A company’s intellectual property is its number one asset, and as such, choosing the method to protect it can be one of the most important business decisions an entrepreneur will make in the start-up phase. Two options for protection are patents and trade secrets.
Utility Patents
Patents are contracts between the patent owner and the government. In exchange for the patent owner’s full disclosure of the invention, the government grants the patent owner monopoly rights for 20 years from the date of filing. Once these rights expire, the invention falls into the public domain, where anyone is free to utilize it.
Requirements
There are four legal requirements for patentability: it must be useful, patentable subject matter, novel, and nonobvious. Patentable subject matter includes machines, processes, methods of manufacture, or compositions of matter, and excludes laws of nature, natural phenomena, abstract ideas, and business strategies.
Once these four requirements are met, the invention must be fully disclosed to the United States Patent and Trademark Office (“USPTO”) to receive protection. A full written disclosure to the USPTO requires the inventor to provide a written description of the invention that will enable an expert in the field to make the invention without undue experimentation.
This is only a brief explanation of the requirements for an invention to be patented. If you wish to choose a patent as the method for protecting your IP, you will need to consult with an attorney to begin the filing process.
Pros
Safeguards: Safeguards for protection of patents are considerably stronger than trade secret safeguards. Patents grant their holders the exclusive rights to make, use, sell, offer to sell, and import a product or process for 20 years. If independent invention occurs (through reverse engineering or otherwise), the original product, formula or process still enjoys patented protection.
Worth the Investment: Patents provide strong protection against loss of a company’s investment in technology, particularly when the company intends to continue developing and building upon the patented technology. Additionally, because patents are property rights, they can be bought, sold, or licensed, thus enhancing their value as revenue sources to the company.
Cons
Cost: Patent applications are complex legal documents that require an attorney’s assistance through each step of the process. Further, once the patent is granted, the owner must pay three separate maintenance fees.
Public Disclosure: Patents require companies to disclose their inventions publicly, and in return, they provide protection for twenty years. However, once the twenty years is up, your invention is public knowledge, and can be used by any of your competitors.
Trade Secrets
A trade secret is information, including a formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value by remaining unknown and not being readily ascertainable by proper means.
Requirements
To retain protection, the trade secret must be subject to reasonable efforts under the circumstances to maintain its secrecy, which could mean securing relevant documents, using encryption, having employees sign nondisclosure agreements (“NDAs”), and only allowing employees to know the information on a need-to-know basis.
Pros
Duration: Trade secrets can be protected indefinitely. One example of this is Coca-Cola’s secret recipe, which they chose not to disclose through a patent and remains a trade secret.
Cost: Trade secrets do not need to be filed or approved, meaning they do not require filing fees or legal fees. The secret must simply meet the requirements of the statute, and then it immediately becomes a trade secret.
Advertising: People inherently want to know that which is not meant to be known. People naturally gravitate toward the hidden and mysterious, providing intrinsic value in products with a secret component.
Subject Matter: Trade secrets can be used to protect things that are not considered to be patentable subject matter. This allows things such as customer lists and pricing information to be protected as a trade secret in some instances.
Cons
Less Protection: Trade secret protection is inherently riskier. While the duration of a patent is much shorter, its protection is much stronger than that of a trade secret. Trade secrets only protect against unlawful breaches. They do not prevent parties from legitimate duplication efforts, such as reverse engineering, to learn of the secret independently. Alternatively, competitors could develop their own version of the trade secret and could even file a patent to claim an exclusive right to it, effectively shutting out the inventor.
Risk of Unintentional Disclosure: Using your trade secret in business can lead to unintentional disclosure that results in a loss of protection. Trade secret protection can be lost through independent discovery, reverse engineering, discovery under a license from the owner, observation of an item in public, through literature, or a failure to have company employees sign NDAs to ensure the secret is maintained.
Choosing the Right Approach
The decision between using a patent or a trade secret involves many considerations and an analysis of a multitude of factors.
While they may be expensive and time-consuming to secure, Patents provide extremely effective protection for a limited period: a company with exclusive use of a product or process will command the market for 20 years.
While a well-kept trade secret could be secret indefinitely, any person who lawfully learns of the secret may use it as their own. A patent may only last 20 years, but the protection is stronger during that era: independent invention is no defense in a patent suit. However, a trade secret could be used to protect anything not considered to be patentable subject matter.
If the requirements for both options are met, a company should investigate two factors in making their decision:
- Is 20 years a sufficient period of protection?
- Is a competitor likely to reverse engineer or independently reproduce the product during that period?
It is important to think long term in making the decision between a trade secret and a patent. These pros and cons should assist with your determination.
Sources:
- https://www.morningtrans.com/trade-secrets-vs-patents-which-is-right-for-you/
- https://ocpatentlawyer.com/can-get-patent-invention/
- Lydia Pallas Loren & Joseph Scott Miller, Intellectual Property Law: Cases and Materials (7th 2021).
- https://www.ift.org/news-and-publications/food-technology-magazine/issues/2002/april/features/protecting-innovation-patents-vs-trade-secrets
Your blog post was written in concise and clear language, which made the subject matter more digestible. The comparison between patents and trade secrets was organized in a clear manner, which makes comparing them even easier.
Great post! I feel your explanation of intellectual property mechanisms and the pros and cons of each was excellent. I also feel you did a great job offering some decision making factors for entrepreneurs. I would suggest some kind of hook to ease into the material instead of just starting right in.
Overall, excellent work!
Great article. I love how the sections were accompanied by pros and cons so that someone unfamiliar with patents can weigh their options. Overall, the information was digestible and reader-friendly. I’m excited to read your future articles.