means includes:  (a) unlawful conduct, and (b) otherwise lawful conduct that is improper under the circumstances.  Acquiring a trade secret through unlawful conduct includes theft of trade secrets, bribing an employee to disclose his employer's trade secrets, fraud, breach of contract, and electronically surveying a competitor's operation.