A patent gives a temporary monopoly right for an invention. The
trade off? That invention must be publicly disclosed, as well as at
a cost to secure and maintain patent protection in each country
required.
A trade secret can be confidential information relating to an
invention, with an unlimited length of protection from unauthorised
use and at no or little cost to secure and maintain. The trade off?
Nothing can be done if a third party independently arrives at the
secret.
The World Trade Organization (WTO) defines a trade secret as:
a) is secret in the sense that it is not, as a body or in the
precise configuration and assembly of its components, generally
known among or readily accessible to persons within the circles
that normally deal with the kind of information in question;
b) has commercial value because it is secret; and
c) has been subject to reasonable steps under the circumstances, by
the person lawfully in control of the information, to keep it
secret.
And it is this definition that is generally adopted throughout
the world by most countries. If proprietary information meets these
criteria, it may be eligible for trade secret protection depending
on the laws of the jurisdiction(s) in question.
However, trade secrets do not come without their challenges, most
fundamentally of all how to keep them secret. Many aspects of
industry have become increasingly digitised over the past 20 years,
with information and communications being electronically recorded.
There exists an increased ability to store and transfer large
amounts of data, and employees have a propensity to work for
multiple employers across their working life span. Working
collaborations with other companies in the same field also provide
opportunities for sharing information and intellectual property.
Controlling the dissemination of proprietary information and
know-how is arguably more difficult than it has ever been. Perhaps
the most well-known trade secret, which is still a secret after all
this time, is the recipe for Coca-Cola. Despite a number of recipes
being published, remarkably it is claimed that the actual formula
still remains a secret to all but two employees at any one
time.
Some companies might therefore favour the approach of patent
protection, particularly with a view to the relative ease of
potential enforcement of a registered right. Others, due to the
reasons outlined above, might adopt a trade secret first view,
particularly as patents are territorial in their scope of
protection, whereas most jurisdictions provide automatic protection
for information that qualifies as a trade secret. However, it is
the wide-ranging area in between that requires further
investigation and strategic planning. Though before we step into
the grey, let us first briefly consider the black and white of
trade secret protection in two of the world's largest
jurisdictions, namely Europe and the United States, both of which
recently adopted significant changes to their laws.
Trade Secrets in Europe and the U.S.
In May 2016 both the EU and the U.S. adopted legislation with a
view to harmonise trade secret laws across their respective
jurisdictions. The EU Trade Secret Directive requires EU member
states to implement the Directive by June 2018. Failure to do so,
or if national legislation does not adequately comply with the
requirements of the Directive, may result in the European
Commission initiating legal action in the CJEU against the
offending member state.
Under the Directive, the unauthorised disclosure and use of a trade
secret is considered to be "infringing conduct".
Infringing conduct is classed as actions taken by an unauthorised
individual who knew, or should have known, that the information had
been obtained unlawfully or is in breach of a confidentiality
agreement. Additionally, production, offering, placing on the
market, importing, exporting and storing of infringing goods are
also considered unlawful use. Remedies available under the
Directive include injunctions, damages and an account of
profits.
What is significant about the Directive is not just addressing
"fragmentation of the [EU] internal market", but also
that it will establish a minimum standard for protection in all EU
member states including in those countries that had no trade secret
laws.
Earlier in the same month, the U.S. Defend Trade Secrets Act was
passed. Prior to this, trade secrets were governed by state law.
While this will continue to apply, the new Act provides for federal
protection and regulation of trade secrets. The Act was also
amended recently to protect against the inevitable disclosure
doctrine. This is where a person cannot be prevented from entering
into a new employment relationship simply because they have
knowledge of a trade secret from their previous employment
elsewhere. If any conditions are placed on this new relationship,
this must be based on clear evidence of alleged ongoing
misappropriation.
Similar to the EU, it must be demonstrated that the information
derives economic value (actual or potential) from being secret,
that it is not readily ascertainable by proper means and reasonable
efforts have been made under the circumstances to maintain secrecy.
Remedies include injunctions and damages which may reflect actual
loss or unjust enrichment.
