Patents or trade secrets: Which is better to protect your intellectual property?

As I walked around the exhibit hall at Photonics West in January, I fell into conversation with a new friend, as one does at such events. The discussion moved to the topic of patents, and he told me he chooses not to patent his inventions anymore. Instead, he keeps them as trade secrets. This conversation got me thinking about the differences between the two approaches to protecting technical innovations.

Of course, photonics companies can use both patents and trade secrets to protect intellectual property. However, one or the other may be better at protecting different types of innovations or parts of an innovation. What follows is a primer that will help you understand the basics.

What is a patent?

First, let’s define what we mean by a patent and a trade secret. I briefly discussed patent protection in last month’s article, but here’s a recap. A patent is a property right granted by the government that allows the holder to exclude others from making, using, selling, offering to sell, or importing the invention defined by the patent claims. Essentially, the patentee assures the government that the patent specification teaches a “person of skill in the art”¹ how to make and use the invention in sufficient detail so that anyone can use the invention after the patent expires. The patent applicant must show that the invention is useful, falls within what is called “patentable subject matter” (a technical development that is not just an abstract idea or law of nature), and has not been made public before; i.e., has not been anticipated. Also, to ensure that this right to exclude others is not given for trivial advancements over old technology, the patentee must establish that the invention is distinct (not an expected change) from previously published patents. In patent parlance, the invention must not be “obvious” over the prior art.  If the applicant can satisfy these five tests, the government grants them a patent.

The duration of a patent is finite. At some point, it expires, and the invention enters the “public domain,” meaning there is no limit on who can use the IP described in it. Though a patent typically expires 20 years from the patent application filing date, two situations may extend the term. If the Patent Office caused delays in its approval, it can be extended. Also, when the patentee has been delayed in selling the invention because it was waiting for regulatory approval, the patent term may be extended by up to five years. In other cases, the term may be less than 20 years; for example, if filed as a continuation or divisional of an already pending case. 

Since the federal government grants U.S. Patents, any issue with a patent is a federal question, so the Federal District Court adjudicates patent infringement suits.

What is a trade secret?

A trade secret is information with the following three attributes:

• is not known by the general public
• confers an economic benefit to the holder because the information is not well-known
• is being protected by the holder taking reasonable steps to maintain its secrecy

Unlike patents, there is no limitation to the type of information that can constitute a trade secret: it may be a formula, process parameters, instruments, designs, customer lists, or anything else that provides economic benefit to the user. However, if a third party independently develops the secret, they are entitled to use it and even make it public. The trade secret owner has no redress in such a situation.

There is no limit on the lifetime of a trade secret. So long as the applicant meets the three requirements and no third party develops the secret independently, the information will continue to exist as a trade secret. You only need to ask the Coca-Cola Company how valuable this can be.

Traditionally, trade secrets have been the domain of state law. Until 2016, when Congress enacted the Defend Trade Secrets Act (DTSA), there was no federal cause of action for trade secret misappropriation. The DTSA provides distinct advantages for a trade secret holder compared to state law. For a start, the DTSA is litigated in federal rather than state court, which provides procedural advantages. It also provides for the preliminary seizure of property necessary to prevent the propagation or dissemination of the trade secret.

The DTSA proved to be a powerful tool for one of my clients. Several of its employees had moved to a competitor, and my client suspected they had taken trade secrets with them. A raid at the competitor’s facility by U.S. Marshals turned up a laptop containing my client’s CAD files and other information relating to its products. It’s hard to deny trade secret misappropriation under these circumstances! Lastly, the DTSA allows for punitive damages of up to two times the actual damages where the trade secret misappropriation has been “willful and malicious.”

How to choose which approach to use

Usually, a company seeks patent protection for the unique products they sell. Competitors can reverse engineer the marketed product, discovering its components and how to assemble them. This information becomes public once the product is released, so patent protection is the way to go.

Most often, trade secret protection is used for information that does not become public when a product is marketed and is not subject to reverse engineering. For example, a process for laser treating a lens to achieve a surface capable of handling higher power densities than a competitor’s lens would not be revealed by reverse engineering the lens. Such a process would, therefore, be a good candidate for trade secret protection.

Companies and entrepreneurs can use both patent and trade secret protection to protect a product, and, in many cases, that is the preferred strategy.

The development of a product does not end upon a patent application’s filing. You can protect any further developments of the product or processes for making it as trade secrets or the subject of additional patent applications as best suits the situation. Information about these additional enhancements can increase the commercial value of the patent. Most patent licenses include a clause covering the confidential transfer of trade secrets, or “know-how,” necessary to carry out the invention. Most legal advice recommends that the trade secrets associated with the manufacture of a patented product, to be transferred as “know-how,” be considered before entering patent license negotiations. It’s not advantageous to sign a patent license and later realize it obligates you to disclose the family jewels to another party. 

Uniquely to the U.S., there is a requirement that a patent specification discloses the “best mode” of carrying out the invention, which might include something that a patentee would prefer to treat as a trade secret. For example, in a patent covering a new lens coating, the “best mode” might cover specific process parameters for forming the coating, such as substrate temperature and how it is varied during the coating process or the partial pressure of the coating materials while depositing the individual coating layers. In 2013, the Patent Statute was changed; now, failure to disclose the “best mode” no longer results in a patent being found invalid. This change significantly increased the use of the synergistic coverage of a product by patents and trade secrets. 

IP is an expensive asset for a company to develop. A comprehensive IP policy to determine which innovations should be treated as trade secrets and which should be patented is essential for maximizing the return on investment in creating innovations. 

REFERENCE

1. A “person of skill in the art” is a fictional person who has normal, not expert, skills and knowledge in a technical field.