Trade Secrets vs. Patents: Pros & Cons

First of all, what is a trade secret? A trade secret is:

1. A piece of information that the creator or owner has gone to the trouble of keeping secret by restricting access to it and choosing not to patent or otherwise secure protections that would require public disclosure, and is
2. Knowledge that derives independent economic value—by defining a popular product or conferring an advantage over competitors—by being kept secret.

A trade secret enables you to sell a good or service whose nature is not entirely known to the public and could not be easily determined. Examples of trade secrets include the formula for Coca-Cola, the algorithms that power the Google search engine, and the software-based delivery route planner used by UPS to save millions of gallons of fuel.

Trade secrets are legally protected, as the misappropriation of a trade secret is against the law.

Misappropriation of a trade secret is one of those rare events that can give one both criminal and civil liability.  Misappropriation can occur if someone:

1. Comes to possess a trade secret by permission of the owner, but then discloses it without the owner’s consent, or
2. Obtains a trade secret in an inappropriate manner, such as by stealing it or accepting it from another person with the understanding of what it likely is.

Both forms of trade secret misappropriation were aptly demonstrated in 2006, when an employee of Coca-Cola attempted to sell the formula for Coke’s flagship product to a senior vice president of PepsiCo. Both forms of misappropriation were fulfilled in this case, as:

1. An executive assistant at Coca-Cola used her access to steal a number of confidential documents and experimental formulas and passed them on to a middle man for sale, and
2. The middle man accepted the documents, knowing their significance and intending to sell them.

As it turned out, Pepsi had not been eager to wind up in court for buying Coke’s trade secrets (which would have fulfilled the second definition of misappropriation) and had immediately contacted the FBI to treat this case as a criminal matter. The former Coca-Cola employee was ultimately sentenced to 8 years in prison, while her accomplice received a 5-year sentence.  Coca-Cola could have also sued the employee for damages if there were any in this case.

Enforcement of trade secrets can occur at both a federal and state level.

There are two legal frameworks for the protection and enforcement of trade secrets. In May 2016, the Defend Trade Secrets Act (DSTA) was passed, technically serving as an extension of the Economic Espionage Act passed twenty years prior. The law not only gives the owners of trade secrets new means of recovering financial damages, but also grants whistleblowers legal immunity. The DSTA was designed to align closely with Uniform Trade Secrets Act (UTSA), a state-level law currently adopted by 47 states, Puerto Rico, D.C., and the U.S. Virgin Islands. New York and Massachusetts have not adopted the UTSA, while North Carolina has passed its own trade secrets law based largely on the UTSA.

Where possible, you should set up your internal information control process to best leverage the protections afforded by both legal frameworks. For instance, the DSTA has a broader definition of what information can be a trade secret. But. it also requires contracts regarding trade secrets to have whistleblower provisions in order to obtain damages, which isn’t the case with the UTSA.

Because of differences in state law, trade-secret owners will have to be cautious. New York (which hasn’t enacted the UTSA) only provides for actual damages for trade secrets, and has no provisions for the disgorgement of profits, whereas California (which enacted the UTSA in 1984) does provide for disgorgement of profits. However, Californians seeking profit disgorgement will have to disclose what the trade secret is in the initial complaint, with a protective order and redaction in place so that only the defendant sees the sensitive information.

Trade secrets have the advantage of being protected in perpetuity, but are vulnerable to reverse engineering.

The single biggest pro of trade secrets is that they don’t expire, while patents and copyrights have a limited duration. As long as a piece of information meets the definition of a trade secret, it is protected. The legal protections for Coca-Cola’s formula were still applicable in 2006, despite the drink having been first marketed 120 years prior.

Depending on the jurisdiction, actual and exemplary damages may be applicable to violations, along with an injunction, as is the case with patents and copyrights.

There are two big downsides to trade secrets. First, there is no procedure for filing for trade secret status. It is entirely the responsibility of the owner to take the steps necessary to adequately protect the trade secret and ensure it is enforceable.

Secondly, it’s perfectly legal to reverse engineer a trade secret. If you do this successfully, you can disclose and make money from it. If someone used analytical chemistry to identify the recipe for Coca-Cola and make their own derivative soft drink, they would be legally in the clear.

This is why it’s strongly advised that you consult with an intellectual property lawyer, such as the Law Office of Michael O’Brien, to determine whether something should be patented, copyrighted, or kept as a trade secret. To learn more, contact us by calling our office at (916) 760-8265, or send us a message using our contact form.