There are various means by which business organizations can protect innovation by preventing unfair use by competitors of the organization's innovations, while preserving the innovator's right to use. These include patents, trade secrets, and naturally occurring competitive advantages. Intelligent use of these tools requires consideration of the implications on the business organization's ability to freely commercialize the innovation in the marketplace. Deciding between these tools is not so straightforward, especially where technology innovation is often susceptible to alternative forms of protection, such as in the oil & gas industry. For example, many innovations in the oil & gas industry relate to processes whose commercial exploitation does not require their public disclosure, and which are difficult to reverse engineer from the resultant commercial product deriving from such processes. Potentially, exclusivity with respect to the exploitation of such newly developed technology, and the associated competitive benefits, could be enjoyed by protecting the technology either with patents or as a trade secret. Overriding this is the importance of preserving the right to use the technology, which imports the consideration of defensive publication of the newly developed technology. Strategies to preserve the right to use, while optimizing monopoly-like power with respect to the newly developed technology, will be discussed, including factors which bias the decision-making process towards one of patent, trade secret, or defensive publication.
Defensive Publication vs. Trade Secrets
If the invention is of marginal value, it may be difficult to justify the costs of patent protection. Other IP-unrelated competitive advantages may be sufficiently significant to outweigh any benefits associated with securing patent or trade secret protection. These IP-unrelated competitive advantages include:
- first mover advantages;
- excessive time lag before competitors recognize market opportunity;
- significant R&D catch-up hurdles;
- brand power;
- network effects; and
- oligopolistic market conditions.
As well, it may be difficult to justify choosing trade secret protection, having regard to the risk of infringing future patent rights of a later-innovating competitor and becoming blocked from using the invention. If the innovator keeps the invention a trade secret, a competitor may later develop the same invention and still be able to secure patent protection. Generally, being blocked by such a competitor's patent is less of a concern in those jurisdictions (eg. some European states) that recognize prior user rights (prior user rights do not appear to be sufficiently recognized in Canada and the United States to completely remedy this situation, especially with respect to chemical and other industrial processes). Generally, prior user rights insulate prior users of an invention in a jurisdiction from patent infringement liability to competitors with later-arising patents in that jurisdiction so long as the use precedes the competitive patenting. Even when prior user rights are not available, these patent infringement risks are tempered by the fact that a later-innovating competitor could, of course, choose to rely on trade secret protection. Also, even if the later-innovating competitor chooses patent protection, infringement risks are tempered by virtue of the fact that, because the subject innovation is amenable to trade secret protection, infringement detection is more difficult in these circumstances. Having said that, the potential consequences of infringing such competitor's patent may be sufficiently significant (eg. business failure) that assuming the risk that a competitor will independently develop and patent the same invention, and be able to detect infringement, may not be worth it, thereby eliminating the trade secret protection option from consideration.
In these circumstances, instead of patent or trade secret protection, there may be a justifiable bias towards defensive publication so as to create prior art that blocks competitors from obtaining patent rights for the same invention, and thereby preserve the innovator's right to use and commercialize the invention (hence the characterization of the publication as "defensive"). Although other forms of public disclosure trigger prior art consequences in some jurisdictions, prior art consequences are triggered in a wider number of jurisdictions when the public disclosure is elevated to the form of a "publication".
For example, technologies in the oil & gas industry that are susceptible to trade secret protection, but also warrant consideration for defensive publication, may include laboratory equipment and methods, internally-used material handling equipment, minor improvements to chemical processes, or simple non-core technologies. Bias to either one of trade secret protection or defensive publication depends on, amongst other things, the likelihood and consequences of infringing a competitor's future patent and the likelihood of detection of such infringing activity. For laboratory methods or internally used material handling equipment, competitive patenting activity is more likely to be low, infringement detection is more likely to be difficult, and the consequences of infringement are not likely to be significant. In such cases, there may be a justifiable bias towards maintaining trade secrecy. On the other hand, where potential infringement consequences are higher, such as for marginally improved chemical processes, and especially where relatively little value is likely to be extracted from protecting the technology by trade secret, such as in the case of simple non-core technologies, the bias may swing towards defensive publication.
