Trade secrets vs. patents

by McAfee & Taft
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How do you determine whether technology-related information will have more value as a trade secret or a patent? Both protection strategies have advantages and disadvantages for certain types of information. Here are a few tips to help you balance what's most appropriate for the proprietary information in your business:

A "trade secret" can be any technical, scientific, or business data which:

1. Is not generally known to the public
2. Provides economic value to the owner
3. Is protected by reasonable efforts to secure the trade secret

Nearly anything treated with the necessary degree of care can qualify as a trade secret. The customer list you’ve spent years developing, the secret formula for Diet Coke®, or a proprietary operating procedure for a metal coating process are examples of trade secrets. In contrast, patent protection is only available if the information or device is novel and inventive, so it won’t apply to a significant portion of a company’s information. Patent protection allows the patent owner to exclude competition during the life of the patent. Most utility patents have a term of 20 years, and design patents have a term of 14 years (design patents issued on patent applications filed after December 18, 2013, will have a term of 15 years).

Both patents and trade secrets can be used to generate income streams, but each method has different risks and costs associated with it. During the patent term, only the patent owner can make or sell the device. A patent owner can generate income during the limited life of the patent by licensing the technology, but that income stream must be weighed against the significant cost in time and money required to obtain and then enforce a patent. Trade secrets, on the other hand, have a potentially unlimited life, but it’s fragile. A trade secret can be lost forever through independent discovery, accidental disclosure, or intentional unauthorized publication. In busy technology fields where research competition is fierce, for example, the risk of independent discovery is significant, and could even result in two competitors independently making the same discovery, such that neither gains a competitive advantage. Trade secret technology may also be licensed to generate income, but that increases the risk of accidental disclosure, so it can be riskier than licensing information or technology protected by a patent. While trade secrets are not protected by a formal filing process and thus don’t carry the same costs as patent preparation, filing and enforcement, establishing technology as a trade secret can require financial outlay in the form of security and safeguards.

A decision tree like the one presented here is one good way to assess technology and help decide whether trade secret or patent protection is the most appropriate. Begin with an Invention Disclosure, which is by definition a trade secret. All patentable technology is thus initially protected as a trade secret until it is reviewed by the appropriate company personnel to determine its potential commercial value. Next, decide whether the company’s interests are best served by excluding others from using, making or selling the technology. If excluding others will not impart value, decide if there is value in publishing it.

Patents provide an exclusionary right, for a limited period of time, to the patent owner. In addition to excluding competition from use of the technology, the patent owner may choose to license the technology, thereby generating an income stream. Obtaining an issued patent may require a significant investment of time and money. Once the patent has issued, the patent owner must then enforce the patent to obtain value. Hopefully, the threat of enforcement will suffice; however, litigation may be necessary. Thus, a patent owner may gain a competitive advantage by exercising the rights associated with the patent to exclude the competition from the patented technology and/or through income generation by licensing those rights to third parties. This competitive advantage does require a capital investment.

If the technology does impart commercial value, a patent may be worthwhile. All patents are eventually published, which gives the competition access to a fully enabled disclosure of the invention. Of course, this means that competitors can use the information to design around the patent or to develop alternative non-infringing embodiments of the technology and can begin using, making or selling the same technology (which the patent tells them how to make) as soon as the patent term is up. The next branch of the tree requires you to weigh the likely scope of patent protection against the details being made available to the public. If a patent will provide very broad patent protection, publication may not be a concern. However, if the scope of the patent is likely to be very narrow, publication may reveal too much detail. In a case like this, a competitor could follow the “instructions” for making the device found in the published patent, and make a few changes to avoid your narrow scope of protection. In a case like that, publication is an advantage to your competitor.

Not all information will qualify for patent protection, and some types of information can have value that would extend long after a patent expired. Using a decision tree can help you look at both the long and short-term risks and rewards as you maximize the value of your company’s technology assets.

This skeletal decision tree can easily be adapted with additional branches and details specific to your business and/or industry.

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McAfee & Taft
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