These contemporaneous changes to EU and U.S. law, as well as the
similarly qualified definition of a trade secret, undoubtedly
acknowledge the global significance of protection of confidential
information.
Relevance in the Chemical Industry
Trade secrets can be commonplace within the chemical industry.
In particular, innovator companies working in areas such as oil and
gas often focus on similar technologies within narrow research
areas. Equally manufacturers may choose not to publicly identify
valuable changes to processes which could prove difficult to
enforce in jurisdictions with limited or no discovery available for
patent litigation, but instead choose if necessary to rely on
available prior use defences even if a third party secures
subsequent patent protection. Small advances can be sufficient to
provide a significant advantage over other competitors. Hence
disclosure to the public, albeit with the potential reward of
patent protection, may be deemed too big a risk to take.
One of the big risks of the trade secret route however is that the
unpatented product or process may be reverse engineered and the
commercially sensitive information revealed. Once this information
has been discovered, there is nothing that can be done
retrospectively to compensate for any damage caused, unless
qualifying as a breach of trade secret protection when it then must
be sought through the courts. Even in the instance that remedies
are awarded to the proprietor, the information has been publicly
disclosed and cannot become secret again. In the chemical industry
today, it may only require what could tomorrow be routine
laboratory testing to determine the compound type, percentage
composition or manufacturing conditions of a chemical
product.
Safety requirements in the chemical industry also influence whether
information is able to be kept as a trade secret. The public
disclosure of information related to toxicity, flammability,
density, durability and disposal of chemical products is often
required to conform with safety regulations. In the EU, the
Registration, Evaluation, Authorisation and Restriction of
Chemicals (REACH) ensures chemical data is submitted to the
European Chemicals Agency (ECHA) and that Safety Data Sheets (SDSs)
are produced which disclose the chemical formula. In the U.S., the
Occupational Safety and Health Administration (OSHA) is responsible
for ensuring SDSs communicate any risks and disclose the chemical
formulation.
However, in order to respect the commercial need to keep certain
proprietary information confidential, REACH considers that
disclosure by the ECHA on the precise use of a composition or
details of the full composition of a preparation is not required.
However, if details are needed urgently to protect human health,
this information will be disclosed by the ECHA.
In the U.S., if a company states that certain information relating
to a chemical product is being withheld as a trade secret, they may
not have to fully disclose the chemical formula. For example, the
disclosure may not have to disclose the exact percentage
composition of a substance but a range must be provided
instead.
Essentially, a company must make an informed decision on how likely
it is that a competitor will be able to reverse engineer a product,
especially in light of any information which must be publicly
disclosed relating to safety. In the eventuality that it is clear
that the chemical formula must be disclosed in full, patent
protection is likely to be the safest route to securing the
intellectual property.
Patent or Trade Secret?
Patents and trade secrets can protect different aspects of
intellectual property, and the table above points to the main
considerations for these different types of protection.
One of the fundamental considerations is duration of protection. In
contrast to a patent, the very nature of a trade secret is that it
is not publicly disclosed in order to give the company a
competitive edge over competitors. Provided the trade secret
remains confidential, the company can exploit the product or
information for an unlimited duration.
However, the term of protection for a product, but not necessarily
the invention, may also be extended using patent protection. Patent
ever-greening, where small but significant adaptations to an
existing patented technology are the subject-matter of a subsequent
patent application, is potentially such a way. For example, an
existing patented biofuel may comprise an additional component
which results in an unexpected synergistic effect, such as
increased fuel efficiency. If a patent is granted for this new
biofuel, it will effectively extend the life span of some of the
original technology. A new use of a known product may also be
subsequently realised and patented. Therefore, patent protection
for a product is not always necessarily limited to 20 years.
Another consideration is that once a trade secret is disclosed,
intentionally or unintentionally, it cannot be protected further,
whereas disclosure of an invention in a patent application does not
affect protection of the invention provided a patent is eventually
granted. It is also important to remember that if a patent
application is withdrawn before publication, it will not be
publicly disclosed. For example if a negative opinion is issued by
the searching patent office and it appears unlikely that a patent
will be granted, the company can elect to withdraw the patent
application and keep the invention as a trade secret. This can
therefore be a useful commercial strategy which also saves on the
cost of the patent prosecution process, but will still involve the
initial cost of drafting and filing the patent application.
