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IP, Patent

Power Play: Are Trade Secrets More Powerful Than Patents?

The California Employment Lawyer blog alerts us to an ABA-Landslide article discussing the possibility that trade secrets provide more powerful protection than patents. The lawyer’s answer, like the answer to so many questions, is it depends. *Sigh* The passage quoted by CEL summarizes:

In recent years, decisions by the U.S. Supreme Court and other developments in the law have circumscribed the once broad protection afforded to patent holders as well as remedies available to patent holders. Upon consideration of all the issues discussed in this article, the protection of such assets as trade secrets may provide a better choice for your clients in today’s environment.

via Is Trade Secret Protection Better Than a Patent? « California Employment Lawyer.

Is this a sign that lawyers will advise more firms will turn to trade secrets, rather than patents to protect their intellectual property? And if so, what are the legal arguments supporting that advice? More importantly, what policy implications does this present?

Trade secrets are the most natural form of intellectual property. A trade secret exists by virtue of being secret. In its simplest terms, the owner of the trade secret can enforce it to prevent others from usurping the secret for their own benefit, or exposing it to the public. And the trade secret can, in theory, exist forever, unless others are able to independently discover the secret (for example, through reverse engineering).

Patents, by contrast, are limited in time, but their remedy is good against any infringer, including those who had no knowledge of the patent.

The legal and policy arguments for IP protection are varied.  On the legal side, trade secrets law does provide for a wider variety of remedies. Most commonly, patent owners are limited to a “reasonable royalty,” but trade secrets owners can be awarded a disgorgement of profits, in addition to actual losses. Injunctions, including preliminary injunctions are also more commonly issued in trade secrets cases.  In some states, violating a trade secret can also constitute a felony (carrying a prison sentence of up to ten years). And that brings up another point, which is that trade secrets are a matter of common law, meaning their enforcement can be carried out in state courts, which can be faster and cheaper than federal courts.

With all of that said, your client might wonder why you’d ever recommend applying for a patent. You have to fully disclose to the world how to make and use your invention, at the expiration of your patent the world is free to practice it, and during its lifetime your remedies aren’t necessarily as good as they were under trade secrets law.

Well not so fast, you’d say to your client … If your product is such that any reasonably sophisticated firm could purchase it, take it apart and learn how to make it, then your trade secret would last about as long as your first sale. Once its independently discovered by others, your trade secret ends. Many lawyers (looking to mitigate risk) would prefer to swap the indeterminacy of a trade secret for the certainty of a patent.

On the policy side, patents are intended to promote progress, at least according to the constitution. However, when patents are enforced against companies that are making use of the claimed inventions, the reporting often claims that progress is being hindered. Such claims ignore the patent quid pro quo, which is disclosure of how to make and use the invention. While we may get the commercial benefit of a firm’s innovation protected through trade secret, society at large may get little to no information about the technology behind it. Discovering this information may only come at great expense, so patents are a way of encouraging this disclosure and inspring further innovations.

For example, patents encourage innovation by providing incentive to competing firms trying to avoid infringement.  A competitor can attempt to design around a patent, providing a product that accomplishes the same purpose while avoiding something claimed as part of the invention. These alternative designs may be novel in themselves, and thus patentable.

The limited life-time of patents also encourages innovation. Due to the risk of losing exclusivity, firms look for other ways to maintain control over a market by either patenting improvements to an existing product, or patenting new, complementary products. Consider everybody’s favorite trade secret, Coca-Cola. The formula has remained a secret for over 100 years. Similarly, Coca-Cola has remained more or less the same for 100 years. Other than the recent rise of “energy drinks,” most soft beverages are more or less the same. Imagine if Coca-Cola had to develop new formulas every generation to maintain their distinctiveness and uniqueness. Is it possible we’d have vastly different soft drink choices? And if we all liked the original Coca-Cola formula, that recipe would now be free for generic soft drink makers to use.

Naysayers point out that infringers can be sued even when they re-create the invention without knowledge of the patent in the first place. Because of this independent act of invention, the disclosure fails to provide a benefit to society, or so the argument goes. Of course, its true that independent invention is no defense to patent infringement, but that’s due to the fact that patents are awarded not to anyone who invents, but to the first person to invent. The fact that the second to invent didn’t realize he was re-creating the wheel doesn’t change the fact that he did. Similarly, the original inventor put the world on notice and can’t be blamed if others choose not to educate themselves.

Many of these benefits are not available when firms favor trade secrets over patents.



7 thoughts on “Power Play: Are Trade Secrets More Powerful Than Patents?

  1. Certainly, some innovators — particularly those who cannot afford the expenses associated with patent prosecution — might be better served by securing trade secret IP rights instead. Nevertheless, it’s always wise to consult an IP legal professional before making such a weighty decision, because, after all … *it depends*.

    Posted by patent litigation | January 25, 2011, 12:45 pm
    • Thanks for reading.

      It’s worth pointing out that patents are also more liquid than trade secrets. They can (and do) trade on their own. While trade secrets can be licensed, outright assignment of trade secrets more often occurs with the transfer of a company or line of business.

      Posted by Patrick | January 25, 2011, 4:23 pm


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