There is much confusion in the public about the difference between a trade secret and a patent. Both are associated with innovation, and each constitute a business asset that should be vigorously protected. But why do some companies choose to patent their innovation while others choose to cloak it as a trade secret? The Uniform Trade Secrets Act defines a trade secret as information that: (1) derives economic value from not being generally known or readily ascertainable by proper means; and (2) is the subject of “reasonable efforts” under the circumstances to maintain its secrecy. A properly-guarded trade secret could potentially last forever, since it derives its legal protection from its inherent secret nature. On the other hand, patent protection only lasts for 20 years, and patents can only be protected through public disclosure. Specifically, patent protection is acquired through a public application process with the United States Patent and Trademark Office. On the surface, it would appear that trade secret protection is the preferred route due to the potential for perpetual protection. However, there is a risk with considering such an approach. Unlike with patents, it is perfectly legal to reverse engineer and copy a trade secret.  Once someone is able to successfully determine the components of a trade secret, the owner is without recourse and could instantly lose the peace of mind and protection that was enjoyed up to that point. However, with a patent an owner in effect has a “monopoly” for the duration of the patent, and it can exploit this powerful position by excluding all others who dare to manufacture a similar product. This is the case even if someone else independently came up with the same idea. Of course, a patent owner pays a price for this 20 year window of exclusivity. Once the patent expires, the once-protected idea enters the public domain and can then be manufactured and sold by anyone. Therefore, the patent owner’s goal will be to maximize the profits of their invention during this 20 year period.

Although trade secret owners can potentially enjoy profits indefinitely, they can be knocked off their perch at any moment if it is determined by a court of law that the idea does not qualify for trade secret protection (either because the information is readily ascertainable by other means, or because sufficient measures were not put in place to protect the idea). The trade secret owner can also lose the benefits of protection due to events beyond their control. For example, although most conscientious business owners will procure the requisite non-disclosure and confidentiality agreements from their employees, there is no accounting for a rogue or disgruntled employee beaming out these secrets to competitors. Even if an owner files a lawsuit to protect its trade secrets, there is an inherent tug-of-war between the secretive nature of the information at stake and the policy of open courts to the public. Although courts typically allow sealed filings and protective orders to be implemented in lawsuits, suing another party may require disclosure of trade secrets due to the burden of proof placed on plaintiffs.

Determining whether to seek patent protection or trade secret protection requires a realistic analysis based on the nature of the company as well as the type of invention at stake. Budget constraints should factor into this analysis, as well as a clear protocol on how the intellectual property of the business will be protected and enforced in the future. The following are some questions to consider when making this decision:

  • Is it possible for someone to reverse engineer the idea?
  • Is it possible for the invention to be independently discovered in the future?
  • Will the idea still be useful and profitable more than 20 years down the road?
  • Does the company have the monetary and legal resources to pursue patent protection?
  • Does the company have a revolving door of employees whereby adequate protection of the idea cannot be ensured?

Not everyone can be a Fortune 100 company, with their secrets locked in expensive vaults and with costly measures in place to ensure secrecy. The answer is not always clear, and the ultimate decision will be based on a sliding scale of risk that will be commensurate with the vision and goals of the company.