Patent Protection Versus Maintaining a Trade Secret

Deciding how to protect intellectual property (IP) is often difficult. Innovators typically protect inventions and innovations, opposed to literary works and designs, with either a patent or a trade secret. Federal law alone protects patents, while both state and federal laws govern trade secret protection. Most states adopted a version of the Uniform Trade Secret Act (“UTSA”), while Congress has enacted both the Defend Trade Secret Act (“DTSA”) and the Economic Espionage Act to provide both civil and criminal remedies for trade secret misappropriation. Pros and cons exist for both patent protection and trade secret protection. While an IP owner must decide between trade secret and patent protection soon after the creation of the IP, the two doctrines can work in tandem as well, with patents protecting some aspects of a technology and trade secrets protecting others.

Patent Protection

A patent protects “any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” 35 U.S.C. § 101. Patents do not give the patent owner the right to use their own invention, rather it gives them the right to exclude others from using the invention. Under U.S. patent law, inventors own their patented inventions by default, not the employer. Accordingly, most employment agreements include a provision that any employees have a duty to assign inventions to the employer.

The term for a utility patent is twenty years from the filing date of the earliest non-provisional patent application. Patent applications are publicly available documents that must disclose, among other things, a detailed description of what the inventor believes to be their invention. This enables others to use the invention and the best mode contemplated by the inventor. Patent owners must file applications in each country/jurisdiction in which they want patent protection and pay the required fees for each country. Additionally, patent owners must pay patent maintenance and annuity fees to maintain the patent. Patent protection is also available for new and unique varieties of plants (called plant patents under 35 U.S.C. § 161) or for ornamental design (design patents under 35 U.S.C. § 171).

Patent protection is the best option for IP that is novel and non-obvious, but that is detectable when used. For example, mechanical and electronic configurations can be easily understood when embodied in a commercial product while in comparison,  algorithms and formulas are sometimes difficult to clearly identify. Methods used in the manufacture of devices may also be difficult to detect. Accordingly, these types of secret uses may be better protected by trade secrets.

Trade Secret Protection

Trade secrets are protected under Federal law (DTSA) and individual state laws (usually under some form of the UTSA). The UTSA, which has been adopted at least in part by 48 states and the District of Columbia, defines a trade secret as information, such as a formula, pattern, compilation, program device, method, technique, or process, that is both:

1. Valuable because of secrecy. A trade secret is something that is or potentially could be economically valuable at least in part because it is not known by others, or able to be discerned by others, who otherwise could benefit economically from using or disclosing it; and
2. Protected by efforts to maintain secrecy. A trade secret must be protected by reasonable efforts to maintain its secrecy from others.

Trade secret protection is maintained as long as the owner follows formalities to maintain its secrets. Trade secret information can include compilations of publicly available information if the compilation itself meets the definition of a trade secret.

Valuable Because of Secrecy

Trade secret protection extends to information that is secret and has economic value because of its secret status.

To help keep information secret, knowledge of trade secrets should be confined to those who “need to know.” Anyone with access to trade secret information (e.g., employees, contractors, vendors, and business partners) should be prohibited from disclosing the information to others. Ideally, employers impose this requirement by contract (e.g., Non-Disclosure Agreements, Employee Confidentiality and Proprietary Rights Agreement, Independent Contractor/Consultant Agreement, Employee Non-Compete Agreement, etc.).

If the secrecy of information has been diminished, courts may decline to recognize it as a trade secret. For example, information may not be a trade secret it if is:

• Generally known. Information that is generally known or readily ascertainable is not secret, and therefore not a trade secret. For example, information may initially be secret, but then may lose its secrecy and its potential for trade secret protection if it becomes publicly available in the marketplace. In addition, information may be readily ascertainable if it can be reverse engineered. For example, a product that can be easily taken apart and duplicated may not be entitled to trade secret protection. The DTSA specifically excludes reverse engineering from the definition of misappropriation by “improper means” (18 U.S.C. § 1839(6)(B)).
• Used in the industry. Information that is generally used by others in the same industry is probably not a secret, and therefore unlikely to be afforded trade secret status (unless it is collected or assembled in a unique way). Companies should determine what similar products, processes, or ideas are already used in their industry to realistically assess their ability to protect their information as a trade secret.
• Outdated. If the information is no longer valuable, courts are unlikely to recognize the information as a trade secret. Information that is outdated by subsequent business developments may be a secret, but since it derives no independent economic value from being maintained as a secret, it cannot be a trade secret. Keep in mind that rapidly evolving technological developments may retain trade secret status for less time than more traditional trade secrets, like the formula for Coke® or Pepsi®.

