Patents and Trade Secrets

Newly formed start-ups, particularly in the technology sector, rely heavily on the protection of intellectual property (IP) to establish a foothold in their industry and to provide leverage with larger, established companies. The two most common ways a company protects its IP are patents and trade secrets.

Choose One or the Other Carefully

Patents and trade secrets are often referred to as “two sides of the same coin” in that, for any specific IP, you have to choose one or the other. However, the decision on which form to use for particular IP is critical, and making the wrong choice can be devastating.

Are Patents Good or Bad?

Patents have both their upsides and downsides. A patent is a creation of statute – based in the Constitution – that grants a limited monopoly to the inventor to exclude others from “practicing the invention.” The monopoly is considered limited because it expires 20 years from the earliest claimed filing date of the patent.

But…

This monopoly comes at a cost. In order to enjoy exclusivity, one must also teach the invention to the world. So, while a patent holder may be able to exploit their invention for many years, others can read the patent, understand how the invention works and, as is often the case, come up with improvements on (or workarounds for) the patented invention and obtain patents themselves. Further, the day after the patent expires, anyone can practice the invention. For many technology companies, this may not be an issue as technology changes so rapidly, but pharmaceutical companies strive to use every day of a patent’s term to exclude generic drug manufacturers from a lucrative market.

Once issued, a patent can be a very strong deterrent to entering a particular market or incorporating key features in a product, and the invention cannot be used without a license from the patent owner. This is true even for “innocent” infringers – as not knowing about a patent is not a defense to infringement.

The inventor who chooses to apply for a patent essentially is making the decision to sacrifice secrecy and potential long-term exclusivity for a short-term guarantee of exclusivity.

The difference between patents and trade secrets

Unlike patents, trade secrets, prohibit unauthorized access to the protected IP.

But…

Trade secrets do not completely prohibit actual use of the IP. Reverse engineering, innocent use and sometimes even a lucky stroke of genius are all complete defenses to misappropriation of a trade secret. This places a heavy burden on the owner of the trade secret to implement proper access and use restrictions to establish and maintain trade secret status for the particular IP. Disclosure is not strictly forbidden – companies often share trade secrets under a form of confidentiality agreement. But any disclosure comes with risks, especially as employees and consultants move in and out of an organization. Of course, bad actors that divulge or steal trade secrets are liable for misappropriation, but once the trade secret has been revealed to the world, it is “out of the bag” and no longer is considered secret.

As with patents, trade secret protection can provide exclusivity. Unlike patents, the protection starts on day one – there is no need to wait for the government to approve or issue anything. However, relying solely on trade secrets carries a risk that the IP will be divulged or innocently “discovered” by another, effectively eliminating trade secret status. As a general rule, any technology that is “customer facing” and can be easily understood without access to anything more than a commercially available product is a good candidate for a patent, whereas back-office algorithms and many methods of manufacture are typically protected via trade secret.

But any disclosure comes with risks, especially as employees and consultants move in and out of an organization. Of course, bad actors that divulge or steal trade secrets are liable for misappropriation, but once the trade secret has been revealed to the world, it is “out of the bag” and no longer is considered secret.

Example: Patent or Trade Secret?

The challenge is to decide, for particular IP, which form of protection is most appropriate and aligns with the company’s goals.

Consider a company that has invented a new system for compressing and storing data, consisting of two functional modules:

• Module 1 reads and writes data in a novel manner
• Module 2 uses a new compression routine to reduce the size of the data when stored

Because the read/write process may be something that needs to be disclosed to partners or customers and is likely easily reverse engineered, trade secret protection may not be available, and a patent may be the best solution.

However, the compression routine – something that happens solely within a “black box,” is not disclosed to anyone and cannot be easily reverse engineered — is a good candidate for trade secret protection.

In drafting a patent application, the company will likely mention that a compression process is used, but so long as the claims of the patent do not recite the specific steps of the compression routine, there is no requirement to provide any such details of in the patent application. Conversely, if the compression routine is likely to become an industry standard (e.g., MPEG, JPEG, etc.), a patent may be the more appropriate route.

The bottom line is more often than not, understanding the use and business strategy for a particular piece of IP will lead you to the correct conclusion.