Many of you are probably familiar with patents, but what’s a trade secret. A few famous examples include the Coca-Cola formula, the Google search algorithm, and KFC’s secret recipe of 11 herbs and spices. More common examples for small business include client lists, cooking recipes, or computing algorithms. Before you begin selling your innovation, you need to understand the difference between a patent and trade secret to select the most appropriate means of protecting your innovation. Here’s a short overview of the key differences between trade secrets and patents.
Essentially, a trade secret is anything that adds value to a business by virtue of being a secret. However, the U.S. Patent and Trademark Office (USPTO) ascribes three elements that must be met for a piece of information to be considered a trade secret. A trade secret is:
- is information that has either actual or potential independent economic value by virtue of not being generally known,
- has value to others who cannot legitimately obtain the information, and
- is subject to reasonable efforts to maintain its secrecy.
On the other hand, your innovation must meet five requirements to be eligible for patent protection:
- Patentable subject matter
- Novelty (must be new)
- Utility (must be useful)
- Nonobviousness (must be inventive, not obvious)
- No Prior Commercial Use (must not have prior use, such as being sold)
Businesses usually falter on the final criterion by selling their product, or otherwise commercially using it, before filing a patent application. When this happens, the business can only protect its innovation with a trade secret.
Patent or trade secret?
First, consider what is the subject matter of your innovation. All jurisdictions place strict restrictions on what types of ideas can be patented: the innovation must be a “new and useful process, machine, manufacture, or composition of matter.” Trade secrets can be virtually anything secret that has economic and competitive value.
Disclosure. A key consideration is that patents must be disclosed in detail and must be examined by the USPTO, thus becoming part of the public record. Because patents eliminate the need for secrecy, patents can be licensed and monetized. In contrast, trade secrets are not subject to examination by the USPTO and remain hidden from public knowledge.
Duration. Trade secrets last potentially forever, if you’re careful enough to prevent any leaks in your organization. Patents, however, last only 20 years. Trade secrets are preferable for technological innovations, which have a fairly short product life cycle of approximately 5 years.
Cost. Patent applications can be fairly expensive (think upwards of $200,000), especially if they involve complex technological innovations. And, you will need to personally prosecute infringers, adding potentially significant litigation costs. Meanwhile, trade secrets can be protected with a fairly standard non-disclosure agreement.
Protection. Patents require the patent owner to police the use of its innovation and take action against infringers. Patent infringement comprises any unauthorized use of the innovation, offer to sell in the U.S., import of the invention into the U.S., and encouragement of others to infringe. Patents are protected under Title 35 of the U.S. Code.
Trade secrets are protected under the Economic Espionage Act of 1996, which criminalizes the theft of trade secrets. An offense can lead to prosecution by the Department of Justice, possibly resulting in fines and imprisonment. The Defend Trade Secrets Act of 2016 allows you to sue someone in civil court for the misappropriation of a trade secret. The court can protect your trade secret by
- ordering the offender to stop misappropriating of your trade secret,
- Preventing the secret from becoming public knowledge,
- Ordering the seizure of the trade secret.
If the innovation can be easily reverse engineered or can be independently developed, a patent may be more appropriate because trade secret protection doesn’t cover these situations. You can lose trade secret protection by
- Owner or owner-authorized disclosure
- Reverse engineering
- Independent development
- Failure to take reasonable steps to prevent disclosure
Other considerations include how the innovation may be stolen and who the possible perpetrators may be. As you’re developing your innovation, also think about how it may evolve in the future and how you can best protect future iterations of your product.
In sum, trade secrets protect against unfair or illegal uses of your innovation, while patents protect your innovation against any use. LawChamps can help you find an attorney to assess how to appropriately protect your innovation.
This article is intended to convey generally useful information only and does not constitute legal advice. Any opinions expressed are solely those of the author, not LawChamps.
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