Patents Versus Trade Secrets

Patents Versus Trade Secrets

I work with companies of all sizes – large multinational pharma companies to life science startups with just one person. A common thread that I see is deciding whether to file patents on company innovations or to protect them as trade secrets. As a patent lawyer, my obvious bias is toward patents – but hear me out.

What are the benefits of patents? They give the patentee, of course, the right to exclude others from making, using, offering for sale, or selling the claimed inventions (35 USC §154(a)). They have a limited monopoly for the claimed inventions – usually 20 years from the earliest U.S. or national phase application filing date. If a patentee has the resources, they can assert the patents against alleged infringers to try to get them to stop infringing.

Another advantageous route is licensing the claimed inventions. This can be a substantial benefit to companies at all economic scales. For startups, it can represent a much-needed cash infusion for further operations or a source of funding for further prosecution costs. Patents can also form the basis for important partnerships or serve as leverage against potential adversaries in negotiations. Patents can represent a very large portion of a company’s valuation.

So what are the downsides? Usually an initial consideration is the cost of drafting, filing, and prosecuting patents worldwide. These costs can be substantial and unpredictable. The good news, however, is that they may be spread out over a number of years. On the other hand, the cost of patent litigation can be astronomical! Another downside is the requirement that one describes the invention in enough detail to enable a person of ordinary skill in the art to practice the invention. Patent applicants must also disclose the “best mode” for practicing the invention. Even after making these disclosures, it’s possible that a patent will not issue in one or more countries with desirable claims. In those countries, without those claims, third parties are free to practice those inventions. Moreover, once a patent expires, all disclosed inventions are “dedicated to the public.” In other words, they are fair game.

Now to the trade secret side (full disclosure: I’m not a trade secret jockey but I play one on TV). The first benefit is that the cost structure is different from patents. At the lowest level, it’s just a matter of keeping secrets. This might seem trivial – but it’s not (more on that below). Also, there is no limit on how long trade secret protection lasts – it’s only limited by the ability to keep secrets. Theoretically, a trade secret can last forever. Moreover, there is (obviously) no public disclosure requirement. The holder of a trade secret is under no obligation to teach anybody anything. The secrets are shared on a need-to-know basis.

And now the downside. Trade secrets get leaked. Employees can quit and walk them into your competitor (which may be illegal). Employers run the risk of illegally acquiring trade secrets from new hires. Also, trade secrets can be inadvertently disclosed during the normal course of business such as through supply chains or contract research organizations. Once a secret is lost, it’s lost forever.

Recently, I attended a seminar given by an FBI agent that was discussing industrial espionage. It was eye-opening. Certain countries routinely steal intellectual property. They are generally ones with autocratic governments that rely on IP theft to compensate for the inability to innovate in certain areas or pay for licenses from valid IP holders.

When anybody with confidential industrial secrets visits one of these countries, subterfuge and networking technologies are commonly used to access those secrets. The FBI agent recommended not putting any device with such information on a network in these countries – and don’t leave them alone in a hotel room. Bring clean devices and burn them when done. Be cautious when people suspiciously seek to foster long-term relationships. Be cautious at conferences.

Furthermore, nationals from those countries that work in the United States could be compromised. They could be employees at any level – including executives, engineers, quality control staff, and R&D staff. They may be willing thieves for money. They may be compromised by blackmail, threats to family in those countries, financial strain, or poor health.

IP theft in these countries is normal and institutionalized through the intelligence agencies. Companies that do business in those countries are often required to turn over industrial secrets to the government – no matter if they are under a confidentiality agreement. The U.S. business partners will never know because it is done under a gag order. Any participation in those economies makes one vulnerable. This includes taking venture money that has some ties to those economies.

Theft of trade secret litigation can be very expensive and acrimonious. It is governed by the laws of each of the 50 states, or in the alternative, federal law. Each jurisdiction has its own set of laws that may be different. One common thread, however, is that one must religiously safeguard the secrets or else there may be no recovery for trade secret theft. The World Intellectual Property Organization makes the following recommendations:

• Create agreements, policies, procedures and records to establish and document protection
• Establish physical and electronic security and confidentiality measures
• Assess risks to identify and prioritize trade secret vulnerabilities
• Establishing due diligence and ongoing third-party management procedures
• Institute an information protection team
• Train employees and third parties
• Monitor and measure corporate efforts
• Take corrective actions to continually improve policies and procedures

These measures require time and resources. Thus, maintaining trade secrets is not free. Substantial risks exist that the secrets will be lost or that one cannot recover damages for trade secret theft.

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