In the course of developing new products and services, innovative businesses often develop commercially significant inventions. The natural question is then how to protect those inventions for their own use. This can be achieved through the grant of a patent, or by keeping the invention a “trade secret”, with each option having its own specific requirements and advantages.
Keeping the invention as a trade secret requires that the details of the invention are maintained as confidential, and in some circumstances keeping a trade secret may be an appropriate decision for the business. For example, it has been a strategically sound decision for Coca-Cola to keep its secret formula as a trade secret, which is locked away in a special vault in its headquarters. Other well-known trade secrets include Google’s search algorithms, and KFC’s recipe. Interestingly, Coca-Cola and KFC’s decision to protect their secret formula as a trade secret has also strengthened their respective trade marks. However, the value in the secret only persists for as long as the information remains confidential, and generally trade secrets do not protect inventions that competitors have been able to discover by reverse-engineering.
On the other hand, the process of registering a patent with a patent authority means that the invention will be published, but in return for a time-limited monopoly to the invention that prohibits others from exploiting the invention (unless authorised by the patentee). Additionally, where it may be difficult to keep a trade secret, for example in the case where the invention is easily copied or reverse engineered, patent protection is usually the more appropriate form of protection.
These are but a few of the important differences between patents and trade secrets. Moreover, once a decision is taken on which form of protection to pursue, it is generally impossible to change to the other. It is for this reason that inventors (with the assistance of legal advice), must carefully consider each option, including the specific requirements and advantages, to ensure that they make the right choice for their invention.
What is a trade secret, and what does it cover?
There is no statutory definition of a trade secret in Australia. However, there are various statutes which protect against the disclosure of confidential information through imposing an obligation of confidence, such as The Corporations Act 2001 (Cth) and The Privacy Act 1988 (Cth). Trade secrets were considered in GlaxoSmithKline Australia Ltd v Ritchie as “an item of confidential information, learnt during employment, the confidentiality of which, as an employee of ordinary honesty and intelligence would acknowledge”. The value that attaches to the trade secret is the information that gives the owner a competitive advantage over others, such as its competitors.
In New Zealand, a trade secret is defined in the Crimes Act 1961 (NZ) as any information that:
(a) is, or has the potential to be, used industrially or commercially; and
(b) is not generally available in industrial or commercial use; and
(c) has economic value or potential economic value to the possessor of the information; and
(d) is the subject of all reasonable efforts to preserve its secrecy.
Therefore, in overview, a trade secret can be considered as any information that is: not in the public domain, is of a confidential nature or is known to a limited number of persons, is subject to reasonable steps taken by the rightful holder of the information to keep it secret (such as by the use of confidentiality agreements for business partners and employees), be of commercial value now or in the future, and have access controlled/limited. The mere desire or intent to keep information a secret is not enough.
Examples of trade secrets include information such as: business plans, manufacturing processes, data (raw and processed), algorithms, software code, marketing information, client data, supplier data, product roadmaps, formulae, test data, cost data, maintenance data, and competitive analysis.
A patent grants a patentee the exclusive right to exploit and to authorise other persons to exploit an invention. Exploit, in relation to the invention, includes:
- where the invention is a product—make, hire, sell or otherwise dispose of the product, offer to make, sell, hire or otherwise dispose of it, use or import it, or keep it for the purpose of doing any of those things; or
- where the invention is a method or process—use the method or process or do any act mentioned in paragraph (a) in respect of a product resulting from such use.
To be eligible for a patent, an invention must:
- be a manner of manufacture; and
- be novel and inventive; and
- be useful; and
- not be secretly used by the inventor before the priority date.
Patents can be sought for a wide range of inventions, including those in the fields of: pharmaceutical compositions, chemical compositions, food compositions, biological materials, medical devices, mechanical devices, electrical appliances, manufacturing processes, and methods of medical treatment.
