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.