As corporations invest in new technology, they find themselves grappling with the question of how best to protect their investment in the technology. This article examines the two options available, each antithetical to the other: protecting the technology as a patented invention or protecting the technology as a trade secret.
The first part of the article focuses on patents, discussing the types of subject matter that are patentable, the requirements for obtaining a patent, and a generalized approach for preparing to apply for a patent. It also addresses the precautions a potential patentee must take to prevent an innovation from becoming unpatentable.
The second part of the article concentrates on trade secrets, discussing the legal criteria required for a trade secret to be deemed “protectable” as a “trade secret” under the law. It also looks at the caveats encountered when treating innovations as trade secrets.
Concluding the article is a comparative analysis of when each of these forms of intellectual property protection may be best employed to protect innovations.
A patent is a contract between the patent owner and a government. In exchange for the patent owner’s full disclosure of the invention, the government grants the patent owner a set of exclusive rights, akin to a monopoly, that are valid for a period of time specified by law.
The rights afforded by the patent are unique because they are “exclusionary.” That is, unlike other property rights which “entitle” the property owner to carry out particular activities, patent rights allow the patent owner to “prevent” others from making, using, offering for sale, selling, or importing the patented invention. The patent rights are legally enforceable and last for the term of the patent. When the patent expires, the patent rights expire, and the invention falls into the public domain, where anyone is free to utilize the invention. The underlying purpose behind granting the patent owner a monopoly on his invention in exchange for full disclosure is to promote innovation and technological development.
Because patent rights are exclusionary, the underlying patent does not necessarily entitle its owner to practice the invention. Instead, the patent owner’s rights are subject to the rights granted on other patents. For example, if patent owner A obtains a patent on an emulsifier blend and patent owner B obtains a patent on an improvement to A’s emulsifier blend, B needs permission from A to make, sell, use, offer for sale, or import the improved emulsifier blend in the United States.
Furthermore, patent rights are territorial in that a patent granted by the U.S. government is not enforceable outside the U.S. To obtain patent protection abroad, a patent application needs to be filed in the country where patent protection is desired.
The crux of a patent is the section called the “claims.” This section, near the end of the document, consists of one or more numbered paragraphs—each a single sentence, sometimes long, sometimes short. The claims describe what the invention is and define what its“metes and bounds” are. The claims are the part of the patent that is construed by the court when a patent is asserted or defended in an infringement action.
Patents provide strong protection against loss of a company’s investment in technology, particularly when the company intends to continue developing and building upon the patented technology. Additionally, because patents are property rights, they can be bought, sold, or licensed, thus extending their value as revenue sources to the company.
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What Is Patentable
Not all subject matter is patentable. For example, patents will not be granted for mere ideas, suggestions, mental concepts and processes, mathematical formulas, business strategies, promotional advertising schemes, or printed matter. Nor will a patent be granted for naturally occurring items such as sap from an ordinary maple tree or for the laws of nature. Also unpatentable are old products discovered to have new uses; however, a patent may be issued on the new use.
Despite the wide range of unpatentable subject matter, what is patentable is covered by the three types of patents that are available—utility patents, design patents, and plant patents. Utility patents protect processes, machines, articles of manufacture, compositions, and improvements to these items. Composition patents protect mixtures or combinations having properties different from those of their individual components. Articles of manufacture include any man-made item that does not fall under any of the other categories. Processes include new uses of known processes, machines, manufactures, compositions of matter, or materials.
Design patents protect the ornamental features, but not the function, of an object. An example is the configuration or shape of a package, the surface ornamentation on the package, or both. Design patents require the design to be new, original, and ornamental.
Plant patents are granted to those who identify or discover and asexually reproduce a distinct and new variety of plant, other than a tuber-propagated plant or plant found in an uncultivated state. Asexual propagation means that the plant is reproduced by means other than seeds, such as by rooting cuttings, layering, budding, grafting, tissue culture, and nuclear embryos. Plants propagated sexually, i.e., with seed, may be protected by the Plant Variety Protection Act, which affords protection comparable to that of a patent. This protection falls under the jurisdiction of the U.S. Dept. of Agriculture.