Finally, as mentioned above, one important factor comparing patent
protection and trade secret protection is the eventuality that a
competitor could independently arrive at the product or invention
without having knowledge of the existence of the original product
or invention. If the invention is protected by a subsequent third
party patent, secret prior use provisions will apply in both Europe
and the US. Broadly speaking, proof of any activity such as
preparation to manufacture or possession of an otherwise infringing
article will allow the competitor to continue the same activity,
which otherwise would be patent infringement. However, there are
restrictions on the competitor for subsequent licensing and
assignment. If trade secret protection was relied on instead of
patent protection, the competitor would not be restricted on any
commercial activity and may continue to act as they wish so long as
they independently arrived at the technology.
As there are clear advantages and disadvantages for both patent and
trade secret protection, a balanced approach using, or at least
considering, both patent and trade secret protection is likely to
be the best route to ensuring comprehensive protection.
Trade Secrets in Practice
Consider the situation whereby a small specialist company is
focused on one particular technological area, such as making a
specific polymer for use in medical implants. Is it riskier to keep
the method as a trade secret and rely on any competitors not being
able to reverse engineer the process, or disclose the process of
making the polymer and the composition by applying for a patent,
with the risk that the 20-year monopoly right may not be
granted?
The risk of the patent not being granted, but the application being
published and therefore disclosing how the polymer is made, may
prevent this company from occupying an area of the market. If the
smaller company does not have the ability to manufacture the
polymer to meet high demands, and a larger experienced company is
free to cheaply manufacture the polymer by the disclosure of the
method in a patent application which never grants, the smaller
company will lose its place in the market. On the other hand, not
applying for a patent could leave the smaller company vulnerable to
the larger company, which may have access to significantly more
resources and expertise dedicated to reverse engineering a sample
of the polymer.
It may also be the case where a patent is granted for the polymer
and the process of making the polymer, but it is subsequently found
that altering the conditions used to make the polymer produce a
polymer with more advantageous properties. Arguably, this is a new
invention and may be eligible for patent protection. But if one
polymer made or licensed by the company is protected, is it wise to
disclose the process of making the new polymer by applying for
patent protection? Or should it be kept a trade secret and the
company rely on the protection afforded by the patented polymer?
How likely is it that the new polymer may be reverse engineered, or
that the secret will not be disclosed by an employee or former
employee? This decision will also be influenced by the market at
the time. For example, perhaps the process of making the new
polymer is expensive and is unlikely to be attractive to potential
licensees, or other polymers emerging onto the market (which may or
may not be patented) may be cheaper and better than the original
patented polymer.
The cost of maintaining a patent through the payment of renewal
fees, and the cost of bringing an infringement action, will also be
important contributing factors in whether a patent is applied for,
especially for a smaller company.
An Integrated Strategy
While a trade secret can subsequently become the content of a
patent application, it cannot work the other way round. Equally,
filing a patent application may not necessarily mean disclosure of
every aspect of your trade secret. Hence, as opposed to a
one-or-the-other approach, a potential integrated strategy could be
considered. This dissects the same subject matter into what needs
to be disclosed for the purposes of securing strong enforceable
patent protection and what from a commercially strategic standpoint
is more valuable, and maintainable, as a secret.
Of course there will be scenarios where consideration of the pros
and cons of keeping proprietary information secret versus seeking
registered IP protection leads absolutely to one or the other. The
secret may not be eligible for strong or indeed any patent
protection. Ultimately, a good knowledge and understanding of the
commercial, technological and regulatory landscape is required in
order to develop a strong IP strategy.
In the chemical industry, there further exists the risk of ever
improving means for reverse engineering. Also, safety requirements
often require near full disclosure of the composition of a product
or how the product is made. Therefore, additional considerations in
this field are required when weighing up whether to apply for
patent protection or rely on trade secret protection, or
both.
Originally printed in Managing Intellectual Property
on July 14, 2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.