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Patents or Trade Secrets? Deciding How Best to Protect Your Invention Part II: Business Considerations

Key Takeaway: Key business considerations relevant for choosing between patents and trade secrets include:  (1) Need for transfer of IP rights; (2) Life cycle of the product or service; (3) Cost of IP protection; and (4) Other business considerations.

Previously, we discussed factors that determine whether an invention can be kept secret, as a part of the bigger question of whether to protect an invention using patents or trade secrets. Here, we explore various business reasons for deciding whether to protect an invention using patents or trade secrets.

Assuming that an invention can be kept secret, the owner of the invention must now determine which of the two forms of protection can better serve the overall business objective of the IP owner. The following are examples of factors to consider when choosing between patents and trade secrets.

1. Need for transfer of IP rights

A key distinction between patents and trade secrets is the mechanism by which the IP owners preclude others from practicing the invention. On one hand, patent owners rely on well-defined government-granted rights to exclude others from practicing the invention. These legal rights, similar to property rights, are readily transferrable from one party to another, in part or in whole, much like the bundle of rights associated with property ownership.

On the other hand, trade secrets preclude others from practicing the invention by keeping the technology a secret. Since trade secrets are largely under the control of the owners of the knowledge, they are not as readily transferrable as patents. For example, licensing of a trade secret results in loss of exclusive control over the trade secret information and may increase the risk that the secret becomes known (accidentally or otherwise).

Therefore, if the patent owner wishes to practice the invention in coordination with others (e.g., licensing, sub-contracting) or transfer ownership of the IP (e.g., sale of a company, assignment of IP from inventors to employer), patents offer an efficient legal instrument to enable such transfer of IP rights.

2. Life cycle of the product or service

Another key distinction between patents and trade secrets is the duration of protection. Patent protection is typically limited to 20 years from the date of filing and it often takes years to obtain a patent. In contrast, trade secret protection lasts as long as the secret can be maintained by the IP owner. Accordingly, for products with very short or very long life cycle, trade secrets may provide a more appropriate form of protection compared to patents.[1]

3. Cost of IP protection

Cost can also be a key factor. The cost of obtaining a patent application varies widely depending on the nature of invention and scope of protection sought. An experienced patent attorney can help plan IP expenditure.

The cost of maintaining a trade secret also varies widely, from virtually nothing to astronomically expensive, depending on the technology that is being kept secret and the cost of implementing and maintaining a trade secret management program (e.g., cost of creating and maintaining security measures such as physical access control and employees’ time devoted to conforming with such security measures).

4. Other business considerations

Patents are legal instruments that signal to consumers and investors that your product or service is innovative and valuable. Thus, patents may be useful for marketing or business development reasons unrelated to enforcement of IP rights. For example, advertising a product as “patent-pending” may enhance the product’s appeal to the public. Similarly, a portfolio of pending and issued patents may help leverage the patent owner’s position in business negotiations or in attracting investors.

For similar reasons, trade secrets can signal mystique and the exclusive nature of a product to consumers. Coca Cola’s secret formula is legendary and has become a valuable marketing tool.

Conclusion

Successful implementation of IP protection requires close aligning of a company’s IP strategy with its business goals. As patents and trade secrets each offer unique advantages and disadvantages, companies should carefully consider which IP protection best suits them.

[1] Patent protection can also offer protection for inventions in rapidly evolving sectors, for example, through continuation-in-part applications in the United States.  In addition, a “patent pending” status provides limited legal rights that may justify seeking patent protection, even for inventions with short life cycles.

Maximizing the protection and value of intellectual property assets is often the cornerstone of a business's success and even survival. In this blog, Nutter's Intellectual Property attorneys provide news updates and practical tips in patent portfolio development, IP litigation, trademarks, copyrights, trade secrets and licensing.

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