The term of the patent varies, depending on the type of patent. Design patents have a term of 14 years from the date of issuance. Utility patents and plant patents generally have a term of 20 years from the filing date of the application; however, the term depends on the filing date of the application giving rise to the patent. If the application was filed on or after June 8, 1995, the patent has a term of 20 years from the earliest U.S. filing date. If the application was filed before June 8, 1995, or the patent was issued prior to that date, the term of the patent is the greater of 20 years from the date of filing or 17 years from the date of issuance of the patent.
A utility or plant patent may expire earlier if certain “maintenance fees” are not paid within the time frame specified by statute—3.5 years, 7.5 years, and 11.5 years after grant or during a six-month grace period that follows. No maintenance fees are required for plant patents or design patents.
Obtaining a Patent
Patentability requires more than that the invention merely embrace patentable subject matter. To be patentable, the invention must meet three rigorous criteria: utility, novelty, and nonobvious-ness.
Utility. The invention must be “new and useful,” opposed to a mere theoretical or mental concept.
Novelty. The invention must be new and not previously invented. For example, in the U.S., novelty will be quashed when an invention for which a patent is sought was previously patented or published anywhere in the world or disclosed outside of a confidentiality agreement more than one year before the filing date of the patent application.
Nonobviousness. The invention must not have been obvious to one of “ordinary skill in the art” at the time the invention was made, in light of the art known at the time. Most rejections made by the U.S. Patent and Trademark Office (PTO) are for “obviousness.”
Filing an application generally entails a three-step process, the first of which is done by the inventor and the other two by the patent attorney:
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The first step to obtaining a patent is to formulate a record of the invention and key dates concerning when the invention was made. The inventor must keep track of the date he conceived of the invention, the experiments he conducted, the dates he conducted the experiments, the results he obtained, and the observations he made in the course. Ideally, the inventor should record his observations in a permanently bound, page-numbered notebook. The pages should be signed and dated, on a routine basis, by the inventor and a noninventor (witness) who has read the pages and understands the contents. Near his signature, the witness should indicate that he has read and understands the written material. A copy of the signed pages should be kept in a safe place.
When the innovation has been made, the inventor will use the information recorded in the notebook to complete an invention disclosure form obtained from his patent attorney to use in preparing the application. Though there is no magic to the form itself, the document must be clear, legible, and understandable. It should include a detailed description of the invention and how it works, replete with figures, examples, and a model, if needed to envision the invention. If the inventor intends to use acronyms in the disclosure, he should refer to the item or process by its full name the first time he mentions it and should, immediately thereafter, include the acronym. The disclosure should also include a clear and complete explanation of the manner and process of making and using the invention in sufficient detail to enable a person having ordinary knowledge in the field of the invention to make and use the invention. It should also include a description of what the inventor knows of the prior art and other works and patents on related subject matter and how the invention is different from these materials.
Key dates tracked by the inventor are also an important part of the disclosure, such as the date the inventor thought of the invention, the date the invention was first used, the date it became operational, and the dates any disclosures were made to others, including publications and disclosures not protected by a secrecy agreement.
The more details the inventor includes, the more helpful the invention disclosure will be to the patent attorney. Additionally, the invention disclosure would serve to prove the invention date, that the named inventor is in fact the inventor, and the nature of the invention.
The inventor should attach a copy of the signed notebook pages to the invention disclosure. The inventor and a noninventor should then sign and date the invention disclosure.
The next step is to conduct a patentability search. Although not required by the PTO, a patentability search is generally invaluable because it identifies patents and publications in the area of the innovation, thus helping the attorney determine how different the invention is from the present art and what limitations he need and need not include in the claims. After reviewing the art, the attorney will typically issue a written opinion on the probability of obtaining a U.S. patent on the innovation.
Some companies decide to forego the patentability search, thinking this would translate into lower costs. One risk of doing so, however, is that neither the attorney nor the inventors would know for certain whether the invention has already been patented. Also, when the attorney drafts the patent application, he does so without knowing what nuances exist in the art that may determine how the claims should be crafted. Furthermore, when the PTO evaluates the claimed invention, it too runs its own prior art search and may uncover some of the very patents that would be identified in the patentablity search. Losing out on this information may make the difference between being granted or denied a patent.
