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How businesses choose between trade secrets and patents

In-house counsel say that deciding between a trade secret and a patent requires looking at patentability, potential infringement detection, and whether an invention could realistically be kept under wraps

Trade secrets are becoming more popular with businesses as a means of protecting ideas, according to in-house counsel.

Sources point out that it is easier for competitors in an interconnected world to copy inventions without authorisation, and that the rise of connected technologies means many businesses have to protect more ‘black-box’ innovations than before.
The IP manager at a Japanese automotive company says that car manufacturers are looking more and more to keep driverless car-related inventions as secrets – particularly artificial intelligence software – because of the difficulty in patenting and detecting infringement of those programs.
The head of IP at a medical device company says that her company is turning more towards trade secrets for its connected medical products for similar reasons.
Claude Kaplan, head of IP commercialisation at veterinary supplies firm Benchmark Holdings in the UK, adds that the internet has also made it easier for competitors to search through patent registrations and reproduce lucrative products or processes.
He suggests that more SMEs are thus choosing trade secrets over patents because of their cost-saving benefits.
Not only do trade secrets save on the cost of registrations, they also reduce enforcement expenses by preventing competitors around the world, particularly in countries with less reliable IP systems, from simply accessing public records and reproducing the invention.
The recent introduction of the Trade Secrets Regulations in Europe has also made trade secrets protection a more viable and manageable option across the EU.

But businesses are aware that trade secrets are not always the best option for protecting a product – particularly if that product is easily reverse engineered. The trick for businesses then is working out whether an invention is better of being patent protected or kept under wraps.


The practicalities

The first and most obvious consideration for choosing a trade secret over a patent is whether the business can get a registration for its invention.
But on the assumption that a patent is possible, says Kaplan at Benchmark, the next biggest test is whether that patent is actually enforceable.
“A company may suspect that a competitor is infringing their patent or a manufacturing process, for example,” he says. “But without a warrant to raid a competitor’s factory, it is often difficult to prove when infringement is taking place.”

A source at a telecommunications company tells Patent Strategy that the decision of whether to patent a product or keep it secret ultimately comes down to whether keeping a trade secret would make more sense.
Mohammed Karim, senior legal counsel at entertainment tech company TiVo, pointed out at this year’s Managing IP International Patent Forum that a business must work out whether an invention can realistically be kept a secret for a long time. If it can, it should be kept as such.
“If you can reverse engineer something, trade secrets is not a good idea,” he said. “Certain subject areas, for example AI, cannot be reverse engineered.” 
There is also the matter of ensuring employees do not run off with company secrets. Kaplan at Benchmark says: “It is the issue I lose the most sleep on. If any of our employees wanted to be malicious, it could be a nightmare.”
There are protective measures companies can take to manage their employees so that confidential information is not stolen. Some top tips from internal counsel include tightening cyber security and doing training sessions for employees on how they are allowed to share information.
"Nobody has invented the memory eraser from Men in Black yet. But the main way you can do that is through employee agreements. You set out what items should be confidential,” said Karim at TiVo.
He suggested that the best way to do that would be through employee agreements that specifically list which items should be kept confidential, and added that it is a good idea to cast as wide a net as possible.
Also speaking at the forum was James Thomson, head of external affairs at the UK Intellectual Property Office, who advised businesses to give thorough exit interviews when employees leave the company. During the interview, staff should be reminded of any training they had plus all the clauses in the contract that spell out what information is confidential.
He added: “The key to this is getting HR on board when they start so they know this a fast moving tech environment. When you leave there are things you can’t delete from your brain, but the non-compete clause can protect you.”
Different jurisdictions, however, allow for different lengths in time of non-compete agreements. It is important for HR and legal teams to double check just how long they can keep their employees under a non-compete agreement. Karim noted: "You can have a non-compete covenant. In different jurisdictions there are limits on how long you can keep someone from working for a competitor.”

Another way of keeping information secret is by carefully classifying internal information. Many companies are adopting methods to label documents according to who has access to the information.


Trends

Manny Schecter, chief patent counsel at IBM, suggests that due to legislation in the US, there might be a slight trend of IP teams deciding to keep a product secret. The America Invents Act of 2011, along with recent US Supreme Court rulings on what can and cannot be patented, have weakened the patenting system.
The US also passed the Defend Trade Secrets Act of 2016, harmonising trade secret infringement on a federal level. The combination of these factors, sources say, has led to more companies opting for trade secrets over patenting.
In the EU, the European Parliament passed the Trade Secrets Directive in 2018. This law harmonised the protection of trade secrets across all EU member states and established means for companies to seek retribution if their trade secrets are breached.
In the end, deciding to forgo a patent for a trade secret requires much careful consideration. As Kaplan notes, “Trade secrets are really about people.” Before deciding whether to choose a trade secret or not, IP teams have to take a careful look at the landscape around them, the invention they want to protect, and most importantly, the people handling the information.

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