Trade Secrets: Considerations for Founders

Protection of intellectual property is often a top priority for founders. Patents have long been regarded as the touchstone of intellectual property protection in the tech space, but data has shown that the number of patent applications submitted by funded tech startups have steadily decreased.[1] So how are founders protecting their intellectual property? While some areas of tech are patent-heavy industries (e.g., semiconductors and compression algorithms), there are many inventions that can be adequately protected as trade secrets. Moreover, trade secrets may not only serve as an alternative to patents, they may be more advantageous depending on your business.

What is a Trade Secret?

A trade secret protects any valuable information that adds economic value to its discoverer by not being general known to the public.[2] The most well-known example is the Coca-Cola formula, but a trade secret can also protect information such as lists of customers, vendors and suppliers, methods and business practices. There is no formal registration process for a trade secret; the only requirements are (1) that the information remains secret and (2) the discover takes reasonable precautions to prevent disclosure.[3] A trade secret is protected for an indefinite period of time so long as these requirements are met.

What are the Advantages of a Trade Secret?

First, a trade secret lasts indefinitely (so long as it meets the definition of a trade secret) whereas patent protection lasts only 20 years. Second, there is no registration process; therefore, there are no filing and maintenance fees, and protection of a trade secret is immediate. The immediate effect of a trade secret is an important consideration if there is an advantage to being first to market. Furthermore, inventions that do not meet the criteria for patentable subject matter can be protected as a trade secret. Patent prosecution, however, may take several years and result in enormous costs for the inventors. 

What are the Disadvantages of a Trade Secret?                

A trade secret is lost once it is disclosed, and you are only protected against misappropriation by improper means (e.g., theft, bribery, misrepresentation) or breach of confidentiality. You will need to implement proper security measures to maintain secrecy and prevent disclosure, but you can’t prevent all forms of inadvertent disclosure, e.g., an employee who leaves a valuable report on the subway. And unlike patents, trade secrets do not protect against reverse engineering. Even with proper security measures in place, you should consider whether trade secrets provide adequate protection in the specific market in which your business operates.

Conclusion

Trade secret protection may serve as an alternative to patent protection, and in some cases, it is the better choice to protect your intellectual property. You should discuss these options with an intellectual property attorney to determine the best approach for your business.

For additional information on trade secrets, please read Goodwin’s “Defend Trade Secrets Act Creates Federal Trade Secret Cause of Action with Enhanced Seizure Remedies” client alert.

[1] https://techcrunch.com/2012/06/21/do-patents-really-matter-to-startups-new-data-reveals-shifting-habits/

[2] Uniform Trade Secrets Act

[3] Id.

 
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