Trade Secret vs. Patent: Protecting Your Innovations

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Trade secrets and patents are two ways to protect an innovation, and they work in opposite directions. A trade secret may last indefinitely while it stays secret, but it cannot stop a rival from independently working out the same invention by lawful means. A U.S. utility patent, the most common kind, is generally good for twenty years from filing and gives the owner a right to exclude others from making or using the invention. That right holds even against someone who took no secrets.

The price of a patent is disclosure: it must explain the invention well enough for a skilled person to make and use it. The choice depends on whether the innovation can stay secret, whether it qualifies for a patent, and what the owner gains by making its workings public.

The difference is what competitors are allowed to discover

Federal trade-secret law looks at how a rival got the information, not merely at how closely two products resemble each other. Acquiring a secret can be misappropriation, the legal term for wrongful acquisition or use, when the acquirer knows or has reason to know it was acquired improperly. The same law includes theft, bribery, misrepresentation, breach of a secrecy duty and espionage among improper means.

The law excludes lawful reverse engineering, independent development and other lawful acquisition from improper means. Reverse engineering means studying, analyzing or taking apart an available product to work out its components, design or manufacturing process.

A patent grants the owner a right to exclude others from making, using, offering for sale, selling or importing the invention in the United States. The patent does not itself authorize its owner to make, use or sell the invention. A patent keeps others out; it is not a complete clearance to launch a product.

A trade secret’s unlimited lifespan helps only if the secret can realistically be kept, while a patent’s limited term protects against independent competitors, which secrecy cannot.

What qualifies for protection

The federal definition of a trade secret covers financial, business, scientific, technical, economic and engineering information, including formulas, designs, prototypes, methods and code. The owner must take reasonable measures to keep it secret. The information must also have actual or potential economic value because it is not generally known and cannot readily be discovered through proper means by someone who could benefit from it. Calling information private is not enough; it has to be valuable because it is secret.

Trade-secret eligibility can include information that is not patentable. A technical invention and information about running the business need not use the same protection.

U.S. patent law allows patents for new and useful processes, machines, articles of manufacture, compositions of matter and improvements, subject to the other legal requirements. The U.S. Patent and Trademark Office, which grants U.S. patents, says the Supreme Court has carved out exceptions for abstract ideas, laws of nature and natural phenomena, and has set a two-step test to distinguish eligible subject matter from those exceptions.

A new invention must also be nonobvious. For a claimed invention, its effective filing date is the application’s filing date or the earliest earlier filing date it is entitled to claim. It fails that test if, before its effective filing date, the invention as a whole would have been obvious to a person ordinarily skilled in the relevant field, given its differences from earlier knowledge. Novelty asks whether the invention is already disclosed; nonobviousness asks more than whether an identical version has appeared.

Secrecy has to survive everyday business

The World Intellectual Property Organization is a United Nations agency focused on the international intellectual property system. To keep know-how secret, the World Intellectual Property Organization points to confidentiality agreements when sharing or licensing it, access controls, security measures and internal procedures for monitoring secret information. An agreement addresses the recipient’s obligations; access controls address who receives the information in the first place.

Unauthorized disclosure or use can constitute misappropriation when the person knows or has reason to know the information was acquired under a duty to preserve secrecy or limit its use. Sharing under a secrecy duty is legally different from letting information become publicly available. But a confidentiality agreement cannot stop an outsider from discovering the same information lawfully.

Trade secrets have no registration costs, although keeping information confidential can entail substantial costs. A secret built into a product is more exposed: others may be able to inspect, dissect and analyze it, and discover the secret.

The two protections can work together: know-how for exploiting a patented invention commercially is often kept as a trade secret. The patent office says unpatented aspects of an innovation, such as proprietary software code, certain data and improvements, may be protected as trade secrets. Patenting one aspect while retaining another as a secret works only when secrecy does not conflict with the patent’s required disclosure.

A patent trades disclosure for a right to exclude

A patent application’s specification must contain a written description of the invention and of how to make and use it, clear enough for a person skilled in the field to do so. It must also state the best way the inventor has in mind of carrying it out. The specification ends with the claims, which must identify precisely what the inventor regards as the invention. Keeping essential implementation details secret cannot substitute for the required disclosure.

Someone other than the inventor may apply for the patent, including a person to whom the inventor has assigned the invention or is obligated to assign it. For example, an employer may apply when the inventor has assigned the invention to it or must do so under an employment agreement. Who invented something and who has the right to apply are therefore separate questions to settle before filing. Applicants unfamiliar with patent law and procedures should consult a registered patent attorney or agent, according to the patent office.

Filing starts an examination process rather than guaranteeing an exclusive right. The application the patent office examines to decide whether to grant a patent is called a nonprovisional application; a provisional application, described later, is not examined. Patent examination checks legal compliance and searches earlier patents, published applications and other literature to assess novelty, usefulness and nonobviousness.

