Patents Vs. Trade Secrets

Posted on September 21, 2011


Protecting your business means protecting the ideas and innovations your business creates over time. Here at Red Mountain Law, we would like to illustrate two measures through which you can protect the ideas that are unique to your business:  trade secrets and patents.

Patents and trade secrets are two different measures that can protect an inventor’s idea or product. Patents are a form of idea protection secured through an application to the U.S. Patent and Trademark Office. The terms of a patent allow that an inventor can maintain ownership of an idea if they disclose with the government how to use and produce the product.  To obtain a patent, the idea must be novel, useful and non-obvious, which are legal terms of art.

The Uniform Trade Secret Act defines a trade secret as follows: “Information, including a formula, pattern, compilation, program, device, method, technique or process, that (i) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”  Trade secrets are kept within a respective company, and therefore a great deal of loyalty and trust are necessary in order to maintain a trade secret.  The companies that trade secrets work well for are those who have a monopoly or a long-standing dominance in an industry.  For example, Coca-Cola has maintained international dominance in the soft drink industry, and that is mostly due to their trade secret on the original Coke recipe, which has been maintained in the company for over a century.

The question then becomes whether a trade secret or patent is preferable for an invention.  The answer is: it depends.  Can the product be easily reverse engineered? If so, then a patent is needed.  Does the idea need to be disclosed by the company’s sales force?  If so, then patent protection will need to be obtained in order to avoid having every potential customer sign a nondisclosure agreement.  Furthermore, patents have greater legal standing as they are conducted and documented by the federal government.  While patents are limited in terms of length of protection, they do make it easier for a company to license its products, which can be where a great deal of profit is generated.

There are some distinct benefits to trade secrets, namely that i) they can potentially last forever and ii) there are no costs to establish the trade secret or to maintain it.  However, the company is still required to keep the trade secret confidential and this can be costly in and of itself.  This may require restricting access to the information, whether physically or through confidentiality and nondisclosure agreements for company employees.  There are at least two circumstances where a trade secret is the obvious choice.  The first of these is when the secret covers something that will not qualify for patent protection.  Examples are customer lists or sources of supply.  Secondly, is the life span of the product substantially shorter than the 20 year life of the patent?   If the technology will be obsolete in less time than it would take for the patent to issue, typically 2-3 years, then a patent is not the best choice.

If you are curious as to which option is best for your idea or company, Red Mountain Law is happy to assist you in choosing the appropriate legal protection.