The “Patent or Padlock Dilemma”: Factors in choosing between patent and trade secret protection

March 2, 2016

Patent LawThe utility of patent protection must be analyzed in light of potential alternatives such as copyright or trade secret protection.  While the choice is generally pretty clear, there are situations where it is necessary to formally evaluate the advantages and disadvantages associated with each alternative.

Since a copyright protection arises automatically once a “work” is created, there is really nothing that needs to be done in order to establish a copyright; however, registration is necessary in order to effectively enforce a copyright claim by filing an infringement suit.  Registration is fairly easy and not costly, and the assertion of copyright protection generally does not preclude also claiming trade secret protection in the case of documents, but companies must be mindful that they will be required to publicly disclose the work by filing a copy with the U.S. Copyright Office as part of the registration process.  In addition, copyright protection is limited to a specific form of expression and does not extend to the ideas or the techniques embodied in the work.  Accordingly, in the case of a computer program copyright law can be used to prevent someone from copying the program directly; however, a copyright owner cannot rely on copyright law to stop some from using the knowledge gained from reviewing the copyrighted program to create his or her own program in a slightly altered form.  Similarly, while someone cannot photocopy a book or manual and claim the work to be their own, they can read the content of the book or manual and then express substantially the same information in a different format.

The more difficult question, and arguably one of the key strategic decisions that a technology-based company must make, is whether to pursue patent protection for a particular invention or protect the invention as a trade secret (see the chapter on Trade Secrets (§§ 199:1 et seq.) in Business Transactions Solution).  The question is sometimes referred to as the “patent or padlock dilemma”, since the alternatives are almost always mutually exclusive and companies will be unable to obtain both types of protection.  Prior to the effective date of the AIA a decision needed to be made during the first year after the initial discovery since the law at that time provided that a patent could only be obtained only while the invention in question had not been in public use for more than one year before application. Current law—the AIA–allows “disclosure” by the inventor or one who obtained the discovery from the inventor for one year before the effective filing date (as opposed to the date of the invention), which means that the owner could make limited disclosures during that period as permitted under trade secret law and then proceed to file for patent protection.

Ultimately, the decision to select either patent or trade secret protection will depend upon a variety of factors, including:

  • The anticipated life of the advantage that the invention provides over competitors;
  • The subject matter of the invention (i.e., patent protection is only available for inventions that fulfill the “novelty” requirements of patent law and which are a new and useful process, machine, manufacture or composition of matter, or any new, useful improvement thereof);
  • The costs and risks of maintaining trade secret protection—while trade secret protection can extend indefinitely it may also be lost overnight if careless disclosures are made or the idea becomes “generally known” or is independently developed and companies may prefer the certainty of knowing that protection will remain in place at least for the fixed term of the patent;
  • The likelihood that an invention protected under trade secret law will subsequently be found to infringe a patent obtained on the same matter by a different entity;
  • The difficulty of proving patent infringement after full disclosure of the invention  in the patent application; and
  • The anticipated efforts of third parties to replicate the invention, and the ease with which they may do so; pursuing a patent is more attractive when replication is easy.

While there are certain similarities between patent and trade secret law, it is very important to remember that the legal rights embodied in a patent grant or a trade secret are functions of distinctly different public policy considerations in the U.S. and around the world. As a result, there are a number of material variations between the two bodies of law, all of which influence the scope of the rights that may be afforded to the holder of a patent or a trade secret and, ultimately, the form of protection a firm may choose for a specific item.

While there are certain similarities between patent and trade secret law, it is very important to remember that the legal rights embodied in a patent grant or a trade secret are functions of distinctly different public policy considerations in the United States and around the world. As a result, there are a number of material variations between the two bodies of law, all of which influence the scope of the rights that may be afforded to the holder of a patent or a trade secret and, ultimately, the form of protection a firm may choose for a specific item. These differences involve conditions for protection; term of protection; and costs.

Although the exclusionary rights granted to the owner of a patent can have significant strategic value, there are a number of consequences which the inventor must take into account in deciding to file for a patent, particularly if the invention can be protected under trade secret law. For example, the information in the patent application will be available to permit the public to learn about the subject matter, thereby minimizing any advantage that the patentee may have had with regard to the general level of knowledge. Competitors can then use the information in the patent application in their own research programs, sometimes to allocate resources away from further work on products that would merely infringe upon the patented invention. Also, information in a patent application can often be used to develop non-infringing products which improve upon, or even replace, the original item.  The PTO’s requirement to describe the best mode of practicing may force the company to disclose additional trade secrets outside of the direct coverage or disclosure obligations of the patent law.  The cost of obtaining and maintaining a patent can also seem relatively high in relation to relying on trade secret law; however, a good and effective protection program for a valuable trade secret can also be expensive since it will usually involve physical security and training for numerous persons.

In general, the tax treatment for patents and trade secrets is similar.  For example, the license or sale of both a patent and a trade secret will generate capital gains for the owner provided that the transaction involves the disposal of substantially all of the owner’s interest in the patent or trade secret.  Patents and trade secrets are also generally treated in the same manner with respect to depreciation, depreciation recapture and investment credits.

From an antitrust law perspective, patents may have a slight advantage because of express provisions in the patent laws that permit territorial and field of use restrictions on licensees; however, patents are subject to per se bars on tying arrangements, a problem not likely to arise for trade secrets since trade secret protection rarely creates the type of economic power required to sustain a per se illegal tying claim.  While antitrust enforcement against trade secret use does occur, in general the fact that trade secrets are not inherently monopolist means that trade secret owners are less likely than patent owners to find themselves subject to an antitrust investigation.  On balance it would appear that antitrust should not be an important distinguishing factor when deciding on patent versus trade secret protection.

For further discussion of perfecting and maintaining patent protection, see Patents (§§ 196:1 et seq.) in Business Transactions Solution.