What’s My Strategy? (Trade Secret or Patent?)
By: JOHN F. DOLAN & MATTHEW J.S. GRAHAM
March 2011
Your company’s team of scientists and/or engineers has just developed a new composition or device, a new way to use some of your company’s existing products, a new process that increases productivity and efficiency 100%, 200%, 1000%… In short, your company has created valuable intellectual property. Now, how can you use this asset to create value for your business and protect these ideas so that your competitors don’t move into your proprietary space? There are a number of things that should be considered and questions answered when analyzing which approach is best to get the most out of your company’s intellectual property. Such an analysis is critical to answering the question “should we patent a technology or keep it as a trade secret?”
As background, a patent is a grant of exclusive rights from a government that excludes others from making or using the invention. Advantages of patents include the ability to force a competitor to stop exploiting the invention and the possibility of generating revenue from licensing arrangements or damages for infringement. Disadvantages include considerable upfront costs in obtaining the patent, complete public disclosure of the invention, and a limited term before the exclusive rights expire.
A trade secret, by contrast, is something that confers a business advantage, is not generally known, and that the owner of which takes steps to maintain as a trade secret. Examples of steps to maintain a trade secret include restricting access to the information and having anyone that comes in contact with the trade secret sign a non-disclosure agreement. Trade secret protection allows you to stop an employee or party to a non-disclosure agreement from publicly disclosing the information, or to seek damages from such parties if the information is disclosed.
Advantages of trade secrets include that the information is kept secret and not revealed to the public or to your competitors. In addition the protection lasts as long as the trade secret is not publicly revealed, and potentially has an infinite term. For example, the formula for Coca-Cola has successfully been kept as a trade secret for decades. Further, trade secrets do not require upfront registration costs. However, there may be large and continuing costs related to keeping the information secret.
There are also several disadvantages of trade secrets. For example, if the secret is embodied in a product released into the market, a competitor can inspect the product and discover the secret. If the secret is discovered in this manner the competitor can proceed to exploit the secret. Along those lines, once it has been made public, anyone may have access to a trade secret and use it. In fact, if a competitor were to independently invent the substance of the trade secret, it could possibly obtain a patent and stop you from continuing to exploit your former trade secret.
Now that I have the background regarding my options for protection, what should my company do? “Patent the technology or keep it as a trade secret?” To answer this question the desired final outcome or business result should be kept in mind. Does your company wish to license the technology, position itself for future sale, raise capital, exclude competitors from using the technology… By considering these desired outcomes, a strategy whether to patent a technology or keep it as a trade secret is easier to determine. For example, if your business generates revenue by inventing or branding new products or contracting out the production of such products, or if your business is attempting to position itself for acquisition or to raise capital through private equity sources, patents will likely provide the most competitive advantage. However, if your business thrives in a mature market by improving in-house production techniques or the technology is difficult to reverse engineer, trade secrets might provide more value.
When keeping the final outcome or business objective in view, a decision for or against protecting intellectual property as a patent or a trade secret is better understood. For example, say your company has invented an improved refining process for the extraction of valuable, well-known chemicals from biomass or has created a new process for the production of soft serve ice cream. The new refining process or production process would be easily recognized and implemented if released into the public. Furthermore, the identification of competitors using either of these process may be difficult to ascertain by just looking at the finished products. Since the invention can be easily implemented and would be difficult to identify when in use by a competitor, keeping this information as a trade secret would likely provide a significant competitive advantage to your business.
On the other hand, say your company has invented a unique chemical compound derived from biomass that can be used as a drop-in component in a large number of products presently commercialized or your company has developed a new drug eluting stent that is more biocompatible with the host tissue than existing stent products. The chemical compound or new stent are easily identified in the final commercialized products and can be produced using off the shelf raw materials and simple processes that are easily derived by combining a few common techniques already known in the industry. Since the invention is a chemical compound or medical device that can be easily identified by examination of the final products and the compound or device is easily produced by a combination of off the shelf components and processes already known in the industry, a patent may provide a larger competitive advantage than a trade secret.
Deciding your company’s intellectual property strategy can be a complex endeavor. For best results, we always recommend consulting with your patent attorney to provide you guidance regarding patents vs. trade secrets.