The final step, if the patentablity search indicates a good probability for obtaining a patent on the invention and the company decides to expend the cost, is to prepare the patent application. The patent attorney drafts the application with input from the inventors, and reviews the drafts by the inventors. The final draft, reviewed by the inventor, is then filed with the PTO. When the application has been filed, the company may use the informal designation “Patent pending” or “Patent applied for” on the items and processes covered by the patent application, or in related advertising.
The PTO examines the application and the claimed invention for patent-ablity, looking closely at whether the claims satisfy the three criteria identified above. How soon the PTO starts reviewing the application depends on the subject matter and the backlog of the group within the PTO that is assigned to the application. The time required for examination ranges from six months to several years and, hopefully, culminates in the grant of a patent when the PTO finds that the patentability standards are met.
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When to File
The time for filing a patent application is critical and needs to be determined carefully. If the application is filed too early—i.e., before the commercial embodiments are invented or determined—any patent that issues would not fully cover the innovation as it is being sold or used commercially. The resulting patent would not provide the protection needed.
On the other hand, if the application is filed late, the inventor risks being forever barred from obtaining patent protection. The last date for filing a patent application is set by statute and is determined on the basis of the date the invention is publicly disclosed. In the U.S., the inventor is allowed one year to file a patent application after the invention is either first publicly disclosed or placed on sale, whichever occurs first. This is in contrast to most foreign countries, where patent protection is not available for inventions that are disclosed before a patent application is filed. Therefore, if a company plans to disclose an invention made in the U.S. at a trade show, for example, it needs to advise its patent attorney of its intentions to do so well before that date so that if the company wants to pursue foreign patent protection, a U.S. patent application can be filed before the date of disclosure.
Moreover, failure to heed the time frames established by law can result in the patent, once granted, later being found invalid.
Some corporations opt to protect information as a trade secret. In broad terms, a trade secret is virtually any type of confidential information that offers a competitive advantage in the marketplace because it is secret. Because state law regulates trade secrets, the definition of a trade secret depends on the particular state.
Today, however, as some 42 states have adopted the Uniform Trade Secret Act, trade secret law is somewhat harmonized across the country. Under this statute, a trade secret includes a formula, pattern, compilation, program, device, method, technique, or process that (a) offers a competitive advantage, actual or potential, because it is not generally known and is not readily ascertainable by proper means and (b) is reasonably guarded by its owner to protect its secrecy. “Not readily ascertainable” means that the information is not available in trade journals, reference books, or other published materials.
Trade secrets run the gambit from technical details to marketing plans and sales projections to company-specific information. Examples of trade secrets include new products or services, formulas such as that for Coca-Cola®, snack food formulations, techniques for measuring the thickness of a coating on a microencapsulated product, processes for analyzing product loss in production, and projects such as setting up an in-line infrared analysis system. Trade secrets may also take the form of lists of information such as names of customers, training methods, and details such as what “not to do” when conducting a particular analysis. Other examples are cited in Table 1.
Unlike patents, trade secrets become “trade secrets” without any formal application or filing process. Instead, information becomes a trade secret simply by being treated as such.
Trade secrets are markedly different from patents in several ways. First, unlike patents, where the underlying purpose is to encourage disclosure to promote technological development, the heart of trade secret law is secrecy. In fact, careless disclosure of a trade secret may extinguish the right to protect the information as a trade secret.
Second, as shown in Table 2, trade secrets are not restricted to certain types of subject matter, as are patents. Nor does a trade secret need to meet the rigorous criteria for patentability. In fact, trade secret law protects all inventions and information, provided that they confer a competitive advantage, irrespective of whether the invention is new, obvious, or simplistic. As such, all patentable inventions are protectable as trade secrets; however, not all trade secrets are patentable.
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Additionally, unlike patents, trade secrets do not expire after a set period of time and fall into the public domain. They may be protected forever.