A nonprovisional application requires filing, search and examination fees that are nonrefundable whether or not a utility patent is granted, followed by an issue fee if the application is allowed. If the examiner determines that the requirements are met, the applicant receives a Notice of Allowance and Fee(s) Due and must pay within three months of its mailing date, a period that cannot be extended. Missing that payment deadline abandons the application and prevents issuance of the patent.

After a utility patent issues, maintenance fees keep it in force, and failure to pay them can cause the patent to expire. Design and plant patents do not require maintenance fees. Maintenance fees may be paid without surcharge during set windows: three to three and a half years, seven to seven and a half years, and eleven to eleven and a half years after issuance. Late payments may be made with a surcharge during the respective grace periods ending at four, eight and twelve years after issuance.

Qualified small entities, a category that covers a person, a small business or a nonprofit organization, receive a sixty percent maintenance-fee reduction. Qualified micro entities, applicants who meet eligibility requirements on a gross-income basis or an institution-of-higher-education basis, receive an eighty percent reduction. A petition to reinstate an expired patent after an unintentionally delayed payment requires the maintenance fee, a petition fee, a statement that the delay was unintentional and a signature meeting the patent office’s requirements.

A U.S. patent has no effect in foreign countries; protection abroad requires applications in the relevant countries or regional patent offices under their rules.

Disclosure and filing can close off choices

Earlier patents, printed publications, public use, sales or other public availability before the effective filing date can prevent patenting under the novelty rules, subject to statutory exceptions. An earlier-filed qualifying U.S. patent or published application naming another inventor can also count as prior art, the earlier material against which patentability is assessed. Keeping an invention secret therefore does not protect a later patent application from another inventor’s earlier filing.

U.S. law provides an exception for certain disclosures made one year or less before the effective filing date by the inventor, a joint inventor or someone who obtained the subject matter from them. The patent office warns that an inventor’s prefiling public disclosure may still prevent patenting in foreign countries. Before a demonstration, publication or sale, settle the filing and confidentiality questions with appropriate patent help.

A provisional application can establish an early U.S. filing date for a later nonprovisional application and is ordinarily abandoned after twelve months. Provisional applications are not examined on their merits and cannot result in a patent without further submissions. The later claimed subject matter must be supported in the provisional disclosure to obtain the benefit of that earlier filing date.

The ordinary route to preserve that benefit is a corresponding nonprovisional application claiming it within twelve months. The other route, also within twelve months of the provisional filing date, is a qualifying petition to convert the provisional into a nonprovisional. A limited procedure can restore a missed benefit claim; in that case the nonprovisional may be filed within fourteen months of the provisional filing date.

Patent applications generally publish promptly after eighteen months from the earliest filing date the applicant claims, subject to exceptions. An applicant can ask at filing that the application not be published, but must certify that the invention has not been and will not be the subject of a foreign or international application requiring eighteen-month publication. An applicant who later makes such a foreign or international filing must notify the patent office within forty-five days, or the U.S. application is regarded as abandoned.

What happens when a competitor crosses the line

The owner of a misappropriated trade secret may bring a federal civil suit when the secret relates to a product or service used, or intended for use, in interstate or foreign commerce. Federal trade-secret law generally leaves other federal and state remedies in place, so it adds to state rules rather than replacing them. One exception protects certain disclosures: an individual is immune from federal and state trade-secret liability for disclosing a secret in confidence to a government official or attorney solely to report or investigate a suspected legal violation, or in a court document filed under seal.

A court may issue an injunction, an order to stop actual or threatened misappropriation. Under the federal law, that order cannot prevent a person from entering an employment relationship, that is, from taking a job. Any conditions a court places on that employment must be based on evidence of threatened misappropriation, not merely on what the person knows. The order also cannot conflict with a state law that prohibits restraints on practicing a lawful profession, trade or business. Those limits apply to injunctions under the federal statute, which generally does not displace remedies under state law. State law may still provide trade-secret remedies, and separate noncompete contracts can restrict work for a competitor under applicable state law.

For trade-secret misuse, a court may compensate the owner’s actual loss plus benefits obtained through the misuse that the loss award has not already covered, or use a reasonable royalty instead. A reasonable royalty measures compensation by a reasonable payment for the unauthorized use or disclosure. Willful and malicious misappropriation may justify exemplary damages up to twice the ordinary damages. Exemplary damages are punitive damages, intended to punish wrongful conduct and deter its repetition. That conduct, or specified bad-faith conduct in the lawsuit, can support an attorney-fee award to the prevailing party.

A federal civil trade-secret claim must be brought within three years after the misappropriation is discovered or should have been discovered through reasonable diligence. Continuing misappropriation counts as a single claim under this federal filing-limit rule. A secret’s potentially indefinite protection does not create an indefinite deadline to sue over its misuse.

A patent owner can sue for infringement in a civil action. If the owner wins, damages must compensate for the infringement and be no less than a reasonable royalty, with interest and costs as fixed by the court.