Trade Secrets vs. Patents

 Trade Secrets vs. Patents

HAS THE DECISION CLIMATE CHANGED?

By Court B. Allen

Many proprietary inventions are eligible for protection under either trade secret law or patent law. For example, a novel computer program, chemical compound or manufacturing process useful in conducting a business may be protectable as either a trade secret or a patent, depending on certain facts and actions. But the inherent differences between patents and trade secrets make them mutually exclusive — as the name implies, trade secrets must be kept secret, whereas patents require a full public disclosure of the claimed invention. Thus, when such an invention arises, the owner of the invention must make a decision: Should I protect it as a trade secret, or should I seek a patent for it?

Patents are exclusively a matter of federal law. To be eligible for patent protection, an invention must fall into one of four categories of patentable subject matter: article of manufacture, machine, composition of matter or method/process; and, must be both novel and non-obvious to a person of ordinary skill in the relevant area of technology. The patent application process typically involves a substantial investment of time, money and effort, and it may or may not result in the issuance of a patent for the claimed invention. However, if granted, the reward at the end of the patent process is the right to prevent others from making, using or selling the patented invention during the term of the patent, which is twenty years from the application filing date. Remedies for patent infringement may include injunctive relief, compensatory damages and, in exceptional cases, treble damages and attorneys’ fees. And unlike trade secrets, independent creation is not a defense to patent infringement.

Trade secrets, on the other hand, have largely been a matter of state law rather than federal law, with the notable exception of the federal Economic Espionage Act. As of this writing, 48 states (all except Massachusetts and New York) have adopted some form of the Uniform Trade Secrets Act (UTSA), and legislation to adopt the UTSA has been introduced in both Massachusetts and New York. The form of the UTSA varies somewhat from state to state, but generally a trade secret may be almost any type of information that (a) provides independent economic value by virtue of it not being generally known and not readily ascertainable by proper means and (b) has been subject to reasonable efforts to maintain its secrecy. For an invention that qualifies as a trade secret, the owner has a private cause of action against others for misappropriation of the trade secret. Misappropriation may involve either (i) acquisition of the trade secret by improper means, or (ii) disclosure or use of the trade secret without authorization. Improper means may include theft, bribery, misrepresentation, breach of a duty to maintain secrecy or espionage through electronic or other means. Similar to patent infringement, potential remedies for trade secret misappropriation may include injunctive relief, actual damages, unjust enrichment not included in the actual damages and exemplary damages up to twice the actual damages and attorneys’ fees if the misappropriation was willful and malicious. Unlike patents, however, trade secrets require no government filing in order to have the protection, and trade secrets may last indefinitely so long as they remain secret.

So, in view of those similarities and differences, how should one choose between a patent and a trade secret? In the past, the answer largely depended on whether the invention could be exploited commercially without disclosing the secret. If so, trade secret protection was generally the way to go. On the other hand, if commercial exploitation would reveal the secret, then patent protection would be the only viable option. Although those considerations still apply, recent legislative and judicial developments in this area may steer more companies toward the trade secret option, especially for certain types of inventions.

On the trade secret side, the U.S. Senate unanimously passed the Defend Trade Secrets Act of 2016 (DTSA), and the White House has already signaled support for the legislation if it passes the House of Representatives. If it becomes law, the DTSA would amend the Economic Espionage Act to create a private federal cause of action for trade secret misappropriation and thereby create a truly uniform, nation-wide trade secret law. Moreover, for extraordinary circumstances, the DTSA would create a powerful civil seizure remedy, namely, an ex parte court order for seizure of property necessary to prevent further misappropriation of the trade secret in question. To balance that extraordinary remedy, the DTSA contains some protections to guard against improper use of the remedy.

On the patent side, the law seems to be continually eroding patent protection, particularly in the area of computer-implemented inventions. One of the most significant recent developments in this area has been a marked increase in patent rejections and patent invalidation decisions on the basis of subject matter ineligibility following the 2014 U.S Supreme Court decision in Alice v. CLS Bank. In Alice, the Court held that abstract ideas implemented on a computer are not patentable, regardless of whether the claims are couched as method, system or computer-readable medium claims. In the Court’s analysis, there must be “something more” than merely implementation on a computer in order to transform an abstract idea into a patent-eligible invention. The challenge, of course, is discerning what that “something more” may constitute. Unfortunately, patent examiners have become quick to reject claims to computer-implemented inventions, and the courts have become prone to invalidate such claims. For example, for e-commerce patent applications, the incidence of such rejections at the USPTO has risen from about 30 percent before Alice to over 80 percent after Alice. And the rate of invalidation of patent claims on this basis in the district courts also appears to be very high, perhaps as much as 70 percent by some estimates.

In view of the apparent sea change in the way some patents are being treated and the potential for enhanced protection in the trade secret arena, some companies may want to rethink how they protect their inventions that could be protected in either manner. For example, companies may want to explore whether certain key elements of a software-implemented invention may be kept secret even in the commercial exploitation of the invention and, if so, perhaps forego patent protection on the overall invention in favor of the trade secret protection for the key aspects of it. In some instances, it may also be possible to seek patent protection for the aspects that would become apparent with commercialization if such combination would meet the novelty and non-obviousness requirements for patentability. The wisest choice will continue to depend on all the facts and circumstances of a particular invention, and patent protection will probably continue to be the best route to take in many situations, regardless of whether the DTSA is enacted.

Obviously, the DTSA has not yet become law, but the chances seem good for that to happen in the fairly near future. If it does, then companies may have another good reason to keep more secrets.

Court B. Allen is a member of Dykema Cox Smith and practices in their San Antonio office. Court specializes in the protection and enforcement of all types of intellectual property rights, is a former aerospace engineer and devotes a substantial amount of his practice to software and intellectual property licensing, technology development and related types of agreements. www.dykema.com

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