Trade Secrets Versus Patents – Does the New Law on Patent Subject Matter Eligibility Change Anything?

Trade Secrets Versus Patents – Does the New Law on Patent Subject Matter Eligibility Change Anything?

January 30, 2015
Author: Ron J. Kamis

I attended the January 8, 2015 Trade Secret Symposium held at the United States Patent and Trademark Office (“USPTO”).  Among other topics, the Symposium covered the strategic choice between patenting and keeping technology as a trade secret.  The panel for this topic included in-house counsel from Intel and Procter & Gamble.  One of the questions to the panel was whether the recent narrowing of patent subject matter eligibility (“eligibility”) has affected their decisions on whether to choose patent versus trade secret protection.  That is, has the patent versus trade secret protection decision tree been affected by the recent Supreme Court cases and Federal Circuit cases that have determined that certain types of software and biotechnology inventions are not eligible for patent protection.  The answer was a definitive “no” from Intel’s counsel and a qualified “no” from Procter & Gamble’s counsel.  This posting considers this question.

First, it should be noted that the panel did not have representation from the two industries that are in my view most affected by the recent change in the law, that is, the software industry and the biotechnology industry.  Second, the panel did not have representation from start-up companies.  That said, I agree with the panelists that the fundamental criteria for the patent/trade secret decision have not changed.  But I do think, as discussed below, that although the decision factors may not have changed for large companies, they have become significantly more complicated for start-ups.

Before going into the decision criteria, I think it is worthwhile to summarize the pros and cons of trade secret versus patent protection.  The first benefit of trade secret protection is that it is free (aside from the cost of maintaining secrecy).  The second benefit is that it lasts forever, so long as the trade secret is kept secret, compared to a 20-year term for patent protection.  However, there are several downsides to trade secret protection.  First, once the secret is out, the protection is lost.  Second, enforcing a trade secret requires disclosing the trade secret in court, which ironically can put its secrecy at risk (e.g., due to judges who are reluctant to clear the courtroom during trade secret testimony and because of the risk that judicial confidentiality apparatuses may be compromised).   Another shortcoming of trade secret protection is that it does not protect against a competitor independently developing the same technology or reverse engineering your technology.

Moreover, a very significant downside to trade secret protection is that a third party can independently patent the same technology and then sue you.  In this case, the right to use your own trade secret can be taken away.   Although the America Invents Act of 2011 (AIA) provides trade secret holders a defense against this scenario, this defense contains several significant limitations.  For example, to qualify for this defense, the trade secret must have been commercially used at least one year before the patent was filed.  Furthermore, there are significant limitations on the transfer of this defense to third parties (e.g., your licensees or acquirers of your business).

Turning now to the benefits of patent protection.  First, patent protection can stop a competitor that independently develops the same technology after you do.   Second, patent protection can prevent competitors from reverse engineering your product.  The major downsides to patent protection are the cost of patent procurement, which must be obtained in each desired country, and the fact that obtaining a patent requires the public disclosure of the invention, typically at 18 months after filing.

As for the panelists at the symposium, the consensus was that the critical consideration in deciding between patent and trade secret protection is whether a technology can be reverse engineered.  If the technology can be reverse engineered, patent protection is the clear choice.  However, two independent considerations that weigh against patent protection are whether infringement can reasonably be detected (if you can’t find out about it, you can’t sue) and, of course, the cost of patent protection.  A final consideration discussed in favor of patenting was filing a patent as a defensive measure.  That is, filing the patent not for the primary purpose of suing others, but for the purpose of preventing the scenario discussed above (i.e., preventing a competitor for independently patenting the same technology and suing you).

Now coming to the panel discussion of the effect of the recent narrowing of patent subject matter eligibility, the panelist from Intel stated that, for core technology, the uncertainty in patent eligibility has not affected the decision on whether to file patents and she intends to pursue patent filings without attempting to predict the future direction of the eligibility law.  The panelist from Procter & Gamble gave a more nuanced answer that (1) for areas that are fairly clearly trending towards non-eligibility under current court decisions, strategic decisions are being made not to pursue these patents, and (2) there is a sliding scale for non-core technology.  Regarding core technology, however, the consensus was that patent protection will be sought and the patent versus trade secret protection decision tree will not include attempts to second-guess the current uncertainties in the law.

