The top 4 advantages of trade secret protection
By Patrick Soon and Rebecca Bellow
*This article first appeared in Inside Counsel Magazine on September 18, 2014:
If you are an entrepreneur who has been told that your invention is ineligible for a patent, do not give up hope. Just because your creation does not qualify for a patent, does not mean that it cannot be protected at all. Trade secrets may be a viable alternative, as this type of intellectual property allows for the protection of many types of information that do not qualify as patentable subject matter. A trade secret can be comprised of almost any valuable non-public information, including a process, compilation, device or technique. In short, if the information in question can be used to gain an economic advantage over one’s competition because the competition doesn’t know it, it probably qualifies as a trade secret.
Typically, trade secrets cover things like customer lists, recipes, formulas, software or unpatented (but not necessarily un-patentable) inventions. Famous trade secrets include Google’s proprietary search algorithm, the New York Times “Best Seller List” rating system, the chemical formula for WD-40, and the recipes for such famous foods as Twinkies, Thomas’ English Muffins, and Mrs. Field’s chocolate chip cookies. Trade secret protection allows the owners of these well-known products to not only preserve their IP rights, but also to enjoy certain advantages that a patent may not provide.
Advantage #1: Unlike patents, trade secrets can cover “abstract ideas”
In June, 2014 the Supreme Court issued its decision in Alice Corp. v. CLS Bank International, holding that if a method or process is drawn to an abstract idea, it will not be transformed into a patent-worthy invention simply because it is implemented with a computer. Understandably, this ruling has raised concerns that many other existing software products may now have their patents invalidated. Therefore, going forward, it may be wise for engineers to consider the option of obtaining trade secret protection for their software designs so as to avoid any such uncertainty.
As long as source codes and algorithms have value and are kept confidential, courts have held that they can be protected as trade secrets. And even where software is eligible for a patent, it may still qualify for trade secret protection. As the California Supreme Court noted in its May 2014 decision in Altavion, Inc. v. Konica Minolta Systems Laboratory Inc., as long as a patentable idea is kept secret, the idea itself con constitute information that is protectable by trade secret law. Whether or not trade secret status will be afforded a concept largely rests on whether or not the information can be readily ascertained by end users. If confidentiality can be maintained, the idea is likely a valid trade secret.
Advantage #2: Trade secret protection can last indefinitely
While patents generally last up to 20 years, and copyrights generally last up to 100 years, a trade secret can potentially last forever. As long as the trade secret remains secret, the protection will not expire. That is how Coca Cola has been able to keep “Merchandise 7x” – the classified ingredients that gives Coke its unique taste – out of the hands of competitors all these years. If John Pemberton had merely patented Coca Cola, assuming the formula was deemed patentable at the time, he would have had to disclose the ingredients during the filing process. The whole world would have thereby learned Coke’s secret recipe over a century ago.
The other side of the coin, however, is that trade secret protection can be lost in an instant. Once the know-how is made public, through disclosure or any other means, it is unlikely that trade secret status can ever be restored. Further, unlike patents, it is perfectly acceptable for competitors to dissect a trade secret and discover how it is made through reverse engineering. Once someone learns the secret, they may be able to file for a patent themselves, which would allow them to exclude others, including the inventor, from making, using, selling, offering for sale, or importing the patented invention for the term of the patent. It is therefore vital that cautionary steps be taken to preserve secrecy, and that ongoing measures be enacted to keep the information secure.
Coke’s recipe, for example, is reportedly locked safely away in a vault and is known only to two executives, and these two individuals are forbidden from flying together. Such security measures are very important because the theft of a trade secret may mean the loss of a company’s most valuable asset. In 2006, a Coca Cola employee, Joya Williams, and her two accomplices, attempted to sell Coca Cola’s classified information to arch-rival Pepsi. Pepsi had alerted Coca Cola of the attempted theft, and this allowed Coca Cola to coordinate a sting operation with the FBI. Williams was caught and convicted. She was sentenced to federal prison for eight years and was ordered to pay $40,000 in restitution. Her two accomplices received similar harsh sentences.
As this case illustrates, the misappropriation of trade secrets is not only a civil matter handled at the state level, it can also be considered a federal crime. Under the Economic Espionage Act (EEA), the Justice Department will prosecute those that misappropriate trade secrets involving products or services sold in interstate (or international) commerce. Generally, however, trade secrets are enforced at the state level, where 47 states have adopted the Uniform Trade Secret Act (USTA). California’s codification of the Act can be found at Cal. Civil Code §§ 3426-3426.11. The only states that have not yet adopted the USTA are Massachusetts (pending), New York, and North Carolina.
Advantage #3: Trade secret protection is comparatively cheap and easy to obtain
Trade secrets can become effective immediately and they do not require many of the upfront fees that are typically associated with patent prosecution. Filing for a patent, for example, generally requires hiring an attorney to complete a patent search and a specification that details – at an expert level – how the invention is made and how it is used. Trade secrets have no such requirements, so these time-consuming, and costly, steps can be avoided.
However, extensive ongoing measures will likely be required in order to ensure that the information remains confidential, and this can involve substantial expense. As noted above, if the information is ever disclosed to the public, trade secret protection may be lost forever. Thus it is very important that access to the information be restricted to a limited number of persons, and that these people sign a non-disclosure agreement (NDA). The conditions that must be met to satisfy the requirements of a trade secret vary in different countries, but the general standards that must be maintained can be found in Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement).
Advantage #4: Obtaining a trade secret can create an aura of mystique
In some instances, companies use their trade secret status to not only gain protection, but to gain notoriety. By promoting the idea, for example, that a recipe for something like Krispy Kreme doughnut mix or KFC chicken batter is known only to a select few individuals, marketers can create buzz.
Bush’s Baked Beans, for example, emphasizes the idea of their recipe being a “closely guarded family secret” in a series of TV ads. In these spots, the family’s dog, Duke, appears to be willing to sell the recipe for the right price. While this running gag is intended to make viewers smile, the results of the campaign are nothing to snicker at. According to Advertising Age, these commercials helped Bush’s Baked Beans almost double its market share, to 80%, in a few short years.
Patrick Soon is an attorney at WHGC, P.L.C. whose practice focuses on intellectual property. Outside of his work at WHGC, Mr. Soon volunteers for the American Bar Association where he works as an editor and multimedia chair for the Technology for the Litigator Committee within the ABA Section of Litigation. [email protected].
Rebecca Bellow is an attorney at WHGC, P.L.C. whose practice focuses on business litigation, civil litigation and intellectual property. Ms. Bellow also represents clients in a wide array of litigation matters including general and complex civil litigation, patent and trademark infringement, and business torts. [email protected]