Optima Law Group Blog

Trade Secrets

We will be doing an informative blog post in November on the new Defend Trade Secrets Act of 2016 and how it impacts our clients. To prepare for that topic, this post is a general primer on the basics of understanding trade secrets. Enjoy!

 

What is a Trade Secret?

Broadly speaking, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. Trade secrets encompass all manner of confidential business information, including development, manufacturing, industrial and other commercial secrets. A simple, classic example would be a confidential customer or vendor list. The unauthorized use of such information by persons other than the holder is regarded as an unfair practice and a violation of the trade secret. Depending on the legal system, the protection of trade secrets forms part of the general concept of protection against unfair competition or is based on specific provisions or case law on the protection of confidential information.

The subject matter of trade secrets is usually defined in broad terms and includes sales methods, distribution methods, consumer profiles, advertising strategies, lists of suppliers and clients, and manufacturing processes. While a final determination of what information constitutes a trade secret will depend on the circumstances of each individual case, clearly unfair practices in respect of secret information include industrial or commercial espionage, breach of contract and breach of confidence.

 

How are Trade Secrets Protected?

Contrary to patents, trade secrets are protected without registration, that is, trade secrets are protected without any state run procedural formalities. Consequently, a trade secret can be protected for an unlimited period of time. For these reasons, the protection of trade secrets may appear to be particularly attractive for businesses. There are, however, conditions for the information to be considered a trade secret. Compliance with such conditions may turn out to be more difficult and costly than it would appear at first glance. While these conditions vary from country to country, some general standards exist which are referred to in Art. 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement):

·         The information must be secret (i.e. it is not generally known among, or readily accessible to, circles that normally deal with the kind of information in question).

·         It must have commercial value because it is a secret.

·         It must have been subject to reasonable steps by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements, limited access rights, encrypted data etc.).

 

Patents or Trade Secrets?

Trade secrets are essentially of two kinds. On the one hand, trade secrets may concern information, data, methods, etc. that do not meet the patentability criteria and therefore can only be protected as trade secrets. This would be the case of customers’ lists or manufacturing processes that are not sufficiently inventive to be granted a patent (though they may qualify for protection as a utility model in certain countries). On the other hand, trade secrets may concern inventions that would meet the patentability criteria and could therefore be protected by patents. In the latter case, the business will face a choice: to patent the invention or to keep it as a trade secret.

Some advantages of trade secrets include:

·         Trade secret protection has the advantage of not being limited in time (patents last in general for up to 20 years from the filing of an application, and a typical patent term is 15-17 years). The protection therefore continues indefinitely as long as the secret is maintained as confidential and not revealed to the public.

·         Trade secrets involve no drafting, filing and registration costs.  Patents are expensive and have ongoing maintenance costs.  It is not uncommon for a single patent obtained in major countries (e.g. the US, Europe, Japan, Canada, Australia, China and South Korea) to costs in excess of $500,000 over the life of the patent.  Even a patent obtained only in the United States can easily cost $50,000-$100,000 over the life of the patent. 

·         Trade secrets have immediate effect.

·         Trade secret protection does not require compliance with formalities such as disclosure of the information to a Government authorities or publication of the details of the invention as required for a patent.

There are, however, some concrete disadvantages of protecting confidential business information as a trade secret, especially when the information meets the criteria for patentability:

·         If the secret is embodied in an innovative product, others may be able to inspect it, dissect it and analyze it (i.e. "reverse engineer" it) and discover the secret and be thereafter entitled to use it.  Trade secret protection of an invention in fact does not provide the exclusive right to exclude third parties from making commercial use of it. Only patents and utility models can provide this type of protection.

·         Once the secret is made public, anyone may have access to it and use it at will.

·         A trade secret is more difficult to enforce than a patent. The level of protection granted to trade secrets varies significantly from country to country, but is generally considered weak, particularly when compared with the protection granted by a patent.  Often, an improper disclosure is done by lower level of employees (who should not have had access to the trade secret in the first place) who, even if sued in a court of law, has no funds to compensate the trade secret holder for its loss.

·         A trade secret may be patented by someone else who developed the relevant information by legitimate means.  This in turn could limit or exclude the original trade secret holder’s right to use the trade secret they created.

 

Thank you to the World Intellectual Property Organization for information used in this post.

 

If you have any questions about protecting your trade secrets or seeking patent protection, please do not hesitate to reach to us. We would love to hear from you at 858-964-4697 or info@optimalawgroup.com.