I agree with the basic principles discussed by the panelists – that patents will continue to be pursued for business critical technologies without second guessing the current uncertainty in the law.   However, there are additional considerations that were not discussed by the panel which are significant.

1.   Size Does Make a Difference:  The panel members represented Fortune 100 companies with large patent budgets and who are not beholden to venture capital.  Start-ups, however, do not have large patent budgets, and patent protection can be a pre-requisite for venture funding.   Furthermore, large companies have the resources to dedicate to trade secret protection.  For example, the representatives from both Intel and Procter & Gamble discussed the significant measures taken by their companies to protect trade secrets, such as ultra-secure facilities that even senior executives of the company do not have access to, the use of data storage that is at all times disconnected from the web and other measures that are not practical for start-ups.   Furthermore, large companies have the legal budget to enforce non-disclosure agreements (NDAs) and non-compete obligations that their employees sign.  This is a very different scenario for start-ups.  What makes a start-up nimble and competitive is that employees are not long-term and that, for cost-reasons, technology is outsourced.  Also, it is simply not practical from a business perspective to quarantine core technology from key employees in a start-up.  Also, in reality, start-up NDAs and non-competes are only as effective as a start-up’s resources to litigate these contracts.  Accordingly, for start-ups, in my view, the trade secret versus patent decision tree has been significantly altered by the new court cases.

2. Global Considerations:  For much of the last 20 years, the United States has generally led the major market countries of the world in expanding the scope of technologies considered patent eligible.  However, recently this has drastically changed.  Given the recent Supreme Court and Federal Circuit decisions, at least for certain biotechnology inventions, the U.S. is now the most restrictive major market country in what it considers patent eligible.  This creates a catch-22 for small biotechnology companies because obtaining patents outside the U.S. will of course preclude trade secret protection in the U.S.   One may now have to make a choice that has not been required in the past – that is, keeping a technology as a trade secret and foregoing major market patent protection outside the U.S. or alternatively, obtaining patent protection outside the U.S., but as a result losing intellectual property protection in the U.S.   While this is a moot point for inventions that can be reverse engineered (e.g., DNA and peptide compositions), it will have significance for other technologies, such as in vitro diagnostic tests, which are difficult to reverse engineer.

3. Provisional Patent Application Strategies.    U.S. provisional patent applications have been used by start-ups for many years as a means to defer costs because the government filing fees are minimal and no action on the application is required for twelve months.   In view of the recent change in patent subject matter eligibility, another reason to file a provisional patent application is that it maintains the trade secret status of an invention for twelve-months, while at the same time reserving your rights after twelve months to proceed with patent protection.  Furthermore, additional strategies are available to maintain the trade-secret status of a U.S. patent application.  First, after twelve months from filing a provisional application, the option is available to file a non-provisional U.S. patent application that is kept secret until it issues, provided that no patent protection is sought in any other country.  It is also possible to abandon the provisional application and re-file another provisional, which will maintain the trade secret protection for another twelve months, but this strategy has the serious consequence of abandoning the original priority date.  There is an additional benefit to the above strategies in that the filing of a provisional patent application memorializes the trade secret technology and can be used to prove the content and date of discovery of the technology in a trade secret litigation.  However, as discussed above, for a trade secret that is considered extremely valuable to a company this strategy generally would not make sense because of the risks involved when a trade secret is disclosed outside the company.  On the other hand, because of the practical difficulties discussed above for start-ups to maintain trade secret protection, the above provisional patent strategy will make sense in many cases.

In conclusion, for many large companies, deciding whether to pursue patent versus trade secret protection may be business as usual, but for start-ups, the decision tree has been significantly changed.



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