Protected by Reasonable Efforts to Maintain Secrecy

To qualify as a trade secret, the party seeking trade secret protection must have made reasonable efforts under the circumstances to maintain the information’s secrecy. Courts assessing whether a company took reasonable measures to protect secrecy are likely to consider procedures and policies created to protect the information from outsider access and employee wrongful acquisition, misuse, or disclosure.

Best Practices for Protecting Confidential Information and Trade Secrets

Companies should take at least the following steps to protect confidential and trade secret information:

• Establish appropriate policies relating to confidential information and intellectual property. Such policies will provide guidance to appropriate personnel as to permissible uses for certain types of information and measures to protect confidential information. The policies will also guide company employees on making decisions as to patent versus trade secret protection in developments moving forward.
• Limit disclosure to those who need to know. Keep the disclosure of confidential information and trade secrets limited to a discrete group of individuals who need the information to perform their jobs or for other legitimate business functions. Remind employees at meetings or events where confidential information will be disclosed that the information is confidential and that they have a duty to maintain confidentiality.
• Label documents. Mark all confidential and trade secret documents “confidential” with the company’s name to:
• help protect the information if documents are copied or emailed to third parties; and
• remind employees and suppliers that distribution of each document should be limited strictly to those who have a legitimate need to access the information.
• Establish appropriate security measures. Courts will look at the totality of the circumstances to determine whether the company’s protections were “reasonable” given the circumstances. Circumstances include the resources of the company, its level of sophistication, and the importance of the secret being protected. Some more sophisticated companies may have different levels of confidentiality. The examples above may or may not be reasonable in your particular circumstances. However, the more protections you have, the more likely a court would consider them to be reasonable. While not an exhaustive list, the below list are exemplary security measures for implementation:
• enact and enforce appropriate policies affecting trade secrets such as confidentiality, electronic access, devices, and marking of confidential information;
• be consistent in marking documents or materials as confidential or trade secret, as needed, but do not mark materials that are not truly trade secrets or confidential, and do not fail to designate material the company wishes to protect;
• keep sensitive information physically guarded, for example by maintaining single entry into the building, using security personnel, creating sign-in and sign-out procedures, installing security cameras, posting signs limiting general access to areas where sensitive information is stored, and controlling access using electronic security or biometric (such as fingerprints or iris scans) security measures (but ensure compliance with applicable biometric privacy laws);
• prohibit employees from removing confidential information from the company’s premises, or accessing or downloading confidential information using personal laptops or cellphones;
• develop procedures that protect the company’s information when employees use company laptops offsite, such as a stated company policy against downloading documents from the company’s shared drives;
• password-protect trade secret and confidential material that is stored electronically, and ensure that only authorized individuals with a need to know the information have access;
• set up sufficient firewalls, encryption, anti-hacker initiatives, anti-virus software, multi-factor authentication tools, and other technical protections;
• disable USB ports or other portable devices or drives on company computers;
• maintain non-electrically stored items in locked cabinets or other secure areas;
• impose strict limits and rules about sharing confidential documents with clients, vendors, or other third parties; and
• clearly communicate the company’s policies prohibiting the posting of confidential information on the internet or social media.
• Require third-party non-disclosure agreements (NDA). Require vendors, suppliers, independent contractors, consultants, temporary personnel, and potential customers to sign non-disclosure agreements covering the confidential and proprietary information provided to them, and inform employees of the policy. Using non-disclosure agreements for third parties will bolster the argument that the company’s business information qualifies as a trade secret, because the company can establish that it has taken extra precautions to protect its confidentiality.
• Use appropriate contractual protections with employees. For example:
• use confidentiality agreements with employees (e.g., Employee Confidentiality and Proprietary Rights Agreement). These agreements should: (i) clearly define what the company considers to be confidential information; (ii) include language that is broad enough to cover changes in technology or in the company’s particular industry; and (iii) explain how confidential information can be used while the individual is employed and after the individual’s employment ends; and
• enter into reasonable non-compete agreements with key employees as allowed by applicable law.
• Train employees. Train employees on the importance of confidentiality and define the universe of information that must be protected. As part of that training:
• require employees to sign documents acknowledging receipt and understanding of confidentiality policies and training (in addition to any confidentiality agreement);
• remind employees of their obligations about taking confidential or trade secret information off the company’s premises and using company laptops remotely; and
• strictly enforce confidentiality policies and restrictive covenants with employees.
• Include relevant policies within the employee handbook. Include a section in the employee handbook that:
• addresses the company’s trade secret, confidential, and proprietary information;
• informs employees about what qualifies as trade secret information and how to handle the company’s information; and
• is acknowledged in writing by every employee confirming that they each have received a copy of the handbook.
• Implement appropriate exit procedures. Adopt a departing employee procedure aimed at minimizing risk of misappropriation. For example:
• provide departing employees with copies of any confidentiality agreement they signed during their employment and the company’s policy on confidential information and trade secrets;
• remind departing employees of their continuing obligations to keep information confidential and ask departing employees to sign an acknowledgement that they understand their continuing obligations;
• arrange exit interviews to determine where the employee will be working subsequently and if the employee may be engaging in competitive activity in the future;
• shut off the employee’s access to computer files and other information technology systems immediately on termination;
• review the departing employee's computer activity, hard drives, email, voicemail, and other communication records for the period before the employee's termination if there is a high risk of misappropriation;
• ensure that the departing employee surrenders or destroys all company documents, files, and other material (including electronic documents) and signs an acknowledgement of having done so;
• ensure that the departing employee returns all company access cards, PDAs, and other electronic devices; and
• change electronic passwords as needed.
• Ensure that confidential information does not appear in promotional or other public material. Exclude any confidential information and trade secrets from patent applications, publications, marketing materials, sales presentations, websites, social media, advertisements, and interviews. Similarly, ensure that employees do not disclose detailed trade secret information at trade shows or other public presentations.
• Prepare for an inadvertent disclosure. Adopt a plan for a prompt response to inadvertent disclosure of trade secrets. For example:
• work with information technology professionals to develop a protocol to limit the spread of disclosed information;
• update the protocol as the company’s technology changes;
• ensure that new hires are trained on this protocol;
• remind employees and third parties of the need to maintain confidentiality; and
• adopt a protocol for contacting the individuals to whom inadvertent disclosure was made to alert them of the error, ask them to return or destroy the information, and ask them to sign acknowledgements that they have done so, if appropriate.
• Be prepared to identify and describe the company’s trade secrets with sufficient particularity to defend against a motion to dismiss in the event of a suspected misappropriation. This may be necessary to support a claim for injunctive relief or, if extraordinary circumstances are present, a seizure order under the DTSA.
• Periodically audit the company’s trade secrets and confidential information. Ensure that the protections and prohibitions in place are:
• being consistently enforced; and
• are reasonable and necessary to protect legitimate business interests.
• Monitor changes in or new interpretations of the law. As a relatively new law, courts are still interpreting the boundaries of the DTSA.
• Respond to suspected misappropriation. Adopt a plan for a prompt response in the event of suspected misappropriation. For example:
• Adopt policy for the immediate preservation of evidence, including collection of all electronic devices, preservation of emails and electronic documents, and immediate shutoff of access to suspected wrongdoer;
• Conduct forensic analysis of electronic devices and databases;
• Adopt internal investigation protocols, including interviews of employees, documentation of and collection of evidence;
• Notification to suspected wrongdoer regarding confidentiality obligations; and
• Notification of counsel to consider immediate legal action, if necessary (e.g., temporary restraining order, preliminary injunction).