Patent vs. Trade Secrets
If the invention is of more than marginal value, and there are no other ways available to assist the innovating organization in recouping its R&D costs, its protection through patenting or trade secrecy is more likely to be warranted. There is a bias towards trade secret protection where there is confidence that the invention could be maintained in secret and where it is unlikely that the same invention will be independently developed or reverse-engineered by a competitor. This bias becomes eroded when circumstances exist which increase the risk of loss of trade secret protection.
The following circumstances increase the risk of loss of trade secret protection:
- extent to which the invention is easily visible in the marketed product or service;
- existence of relatively high employee/ contractor mobility or competition for key employees;
- government regulation requires disclosure of information to a government authority;
- existence of many potential customers and concomitant increased opportunity for information exchange;
- sales process requires information exchange between vendors and customers;
- customers receive on-going technical support, thereby creating further opportunity for information exchange;
- nature of the innovator's business requires regular collaboration with third parties;
- business strategy includes licensing of invention to third parties;
- problem solved by the innovation is something which pervades the industry, and there is a high probability that competitors are continuing, in parallel, to expend R&D efforts, searching for a solution to this same problem; and
- existence of significant market opportunity, attracting competitors to develop same invention.
The bias against trade secret protection becomes even stronger if there is an aversion to accepting the potential consequences associated with the independent development and patenting of the same invention by competitors.
Patenting is the preferred choice when its deterrence power is high or when licensing potential for the invention is attractive. Generally, patents, rather than trade secrets, are the favoured vehicles for licensing. The value of patents as licensable rights increases where:
- the territorial reach of a business organization is limited;
- the invention is embodied in a non-core technology;
- the invention relates to a disruptive technology; and
- the patent landscape is fairly crowded and there is a concomitant increase in the risk of an infringement claim by a competitor.
Patenting may also be necessary to make potential investors feel more comfortable when financing the associated business venture. Further, patenting is more attractive where the innovator can realize value from the patent's ability to facilitate knowledge transfer, open the door to third party collaborations, and thereby inspire collaborative or third party development of foreground or improvement technologies which are potentially useful to the original innovator.
In parallel with filing a patent application, defensive publication of the invention could be effected so as to trigger more immediate prior art consequences, and assist in preserving the innovator's right to use the invention, versus waiting for the patent application to publish in the normal course of prosecution of a patent application (typically, 18 months after its filing).
Technologies that are relatively more valuable, and that are also susceptible to both patent and trade secret protection, may include more significant process improvements or pioneering process technologies. In these cases, a bias towards patenting exists when the technology has been jointly developed, or where licensing is a desired business strategy, or where employee mobility is likely, as these circumstances increase the risk of information disclosure that destroys trade secret protection. As well, the bias exists where government regulation requires disclosure of information to a legislated body, such as the Energy Resources Conservation Board created under provincial legislation in Alberta, which, in regulating the design and construction of new oil & gas projects in Alberta, could force the disclosure of potentially valuable trade secret information in order to help evaluate the environmental impact of the project. The bias also exists, or is further strengthened, when there is significant risk that competitors will independently develop the same technology. Independent competitive development chips away at the exclusivity previously enjoyed by the original innovator who chooses trade secret protection, thereby undermining the original innovator's competitive position. If there is a belief that the competitor will choose to patent the independently developed technology, this, combined with an increased risk of infringement detection arising by virtue of an increased risk of information disclosure through third parties (ie. the joint developer, licensees, or former employees), increases the risk of exposure to patent infringement consequences, and further biases the decision-making towards patenting.
A decision-making tool, in the form of a flowchart, is attached, as a general guide to deciding whether any invention should be protected by way of patent, trade secret, or defensive publication. Of course, this tool is merely a guide, and could be modified so as to recognize further intermediate levels of value and risk and their relevance to possible outcomes, and also to suit personal preferences, objectives, and philosophies.
