TRADE SECRET OR PATENT: WHY ONE OR THE OTHER?

trade secret
Business Lawyer Asheville and WNC

I’m not a big patent lawyer and never will be. Patents, patent rights, and patent law are highly technical and expensive to obtain, maintain, and enforce. Most patent lawyers I’ve met have teams of associate lawyers to help them with the work. Especially for smaller businesses, keeping secret the formula for success is probably better served by following the “trade secret” rules rather than patenting the idea.

WHAT IS A PATENT?

A patent is an acknowledgement by the government that an invention, formula, process, etc. belongs to the owner of the patent. It also gives the patent holder exclusive rights to monetize the subject matter of the patent using the invention, formula, process, etc., to the exclusion of non-patent holders. Last, US patent laws give the patent holder the right to enforce its exclusive use rights against entities that use the patented material without permission. Drugs, manufacturing processes, computer programs, all may be eligible for patent protection.

The down side of patents is that the patentable material must be publicly disclosed to the US Patent office. That means any entity with competence in that field can potentially copy the patented material, and try to monetize it. Now you’re stuck in a very expensive patent enforcement lawsuit, often against humongous and unscrupulous international businesses.

WHAT IS A TRADE SECRET?

Let’s go to the definition that North Carolina uses. A “trade secret” first of all needs to have a business or technical use. Second, it can be a “formula, pattern, program, device, compilation of information, method, technique, or process” used in a business pursuit. Last, the secret holder must be able to derive commercial value from the secret not being generally known or ascertainable. KFC’s special chicken recipe comes to mind; a marketing program that gives one business a distinct advantage over a rival; a computer program that calculates actuarial information for the business to price its goods or services.

THE PROS OF TRADE SECRETS

The first obvious “pro” of a business keeping a trade secret is cost. Filing and maintaining a patent is costly. Billion dollar businesses can afford to patent their ideas because they intend to exploit them globally. Small and mid sized businesses probably can’t. Which of course raises the question of scale: your local coffee shop may not want everyone to know the ingredients in its famous chai coffee mix; a plastic molding manufacturer the process it uses to formulate its plastics for a certain use. But for them to spend tens and hundreds of thousands of dollars to patent it (and in the process disclose the ingredients) is a waste of money. On the flip-side, the business owner need only not disclose the ingredients and recipe to anyone working for the business in order to maintain the secret. Cost: zero.

Which brings us to the next point: ease of protecting the trade secret. As noted, to protect a patent, the patent holder must file a lawsuit against the infringer and prove infringement. Doing this, especially against a foreign actor that is making cheap knock-offs, is expensive. Couple that with the fact that foreign actors can easily just shut down and re-sell the infringing product under a new name, and patent enforcement becomes an impossible to win game of whack-a-mole.

The N.C. trade secret statute requires the holder of a trade secret to use “efforts that are reasonable under the circumstances to maintain its secrecy.” Kind of a broad idea, but in practice can be as easy as restricting access to the secret to either of those who created it, or those in the business who work with it. Add in a “non disclosure” type agreement with employees exposed to the trade secret, and smaller and mid-sized businesses are well on the way to their trade secret getting protection under the Act.

A lot of this really depends on the nature of the business. A software company can protect its algorithms by restricting access on the computer to only those who need to know them; all others are locked out. A potentially protected manufacturing process can be naturally restricted, in that the person running the machine on the shop floor doesn’t necessarily know what’s going on inside the machine. “Reasonable” just depends on the circumstances.

HOW TO PROTECT YOUR TRADE SECRET

As I just wrote, it really depends on the nature of the secret, and how it is exploited by the business. I always recommend to my business clients that at the very least they adopt a formal trade secret maintenance policy. It could be as simple as “our chai coffee formula is a secret and no employee shall disclose the formula or the ingredients.”

The higher the value of the secret to the business, the more controls I like to see in place. Formal controls. Air gaps, knowledge gaps, non-disclosure contracts, password and restricted access, etc. These may even extend to customers, vendors (if they’re contracted to make / use part or all of the secret) and suppliers. It may start getting expensive, but having your rival across town start selling your product because you didn’t protect your special formula is more expensive.

CONCLUSION

Whether to patent protect, or trade secret protect a business formula is up to the client. I’ve advised many clients to use trade secret protections but they opted for patent protections. Their choice, their money to spend, pros and cons.

For all your businesses legal needs, call me in Asheville, Hendersonville, Fletcher, Waynesville, and all of Western North Carolina at (312) 671-6453, email at palermo@palermolaw.com, for more information palermolaw.com, and to download my V-card click HERE.