trade secrets

Trade Secrets or Patents: Which Should You Choose?

Latest posts by Adhip Ray (see all)

Most businesses need to continuously innovate to stay relevant in the marketplace. With such intense focus on innovation, businesses naturally seek to patent their inventions to avoid infringement by other parties. But there’s an alternative: trade secrets.

Getting a patent is a very time-consuming and costly process. In niches such as tech, where first mover advantage can make or break businesses, one generally does not have the leeway to go through a long process.

Plus, most small companies and startups do not have the financial resources to seek patent protection, via the elaborate procedure.



Trade secrets versus patents

The reasons patents are still relevant:

  1. Keeping a trade secret is a risky affair as a company needs to restrict it from being openly accessed by its employees and to demand confidentiality agreements from its employees.
  2. Not all inventions can be kept secret. Some inventions can be reverse engineered.
  3. Some countries, such as China, provide very poor protection of trade secrets.

Of these reasons, the fact that most inventions can be reverse engineered prevents inventors from keeping them as trade secrets. Reverse engineering is basically the art of tinkering with and taking apart a publicly available information or product to discover how it was created.

A very famous example of this is a 1982 case where locksmiths reverse engineered the locking system of a Chicago security company, jeopardizing its security systems.

Also, companies like Coca-Cola have come very close at times to having their trade secret leaked by employees.

The patent versus trade secret debate is not new, but the changing legal landscape is what is forcing startups and businesses to opt out of patenting their inventions.

For example, usually businesses in the hardware sector need to patent their inventions as hardware is easy to be reverse engineered. However, several countries including India do not provide patent protection to software. Therefore, although some seek copyright protection, most, especially Internet companies, keep their source codes as trade secrets.

While pharmaceutical companies always patent their inventions, food and beverage companies usually keep their inventions as trade secrets, although they are patentable.

The perks of a trade secret:

  1. Trade secrets are ever-lasting if you can protect them properly, whereas patents last only 20 years.
  2. You can forego the complicated procedures of a patent and just enjoy the benefits of the invention without having to worry about the legalities.
  3. Trade secrets, by their nature, can cover information including abstract ideas, which aren’t protected by intellectual property laws.

Patent law

Patent law is governed by different statutes in different countries; for example, in the United States, it is governed under the Patent Act (35 U.S. Code), whereas in India, it is governed under the Patents Act of  1970. They both provide protection to both the products and the processes that involve an inventive step and are capable of industrial application.

The United States, being a member of the Patent Cooperation Treaty of 1970, also allows for foreign applications to be made for patent protection as well as for its own citizens to apply in other countries for a patent via the treaty within 12 months of making the local application. After one applies for patent protection in other countries via the Patent Cooperation Treaty, the World Intellectual Property Organization will:

  1. Conduct an international search,
  2. Publish the application in the PatentScope database soon after 18 months of the priority date,
  3. Conduct an optional international search and patentability examination, and
  4. Send the application to national offices where you seek patent protection for their examination under their own laws.

Drawbacks of patenting your invention

With a patent being a territorial right and the procedure of filing a patent application and then having to correspond with the patent attorney and patent office being complex, it is not suitable for startups and small and medium businesses, which often don’t have the capital to fund such an endeavor or the time to commit to it. Further, a large number of patents are rejected after their publication and the owner loses protection shortly after its publication, even after going through the  lengthy and costly research and development and patent due diligence processes.



What’s the solution?

Trade secrets are growing in popularity as an alternative to patents. Although some countries like the United States provide a high level of protection for trade secrets via the Uniform Trade Secrets Act (UTSA) and Defend Trade Secrets Act (DTSA), it is not the same in countries like India, China or the United Kingdom.

The UTSA is a model law enacted by the U.S. Congress that derives its power only upon being adopted by the states concerned. The law was enacted with the aim to redress the uneven legal regulations surrounding trade secret protection across the United States.

The UTSA recommended a uniform trade secret law but also gave states the freedom to meet certain local requirements by modifying the text as it was enacted in each state. For example, New Jersey modified the law to conform with its common law jurisprudence on trade secrets.

The DTSA (2016) also allows for criminal penalties against trade secret infringement. India does not have a stand-alone regime to protect its trade secrets through the DTSA. Further trade secret infringement in India is purely a civil matter.

Learn more about the Indian law here.

In the European Union, member states define trade secrets differently resulting in comparatively lesser, as well as conflicting, protections of trade secrets.

However, in the United Kingdom, with the enactment of the Trade Secrets Regulations (2018), this may be a thing of the past as the statute has kept the definition of “trade secret” quite broad in scope by labeling it as “information.”

The United States, United Kingdom and other major economies have enough ways and means to provide protection to its trade secrets sufficiently.

Takeaways

Some startups are moving away from protecting their inventions via the patent law and choosing trade secrets as they are less complex and less costly. Every startup should consider these factors in their own case as well. There is no one-size-fits-all solution and businesses should consider their niche and size to decide whether they should opt for patent protection.

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