A number of recent court decisions that have highlighted the availability of patent protection for software and business methods, coupled with the growth of the Internet, have fueled a patent rush in the United States. What has been lost in this frenzy, however, is whether patent protection is always appropriate, even if available. In particular, insufficient consideration is often given to whether trade secret protection would be more advantageous.
There are several advantages to protecting trade secrets.
Wide scope of protection. In the United States, patent protection is available only for inventions that are truly novel, useful and nonobvious. In comparison, trade secret protection is broader and the threshold of protection is lower. In general, virtually any "useful" information can qualify as a trade secret, including "negative know-how," i.e. information relating to processes or inventions that do not work. Even a small improvement to a known process can qualify as a trade secret; trade secrets do not have to be new and nonobvious. Finally, unlike patents, trade secrets may also include "business information," such as marketing plans, business strategies and customer lists.
Inexpensive and easy to obtain. The only cost of protecting information as a trade secret is the cost of keeping it secret, which usually entails implementing a trade secret protection program designed to increase physical and computer security. For example, visitors' access to facilities should be limited and they should be required to sign a brief confidentiality agreement before entering the facilities. Further, document controls should be instituted, and employees and third parties should be required to enter into confidentiality and non-disclosure agreements before doing any work. Finally, employees should be taught the importance of protecting confidential information since it has been estimated that most information loss occurs not through deliberate theft or espionage, but because of simple carelessness.
The cost of setting up a trade secret program is generally far less than the cost of filing multiple patent applications. Accordingly, it is wise to decide early whether to seek trade secret or patent protection--to avoid unnecessary participation in the patent application process. Further, since it can take 18 to 24 months for a patent to issue after filing and what is new on the Internet one day may be old the next, the invention may no longer be valuable by the time the patent issues.
Indefinite term. While patent protection lasts for 20 years, trade secret protection can last forever. It is well established that the obligation to pay royalties in return for the use of a patented device may not extend beyond the life of the patent. See, e.g., Brulotte v. Thys Co., 379 U.S. 29 (1964). There does not appear to be any such limitation with respect to royalties for trade secrets. In fact, the Supreme Court upheld a license based on a patent application that never issued-despite the fact that the licensee's competitors could sell the identical product without paying a license fee-on the ground that the licensor did not use the leverage of a patent when negotiating the license. See Aronson v. Quick Point Pencil Co. 440 U.S. 257 (1979). See also Warner-Lambert Pharmaceutical Co. v. John J. Reynolds Inc., 178 F. Supp. 655 (S.D.N.Y. 1959), wherein the court held that the licensee was still obligated to pay royalties for using the formula for Listerine despite the fact that the formula had become publicly known more than 25 years before the suit was filed.
Note that licensors who grant rights to both patents and related trade secrets must avoid intertwining them, or risk a finding that the license is an unlawful extension of the 20-year patent term. The license should carefully separate the consideration for the patent rights from the consideration for the trade secret rights.
Prior user defense. A recent change in the patent act made trade secret protection more advantageous. Previously, an inventor who protected an invention as a trade secret ran the risk that another person would obtain patent protection for the same invention and the first inventor would be excluded from using his or her own invention. It is now a defense to an action for patent infringement if the first inventor actually reduced the subject matter to practice, and commercially used it, at least one year prior to the effective filing date of the patent. See 35 U.S.C. § 273.
Although the prior user defense is limited to a "method of doing or conducting business," under this definition almost any method-for example, operating a computer-could constitute a business method. In sum, the risk for trade secret owners has been reduced in cases where they can show that the invention qualifies as a business method.
Easier to discover infringement. It is often easier to discover trade secret misappropriation than patent infringement. Evidence that a competitor is using a similar process and had the means to acquire the information by, for example, hiring the trade secret owner's employees may be prima facie evidence of trade secret misappropriation.
What to Do
Trade secrets are not without their risks and disadvantages. Trade secret law, unlike patent law, provides no exclusionary rights. The trade secret owner has no remedies against a person who has acquired the trade secret through legal means. To have any value, the trade secret must remain secret. If it becomes known through inadvertent disclosure or through reverse engineering, the information may be used freely by anyone. Also, unlike patents, which can be enforced against "innocent" infringers, trade secret owners generally must prove some bad faith intent. Finally, it is usually easier to establish the value of patents than of trade secrets.
The bottom line is that companies should consider a combination of patents and trade secrets. If the invention can be developed from a publicly available source or easily reverse engineered, then patent protection may be preferable. Trade secret protection may be preferable where it would be extremely difficult, time consuming or expensive to reverse engineer.
Other criteria that should be considered are the extent of similar technology in the area and the expected "shelf life" of the invention. Regarding the former, if the scope of patent protection will be limited because of similar prior art, then trade secret protection may be advisable. With regard to shelf life, if the invention will be valuable for only a relatively short time, then again trade secret protection may be advisable. Of course, in a case in which it is difficult to determine the better protection method, a company should consider pursuing both at the same time. The pending application can be withdrawn at any time prior to the issuance of the patent and the information then protected exclusively as a trade secret. Or, patent protection may be sought for the invention and related information may be protected as trade secrets. This may permit companies to have their cake and eat it too.