Intellectual Property vs Trade Secrets

If your business develops or acquires new information, there is more than one option to secure your IP rights.  Patent laws are the most common source of protection for inventors, but some IP owners choose to rely on trade secrets to prohibit misappropriation of their ideas.  Why do some companies choose to patent their innovation while others choose to hide it?

The Uniform Trade Secrets Act (UTSA) defines a trade secret as any confidential business information which provides an enterprise a competitive edge.  Formulas, programs, devices, techniques and processes are all protected by the UTSA.  Trade secrets may concern inventions or information that is not viable for a patent and therefore can only be protected as a trade secret.  However, some inventors with patentable ideas still choose to hide their intellectual property.

Obtaining a patent requires IP owners to fully disclose what might otherwise be treated as a trade secret.  If the invention meets statutory requirements, the government grants the patentee exclusive rights to make, use, sell, offer to sell, or import the invention for twenty years.  Any method, machine, or substance can be patented if it is new and not an obvious update from something that has been produced before.

Before deciding which is the most appropriate method of IP protection it is important for businesses to understand how each industry handles intellectual property, as this can vary.  Products in biotech and telecommunications are likely to stay on the market for a number of years, which means start-ups in these sectors must obtain secure patents immediately.  Historically patent protection is considered more secure than trade secrets.  Patents protect IP rights regardless of what other individuals may develop in the future.  In the case of a technological breakthrough – a highly competitive area – patent protection is recommended for this reason.  If you develop a product without federal protection in place, another person could patent the same invention and you would be sued for stealing their IP and lose the rights to your invention. In 2012, the National Security Agency estimated that US businesses lose $334 billion per year due to trade secret thefts.  In 2010 Motorola spent more than $400 million developing iDEN military telecommunications technology, which was stolen on behalf of a company that developed products for the Chinese military.

While the law of trade secrets does not prevent others from acquiring and using trade secrets, it prevents the acquisition by improper means.  Should an individual reverse engineer a secret formula, trade secret protection cannot prevent them from producing a competing identical product.  Should someone reveal a trade secret, protection can be lost overnight, even if this was done unintentionally.  For this reason patented technology is often favoured by investors, purchasers and potential licensees.

Why would a business or inventor choose to forego patent protection? In retail, consumer devices and manufacturing firms, products are constantly changing – every year or so.  IP management in these industries would suggest using tactics such as trade secrets to safeguard space for innovation.  Trade secret protection is not limited by time – if the secret is not revealed, protection continues indefinitely.  In a fast-moving industry such as retail, securing patents for numerous products can be costly.  Trade secrets involve no registration costs and take immediate affect – with no administrative delay.

IP ownership comes with a burden of protection – how do you secure your property efficiently?  Saving on patent expenditure and avoiding the disclosure of information may tempt owners to use trade secrets to protect IP.  However, the ‘easier’ option is not always the most effective.  Trade secrets do not provide protection in all scenarios and can prove more expensive to maintain.  The costs associated with keeping information secret can quickly spiral, businesses must consider: physically restricting access to grounds and buildings where the secret is kept or used; restricting information to individuals in the company; labelling information as confidential; and protecting electronic forms of trade secrets via means such as encryption, firewalls and password protection.

Protecting information as a trade secret or seeking patent protection is a decision dependent on a number of factors and should be treated as a strategic choice. Businesses must also consider the broader picture of the overall intangible assets a company possesses.  Different forms of IP protection should be understood as an asset portfolio – you may want to diversify and spread your risk.