Rethinking Patents vs. Secrecy

by Paul Fraulo

Recently there have been many articles discussing the choice between protecting technology as a trade secret as opposed to seeking a patent. While patent law arguably provides stronger protection for an invention, one of the major advantages of protecting technology as a Trade Secret is that it does not have to meet the strict requirements of patentability that companies face in the patent process, such as novelty and non-obviousness. Recently though, the patent process has become even more tricky, and the advantages of safekeeping information as a trade secret have grown. The legal industry has devoted a great deal of attention to three things in particular as they pertain to the relationship between patents and trade secrets, 1) the America Invents Act (AIA), 2) the ruling in CLS v. Alice, and 3) the increased likelihood of a federal cause of action for trade secret misappropriation. Gradually, as lawyers and businesses begin rethinking their approach to protecting their technology, trade secrets are being recognized as a more viable option in many situations.

The once rote calculus of deciding whether to file a patent or protect technology as a trade secret first started to evolve with the America Invents Act (AIA) coming into effect in late 2012. Before the AIA, protecting your tech as a trade secret meant you ran the risk of somebody else obtaining a patent that covers your technology. While there was always a defense of prior use, the AIA expanded the defense to cover even secret prior use, making secrecy a somewhat more attractive option. The impact of AIA and Alice are both discussed in this article by law firm Robins, Kaplan, Miller, and Ciresi (RKMC).

The Federal Circuit's decision in Alice made it substantially more difficult to obtain a software patent. RKMC explains that although software patents may still be obtainable, Alice made it clear that an inventive concept beyond the computer implementation of an otherwise abstract idea is not enough to avoid a 101 rejection. Just how much more is needed, is as yet difficult to say, and thus this increased uncertainty has scared off would-be patent applicants who are instead opting to protect their software as a trade secret. At the symposium TSI hosted last month in October 2014, this concern was solidified as an important consideration by one of the panelists, Jeffrey Schwab, who explained that his advice to software companies is far more pro-secrecy now than ever before in the wake of Alice.

Most recently, there has been a stronger push to create a federal cause of action in Trade Secret misappropriation. While the impact is somewhat uncertain, it is clear that a congressional act with no pre-emption creating a federal cause of action can only increase a company's options, and therefore strengthen the protection of trade secrets. Dennis Crouch explains how this shift in the law may impact not just how companies choose to protect their intellectual property, but also how companies opting out of patent protection means less disclosure of technology to the public. Crouch's article reviewed a study by three economists which purports to show that this decrease in disclosure, also decreases the liquidity of companies that are now opting to keep their technology secret. The link between disclosure and liquidity here results from asymmetric information between the company and the public. To put it simply, a person is less likely to want to trade stock in companies that are not disclosing their technology to the public, because they cannot assess the value of the company without knowing what technology they have.

Interestingly, Professor Christopher Seaman also recognized the potential impact decreased disclosure may have in a more pro-secrecy environment. In his article in PatentlyO assessing the impact of federalizing trade secrecy, Professor Seaman explains that decreased disclosure can hurt innovation, because in a patent-friendly regime disclosure is "used by others to improve upon the invention and to practice it after the patent’s expiration." Professor Seaman discussed this issue along with various other aspects of the debate over federalizing trade secret law at TSI's symposium last month, reviewed here by Alexander Goldman.