Intellectual Property professionals, and owners of intellectual
property (IP) rights, generally agree on the important value of
patents. A relevant question to consider is whether an innovation
would be more properly protected by a trade secret, or by a patent
There are numerous factors to consider in making a decision, and
all these considerations go beyond this post. However, it is noted
that a major difference between the patent system and trade secrets
is that patents require the disclosure of innovation whereas trade
secrets require the opposite.
The authors made the hypothesis that greater trade secret
protection encourages companies to adopt this approach. The
consequences will be an increased information asymmetry and reduced
stock liquidity. On the other hand, better patent protection
encourages companies to apply for patents, therefore disclosing
more information, which results in higher stock liquidity.
The authors conducted a retrospective study of the stock
market's reaction following the implementation of the Agreement
on Trade-Related Aspects of Intellectual Property Rights (TRIPS)
compared to the enactment of trade secret statutes in the United
States of America.
The implementation of TRIPS, which strengthened patent
protection, increased transparency and stock liquidity of patenting
companies. Disclosure of inventions by publication of patent
applications offer investors direct information concerning the
rights held by the company. A patent system favorable to Applicants
encourages companies to obtain patents, which plays an important
role in the financing of small innovating companies.
The enactment of trade secret statutes reduced the publicly
available information about the companies and caused a reduction in
stock liquidity. The strengthening of trade secret protection also
had the effect of worsening the market's reaction to
announcement of seasoned equity offerings (or second equity
offerings - SEO).
The conclusions can be useful to legislators and policy-makers
in developing suitable laws and policies to facilitate the growth
of innovative companies.
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A recent Saskatchewan Court of Queen's Bench decision allowed a court-appointed receiver to sell and transfer intellectual property rights free and clear of encumbrances, finding that a license to use improvements of an invention was a contractual interest and not a property interest.
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