3 factors to consider
Clients often approach their IP advisor with a statement such as: “This invention is important for my business; can and should I file for patent protection, or should I keep the information a trade secret?” The decision between obtaining a patent and maintaining a trade secret is sometimes not straightforward, and can depend on the business objectives. There are several factors to consider, including: the “kind” of the information, the timeframe of protection required, and the ability to be reverse engineered or discovered independently. In the following, we explore the factors that can affect which option to pursue, and in Figure 1 we have mapped out a convenient flowchart.
1.What is the information that requires protection?
A trade secret can be any information of commercial value decided by a business, for example, food and beverage recipes, computer algorithms and client lists. In contrast, a patent may only be granted to an invention that satisfies the specific criteria set out above, e.g., the invention must satisfy an inventive step. However, patents are not always available for certain inventions. For example, with the phase out of the Australian innovation patent system patents are now no longer available for inventions that lack an inventive step but would satisfy the innovative step threshold. Additionally, patents are not available for biological processes for the generation of humans, or a substance (or process for producing a substance) that is capable of being used as food or medicine (whether for human beings or animals and whether for internal or external use) and is a mere mixture of known ingredients. In addition, an invention may not be patentable if it was used for commercial gain before a patent application is filed, i.e., “secret use”. However, in some jurisdictions, such as Australia, a 12-month grace period is available in which to file a complete patent application after any (intended or unintended) disclosure or secret use of the invention.
It is therefore important for a business to assess the patentability of the information that requires protection. If it is not patentable, a trade secret may be the only viable option. In some cases, a “mix and match” may be employed, whereby the invention is patented, while certain information relating to the invention remains a trade secret. For example, a medical device itself may be patented with aspects of the unique manufacturing process remaining as a trade secret. This ensures that the medical device itself is protected from infringing activities within its patent term, while those aspects of the manufacturing process are reserved for other potential products. The “mix and match” approach can be valuable for complicated inventions, and requires deliberate strategy and management.
2. How long is protection required?
A trade secret can be kept indefinitely if confidentiality is maintained, while a standard patent has a maximum protection term of 20 years (up to 25 years in Australia for pharmaceutical inventions). If the information has a diminishing value over the course of 20 years, for example if it is in a rapidly evolving field of technology, a patent is likely the preferred option.
3. How difficult is it to protect the information?
A trade secret loses its value when publicly disclosed, and the risks of disclosure increase with an increasing number of parties that have (authorised) access to the information. The risks also increase as employee turnover increases, despite confidentiality clauses in employment contracts, especially when companies are small and the trade secret may be known by a higher proportion of employees. For example, a beverage with a secret recipe may require several ingredients from different suppliers, and the source code of a machine learning algorithm may be accessed by a number of programmers. On the other hand, the information in the patent specification will be in the public domain once it is published.
Trade secret protection is not useful for inventions that can be reverse engineered, or otherwise independently developed. Certain technologies may mean reverse engineering is difficult or impossible, whereas others maybe relatively simple to reverse engineer. Generally speaking, the easier it is to reverse engineer an invention, the less value there is in keeping the invention as a trade secret, since others could independently discover it. As such, patent protection is more appropriate for these inventions. Conversely, where it is harder to reverse engineer the invention, trade secret protection becomes more valuable. Additionally, it follows that patent protection is preferred for inventions that are easily detectable.
This article outlines some of the important questions faced by a business when considering how to protect its IP. Understanding the requirements and advantages of both patents and trade secrets helps organisations make informed decisions on how best to protect their IP, and given the complexity the involvement of an IP professional is essential.
Spruson & Ferguson attorneys are highly experienced in helping businesses navigate these complexities.
  VSC 164, .
 Patents Act 1990 (Cth) s 3 (definition of ‘exploit’); See also Patents Act 2013 (NZ) s 18(2).
 Patents Act 1990 (Cth) s 18(1); Patents Act 2013 (NZ) s 14.
 Patents Act 1990 (Cth) s 7(2); Patents Act 2013 (NZ) s 7.
 Patents Act 1990 (Cth) s 52(3).
 Patents Act 1990 (Cth) s 18(2); Patents Act 2013 (NZ) s 16(1).
 Patents Act 1990 (Cth) s 50(1).