When Is Trade Secret Protection the Right Choice?
Published: January 18, 2024
Companies rely on intellectual property (“IP”) rights to protect their valuable information, creations, and branding. IP rights come in several forms: copyrights, trademarks, patents, and trade secrets.
As the U.S. Copyright Office explains, copyrights protect “original works of authorship including literary, dramatic, musical, and artistic works, such as poetry, novels, movies, songs, computer software, and architecture.” Copyright protection exists at the time of creation of the artistic or literary work, but before enforcing the rights against an infringer, it is necessary register the work with the U.S. Copyright Office.
The U.S. Patent and Trademark Office (“USPTO”) states, “a trademark protects brand names and logos used on goods and services. A patent protects an invention. For example, if you invent a new kind of vacuum cleaner, you would apply for a patent to protect the invention itself.” While there are certain rights in common law trademarks, greater protection is afforded by registering the mark with the USPTO. And with patents, the only protection arises when the USPTO issues a patent on an invention.
There is a fourth type of IP protection, trade secrets, that doesn’t involve registering the rights with a government office. In fact, the only way to benefit from trade secret protection is to keep the information secret. As discussed below, in many instances, a choice will need to be made as to whether to rely on trade secret protection or pursue a patent.
First, it is important to understand what a trade secret is. A trade secret is a form of intellectual property that protects confidential business information that (1) has economic value, providing a business with a competitive advantage, and (2) is not generally known or readily accessible to others. If that information becomes known to others (outside a nondisclosure agreement or license, etc.), then it is no longer a trade secret.
In business, a wide range of information can be considered a trade secret. For example, a trade secret can be a manufacturing process, recipe, distribution method for products, research and development information, software algorithm, list of ingredients, list of suppliers, list of customers, pricing strategy, business plan, or advertising strategy. Well-known examples of trade secrets include the recipe for Coca-Cola, Google’s search algorithm, the recipe for Kentucky Fried Chicken, the WD-40 formula, the recipe for McDonald’s secret sauce, Hershey’s chocolate-making process, and Procter & Gamble’s consumer research methods.
The question always arises as to whether it is better to rely on trade secret protection or seek patent protection. For example, why didn’t Coca-Cola patent its recipe and process for making the iconic beverage? What should you do with your company’s valuable creations and information? The answer is what you might expect from a lawyer: “It depends.” Then, the explanation continues: “Sometimes your information or creation cannot be protected by patents and is not a trade secret. Occasionally, part of your invention can be protected as a trade secret while another part is eligible for patent protection. Again, it depends. What are you trying to protect? What type of protection is it eligible for? How long do you want to protect it? How much are you willing to spend? What measures are you willing to take to protect it?
Let’s dive in and address a few of these questions, starting with why it matters what you are trying to protect. Under 35 U.S.C. § 101, “[w]hoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” But there are exceptions and exclusions under patent law. For example, courts have found that abstract ideas, natural phenomena, and laws of nature are not patentable. In addition, you typically cannot patent a number of other categories of creations or information, such as
- Methods of doing business
- Literary, dramatic, musical, or artistic works (Look to copyright protection for these.)
- Mathematical formulas
- Discovery of new forms of known substances
- The manner in which information is presented
- Using a computer to automate a known process
- Certain software and algorithms
If your information or creation does not qualify for patent protection, then trade secret protection may be an option. But not all confidential business information that is valuable and generally unknown is a trade secret. Even if the confidential business information was originally protected as a trade secret, that protection can be lost if the information is publicly disclosed whether intentional or unintentionally.
Also, confidential business information is not a trade secret if it can be reverse-engineered. Reverse engineering refers to taking a finished product and analyzing it to determine the recipe for making it, what its functionality is, the ingredients and/or composition of it, and/or the process for making it. In many cases, a lab can test a product and determine its ingredients or an engineering firm can reverse engineer an integrated circuit to determine the design and, in some cases, even aspects of the process steps for manufacturing it. Even though a company considers that information to be confidential and has taken steps to protect the secret, that information is not a trade secret simply because it can be determined through reverse engineering.
In most cases, reverse engineering is legal. A business that successfully reverse engineers a product that is only protected through secrecy can rightly use the same formula or ingredients to compete with the original creator. There are certain exceptions to the use of reverse engineering. For example, if a trade secret holder sells or licenses a trade secret to another business and gives that outside business access to a secret process, software, device, or other information, the licensee will likely be prohibited from using that access to reverse engineer the trade secret. Also, it’s a problem if the information required to reverse engineer a product is illegally obtained.
Looking back on the example of Coca-Cola, it’s clear that the beverage likely would have been eligible for protection under patent law or as a trade secret. Its recipe and process were apparently new and novel at the time of creation and not subject to exclusions. And no one has successfully reverse-engineered it after its creation in 1886. So why did they choose trade secret protection? While we don’t know their actual thinking at the time, we do know they made the right choice. Patent protection only lasts twenty years, whereas trade secret protection can last indefinitely, and in the case of Coca-Cola, it has already lasted almost 138 years.
While a patent is in effect, the patent holder has a monopoly on that invention in exchange for disclosing the invention to the public. This is the tradeoff an inventor makes with the public. In exchange for the monopoly period, the inventor ensures the public will know how to freely use the invention when the patent expires. A trade secret, however, can last forever as long as the owner takes reasonable steps to protect it from disclosure.
The risk of relying on trade secret protection alone is that someone else may independently develop the trade secret, the trade secret may be accidentally revealed, or through advances in technology, the trade secret may become readily accessible through reverse engineering or other means.
If another entity independently develops a trade secret, then they are free to use it as well. The second inventor may even seek patent protection, and the original creator will not be able to claim its creation as prior art because they kept it secret. The America Invents Act (AIA) attempted to address this issue by increasing the coverage of “prior user rights.” The updated law states that “[a] person shall be entitled to a defense . . . with respect to subject matter consisting of a process, or consisting of a machine, manufacture, or composition of matter used in a manufacturing or other commercial process, that would otherwise infringe a claimed invention if . . . such person, acting in good faith, commercially used the subject matter in the United States . . . in connection with an internal commercial use . . . .” See 35 U.S.C. § 273. While this statute provides a defense to patent infringement under certain circumstances, it is not necessarily a complete defense for the original trade secret owner. For example, the original creator of the trade secret must have used it within the United States before the patent priority date. If the original creator manufactured the product in a foreign country before the patent’s priority date and wants to move the now-patented manufacturing process to the United States, they would not be allowed to do so.
If you have a valid trade secret, it will protect against unauthorized acquisition (i.e. theft), disclosure, or use of the confidential information by anyone other than the owner or licensee. A trade secret is enforceable in either federal or state court by proving that you own the trade secret, the trade secret is in fact a trade secret, it was misappropriated, and you took reasonable precautions to maintain its secrecy. In addition to civil remedies, trade secret theft can result in criminal prosecution.
In sum, to protect the valuable IP rights of a business, it is important to consider a combined approach that makes use of patent, copyright, trademark, and trade secret protection. Individually, there are pros and cons to each form of protection, but collectively, they provide a stronger, multi-faceted approach. For example, a business may choose to patent the design of a special machine for increasing efficiency in the production of its product but keep the actual recipe and process for manufacturing the product as a trade secret because the likelihood of someone else independently developing it is very low. This same company may rely on copyright protection for the software that controls the process if that software does not meet the requirements for patent protection. The business may also apply for design patents to protect the visual appearance of the finished product, and they may trademark the logo for the product. As mentioned earlier, the right choices for IP protection, and whether any or all of them are applicable, depend on what you are trying to protect.