What’s My Strategy?

By John Dolan and Matt Graham | April 29, 2011

Your company has valuable intellectual property. How do you create value and protect these ideas from your competitors? You must consider the business objectives for your intellectual property and then decide the answer to this question: “Do I patent a technology or keep it as a trade secret?”

A patent is a grant of exclusive rights from a government that excludes others from making or using the invention. Advantages include the ability to force a competitor to stop exploiting the invention and the possibility of generating revenue from licensing arrangements or damages for infringement. Disadvantages include considerable upfront costs in obtaining the patent, complete public disclosure of the invention, and a limited term before the exclusive rights expire.

A trade secret, by contrast, is something that confers a business advantage, is not generally known, and that the owner of which takes steps to maintain as a trade secret. Examples of steps to maintain a trade secret include restricting access to the information and having anyone that comes in contact with the trade secret sign a nondisclosure agreement. Trade secret protection allows you to stop an employee or party to a nondisclosure agreement from publicly disclosing the information, or to seek damages from such parties if the information is disclosed.

Advantages of trade secrets include keeping the information secret and not revealed to the public or to your competitors. The protection lasts as long as the trade secret is not publicly revealed, and potentially has an infinite term, think about the formula for Coca-Cola. Trade secrets do not require upfront registration costs, however, there may be large and continuing costs related to keeping the information secret.

Disadvantages of trade secrets include risks that if the secret is embodied in a product released into the market, a competitor can inspect the product and discover the secret. If the secret is discovered in this manner the competitor can proceed to exploit the secret. Once it has been made public, anyone may have access to a trade secret and use it. If a competitor were to independently invent the substance of the trade secret, it could possibly obtain a patent and stop you from continuing to exploit your former trade secret.

So, what should you do, patent or trade secret? By considering the underlying business objective, a strategy to patent a technology or keep it as a trade secret is easier to determine. For example, if your business generates revenue by inventing, or if you are attempting to position for acquisition or financing, patents will likely provide the most competitive advantage. However, if your business thrives in a mature market by improving in-house production techniques or the technology is difficult to reverse engineer, trade secrets might provide more value.

For example, your company has invented a refining process for the extraction of valuable chemicals from biomass. The new refining process would be easily recognized and implemented if released to the public. Furthermore, the identification of competitors using this process may be difficult to ascertain by just looking at the finished products. Since the invention can be easily implemented and would be difficult to identify when in use by a competitor, keeping this information as a trade secret would likely provide a significant competitive advantage to your business.

On the other hand, say your company has invented a unique chemical compound derived from biomass that can be used as a drop-in component in a large number of products presently commercialized. The chemical compound is easily identified in the final commercialized products and can be produced using off-the-shelf raw materials and simple processes that are easily derived by combining a few common techniques already known in the industry. Since the invention is a chemical compound that can be easily identified by examination of the final products and the compound is easily produced by a combination of off-the-shelf components and processes already known in the industry, a patent may provide a larger competitive advantage than a trade secret.

Deciding your company’s intellectual property strategy can be complex. For best results, consult with your patent attorney to provide guidance regarding patents versus trade secrets.

Authors: John Dolan and Matt Graham
Shareholders, Fredrikson & Byron’s Intellectual Property Group
(612) 492-7000