Trade Secrets as an Alternative to Patent Protection

A perpetual question from clients is whether a new development should be protected by filing a patent application or kept as a trade secret?

Patents are granted by national patent offices for new, useful and not obvious inventions. Patents require a full and public description of the idea and the details needed by a skilled person to put that idea into practice. For example, Section 27(3)(c) of the Patent Act requires that for machines, the patent “explain the principle of the machine and the best mode in which the inventor has contemplated the application of that principle”.

This quid pro quo is described as being at the heart of the patent system – in return for disclosure of the invention, the inventor gets a time-limited exclusive period to practice the invention.

On the other hand, trade secrets are ideas that are kept confidential, and maintain their value because of this confidentiality. A new process or technique may have value to a company that can use it, however, the value may be lost if all its competitors learn of it. Trade secrets are not registered but can be identified and maintained as confidential. This is usually done through a combination of legal measures (such as non-disclosure agreements), electronic systems (such as passwords and encryption), and physical protection (such as locked doors and need-to-know sharing). A claim for breach of confidence can be brought in provincial superior courts under the common law – see for example Lac Minerals Ltd. v. International Corona Resources Ltd. [1989] 2 SCR 574. There is also a criminal code prohibition (see Section 391) against anyone, who, “by deceit, falsehood or other fraudulent means, knowingly obtains a trade secret or communicates or makes available a trade secret.”

Depending on the nature of the development or idea, either patent protection or keeping it as a trade secret can make the most sense.

A key factor is whether the idea can be reverse engineered. For example, if the idea is for a mechanical part that is going to be sold to consumers, then patent protection is usually favoured. As soon as the first part is sold, any consumer (or competitor) can buy it, and take it apart to see how it works. If the intention was to keep the idea as a trade secret, the confidentiality would be lost and competitors could copy the design and move into the market.

However, if the idea relates to a manufacturing process or server-side algorithm where it can be used without disclosure, then keeping it confidential as a trade secret may be advantageous. New manufacturing processes can provide significant benefits but at the same time be kept away from competitors using factory walls, and NDAs for employees. Similarly, algorithms used deep inside a server may not be discernible to customers even if the inputs and outputs are readily apparent.

For trade secrets, the primary risk is that the secret will be learned by competitors. This can occur inadvertently during a factory tour, sloppy discussion at a trade show, or poor security practices on a website. More nefarious disclosure by hackers, a former employee sharing their secrets or espionage could also result in the secrets getting out. And most innocently, a third party could develop the idea independently. While there are some legal mechanisms to pursue breaches of confidence or violation of trade secrets, these can have limited impact if the secret is already out. If the trade secret is independently developed, then there is no recourse at all.

For patent protection, a key factor is the publication of the detailed description of the idea in the patent application. This description can provide a roadmap to competitors interested in replicating the idea and making their own (potentially patentable) improvements. While frustrating for the patent filer, this disclosure is a core feature of the patent system.

However, because patent applications are typically published prior to grant, the detailed description is shared publicly even if the patent application is refused by the patent office. The statistics for each jurisdiction differ (and most particularly if a patent agent is involved!) but only 40-60% of patent applications are granted. For computer-implemented inventions where the patent office carefully considers if the invention is ‘patentable subject-matter’, the risk that the patent application will be refused can be high. If the patent application is refused, then the invention has been disclosed to the public and competitors, without any ability to stop the idea from being copied.

A key benefit of patent protection is that a patent can be enforced against anyone that infringes the patent, whether they copied the idea or developed it independently. There is no need to show that the infringer “stole” the idea to establish infringement.

Another important factor in favour of patents is that they provide an external validation of the invention since the patent office has considered the patent application and found the invention new and inventive. Patents (and even patent applications) can therefore be a consideration for potential investors in a start-up and customers. It is more difficult to use trade secrets, being secret and not registered in any way, in the same way. However, for cost sensitive companies, the out-of-pocket costs to prepare, file and prosecute a patent application may push them towards trade secrets, that do not have same immediate costs.

Another important difference between patents and trade secrets is the duration. Patents have a maximum term of 20 years from the filing date. However, the time that a patent can be enforced does not usually start for 3 to 5 years until it is granted by the patent office (although financial remedies may be available for pre-grant activity). Trade secrets can be kept confidential indefinitely with suitable procedures.

Often an intellectual property strategy considers a mix of patent and trade secret protection. For example, a key feature of the product may be addressed in a patent application, but the manufacturing process is considered a trade secret. A careful analysis is required early because both trade secrets and patents benefit (or require) that steps be taken prior to any public disclosure.