by David Pardue, special to BeyondMVP
Many business people are familiar with patents but are not as knowledgeable about what is often called the flipside of the intellectual property coin: trade secrets.
Unlike a patent, which is a publicly filed claim of ownership over a valuable asset, a trade secret is intentionally hidden from public disclosure. For now, trade secrets are governed by state laws, the majority of which are based on the Uniform Trade Secrets Act (UTSA). Under the UTSA, a trade secret is defined as:
A formula, pattern, compilation, program, device, method, technique or process that 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 is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.
In laymen’s terms, a trade secret is a valuable corporate secret that can be a formula, device, program, process or compilation (like a customer or price list). Unlike a patent or copyright, you cannot register a trade secret. You have it by creating it and taking steps to keep it a secret through mechanisms such as maintaining password protection, limiting who knows about it, and having employees sign non-disclosure agreements.
No One Size Fits All, But…
It is important for startup founders to know that there are options in addition to patent protection for the inventions that the company makes. While often it makes sense to allocate the budget and time to attempt to patent an invention, in other instances it may be wise to keep the invention secret and maintain it as company property and as a trade secret.
If the company chooses the latter, it must take reasonable steps to keep the secret secure.
Here are several questions to consider before deciding whether to try to obtain a patent or keep the asset as a trade secret:
- How easy will it be to detect and reverse engineer the invention?
- How likely is the patent application to succeed and protect the value of the invention?
- Can the company afford the cost of filing for a patent?
- Can the company keep the invention a secret for more than 20 years and will it still be valuable then?
- Will someone else discover this invention and patent it?
What Can Be Claimed as a Trade Secret?
Customer lists, manufacturing processes and unique marketing strategies are all common examples of assets that are claimed as trade secrets. Obviously, non-patentable materials like customer lists can only be protected as trade secrets, so there is no decision to make in that case. However, for assets of questionable patentability or that are clearly patentable, a decision must be made about whether to file for a patent or try to keep it a secret.
One issue the owner of the asset must consider is whether it could be reverse-engineered. This is especially a consideration if the asset is going to be sold on the retail market or is imbedded in a publicly available device or product that can be taken apart and examined. Mobile devices for consumers or the enterprise are examples of these types of assets. In that instance, it would be impossible to keep the asset a secret and would open up the possibility for competitors to develop their own products absent patent protection.
Another factor to consider is cost. Obtaining a patent typically requires hiring a patent attorney. Defending or enforcing a patent requires a not insignificant cash outlay. Although foregoing the patent process is less expensive than claiming a trade secret, it is not a cost-free alternative.
That’s because keeping the trade secret requires some effort, such as having employees sign confidentiality agreements, and maintaining security to keep the secret from being misappropriated, as well as for satisfying the requirement under trade secret law that reasonable steps must be taken to preserve the secret.
Should You File?
While many startup CEOs do not have the luxury of looking into the future, they should know that patents only last 20 years before they expire. On the other hand, a trade secret can conceivably be maintained permanently.
Of course, one potential risk of not filing the patent is that someone else could come up with a similar invention or asset and patent it before the owner does; in that case, the first owner loses his or her ability to file and may run the risk of running into a dispute with the subsequent patent holder.
Photo Credit: Michael Kenny via Flickr
David Pardue is an Atlanta-based attorney at Owen, Gleaton, Egan, Jones and Sweeney, LLP. His practice focusing on business, intellectual property and real estate litigation. David has represented large and small companies in disputes involving contracts, fraud, trade secrets, trademark, copyright, RICO, breach of fiduciary duty, insurance coverage, real estate, class actions, wage and hour claims and business torts.