Guide for Choosing between Patents, Trade Secrets and Defensive Publications Notes for Guide
Note 1: Invention value depends on, amongst other things, market potential, product life expectancy, and availability of alternatives with comparable utility.
Note 2: "IP-unrelated competitive advantages" include: (1) first mover advantages, (2) excessive time lag before competitors recognize market opportunity, (3) significant R&D catch-up hurdles, (4) brand power, (5) network effects, and (6) oligopolistic market conditions. Apart from any advantages provided by patent or trade secret protection, these IP-unrelated advantages improve the innovator's pricing power and, thereby, the innovator's ability to recoup R&D costs.
Note 3: The higher the visibility of the invention within the marketed product/service, or the easier it is to reverse engineer, the less likely that the invention, by its very nature, can be maintained a trade secret.
Note 4: The following are examples of circumstances which increase the risk of a "loss of trade secret protection event": (1) existence of relatively high employee/contractor mobility or competition for key employees, (2) government regulation requires disclosure of information, (3) sales process requires information exchange between vendors and customers, (4) existence of many potential customers, and concomitant increased opportunity for information exchange, (5) customers receive ongoing technical support, thereby creating further opportunity for information exchange, (6) nature of the innovator's business requires collaboration with third parties, (7)business strategy includes licensing of invention to third parties, (8) high probability that competitors are searching for solution to same problem solved by the invention, and (9) existence of significant market opportunity, attracting competitors to develop same invention.
Note 5: If invention is kept a trade secret, then the invention may not function as prior art in some jurisdictions, thereby permitting competitors to secure patent protection for the same invention and potentially block the earlier innovator who chose to keep the invention a trade secret. Generally, this is not a problem in jurisdictions that recognize prior user rights. However, there are several jurisdictions that do not appear to sufficiently recognize prior user rights so as to completely remedy this situation. (eg. Canada and the United States). Even in those jurisdictions that do not recognize prior user rights, this patent infringement risk is tempered by the fact that a later-developing competitor could choose, instead, to rely on trade secret protection, for the same reasons that are biasing the original innovator in this direction. Also, even if the later developing competitor chooses patent protection, patent infringement risk is tempered by virtue of the fact that, because the nature of the subject technology is amenable to trade secret protection, infringement is more difficult to detect in these circumstances (see Note 6). Having said that, the potential patent infringement consequences of assuming the risk that a competitor would independently develop the same invention, patent protect it, and be able to detect infringement, may be sufficiently significant so as to eliminate the trade secret option from consideration. Infringement risk depends on detectability (see Note 6). Potential consequences of infringement include erosion of profit margins due to royalty payments, business disruption arising from forced substitution with non-infringing technology, or even business failure. Assessing significance of potential consequences may include consideration of invention value.
Note 6: Infringement detection is more difficult when the visibility of the invention within the marketed product/service is low. The probability of detection increases, however, when circumstances (1) through (7), enumerated in Note 4, are operative. The probability of detection further increases when marketplace includes few vendors and is geographically concentrated.
Note 7: Although trade secrets are also potentially licensable, the necessary incidental dissemination of information to a third party, even with confidentiality obligations attached, increases the risk of a loss of trade secret event. For this reason, trade secrets are, generally, considered to be inferior vehicles for licensing, relative to patents, and the bias is towards patent protection when potential licensing value is higher. Licensing value increases where: (1) territorial reach of a business organization is limited, (2) invention is embodied in a non-core technology, (3) invention relates to a disruptive technology, and (4) patent landscape is fairly crowded and there is a concomitant increase in the risk of an infringement claim by a competitor.
Note 8: Patents may be valuable in attracting investment when inventions are relatively significant assets of a business. Again, relative to trade secrets, investors generally feel more comfortable with patent protected inventions.
Note 9: Patents may facilitate collaboration, as original innovator is able to relax secrecy when dealing with third parties when invention is patent protected.
Note 10: Consider defensive publication in parallel with patent application fi ling. Bias towards parallel defensive publication when future improvements unlikely within next 18 months, or when prior art consequences have already been triggered (such as by public use or sale).
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