Federal and state laws protect trade secrets from misappropriation, the unauthorized use or disclosure by anyone under an obligation of confidentiality to the owner. However, for the information to be recognized as a trade secret under the law, the owner of the trade secret must take reasonable measures, discussed below, to protect the secrecy of the information. This last point becomes particularly important when the trade secret is misappropriated and its owner turns to the courts for resolution. If the court finds that the owner failed to treat the information as a trade secret, the owner may find its investment in the information vaporize without any legal recourse.
How to Protect Secrecy
To protect the secrecy of the trade secret, its owner must employ reasonable efforts under the circumstances. Examples of such efforts include:
• Advising employees of the existence of a trade secret.
• Limiting access to a trade secret on a need-to-know basis.
• Marking specifications, memos, drawings, and other documents containing the trade secret “confidential.”
• Keeping the trade secret information in a locked, safe area.
• Controlling plant access.
• Implementing visitor sign-in procedures to monitor who enters the building.
• Restricting visitor access to certain parts of the building, e.g., by posting signs such as “No visitors beyond this point” at entrances to areas containing sensitive information and equipment, such as the research laboratory or pilot plant.
• Instituting policies such as destroying products after stability tests and precluding employees from taking prototypes home.
• Establishing ownership of trade secret information when entering into a joint venture.
• Entering into nondisclosure agreements with third parties and new employees.
• Exercising care in publicly disclosing information through displays, trade publications, or advertising, as carelessness can result in lost protection.
A nondisclosure agreement, or NDA, is one of the most effective ways of protecting trade secrets. It is a contract wherein the parties agree for a defined period of time to protect the confidentiality of information disclosed to them. It is drafted by the attorney and can be structured to impose nondisclosure obligations on one or both parties, depending on the circumstances. The parties or the recipient of the information agrees not to disclose the information to third parties and to use the information solely for the purpose specified by the agreement. It should also include a provision stating that when the recipient of confidential information comes up with new developments to the technology while using the information disclosed to him pursuant to the NDA, those developments are also subject to the NDA. The NDA should be signed by both parties before any confidential information is disclosed.
In business environments, NDAs are commonly used in interactions involving vendors, consultants, universities, co-packers, and potential licensees. Also, many companies as a matter of course ask new employees to execute NDAs to safeguard the confidential information to which they will be exposed. Problems may arise, however, if the company does not require all employees to execute an NDA, or if the employees later execute other agreements that supersede the NDA, such as a union contract, but do not include an NDA.
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Misappropriation of a Trade Secret
Laws for protecting trade secrets began to develop in the late 19th century. The laws, as they exist today, protect against stealing, using, disclosing, and otherwise obtaining a trade secret with-out authorization. For example, the Uniform Trade Secret Act protects against using improper means such as espionage, theft, bribery, misrepresentation, and breach to obtain a trade secret, and disclosing or using the trade secret of another, without the owner’s authorization, when the trade secret was acquired by improper means.
Another statute, the Economic Espionage Act of 1996, criminalizes the theft of trade secrets, whether the unlawful activity is economic espionage directed at benefitting a foreign entity or private trade secret theft. Under the act, it is a criminal offense to steal, copy, download, photograph, destroy, send or communicate trade secrets, without authorization and for the benefit of anyone other than the owner. Penalties can include imprisonment of up to 15 years and/or fines of up to $10 million for economic espionage for a foreign entity, and imprisonment of up to 10 years and/or fines of up to $5 million for private trade secret theft.
Trade Secret or Patent?
As a corporation develops new technology, it reaches a point where it needs to decide which of the two diverging courses—patent or trade secret—it will pursue. That decision requires analysis of a multitude of factors, as neither avenue is without costs. Some of the considerations include:
• How many years the company anticipates it will hold an exclusive interest in the subject matter of the innovation.
• Whether the company’s competitors appear to be engaged in the same technology as to beat the company to filing a patent on the innovation.
• The potential commercial life of the innovation.
• Whether the innovation will support future commercial developments.
• The anticipated cost of protecting the invention, in terms not just of dollars but also time, energy, continuous monitoring, and resources.
• Whether the company wishes to include the innovation in its portfolio of intellectual property assets.
• Whether the company wishes to license the innovation as a vehicle for realizing additional revenue.
• Whether former employees who had access to the trade secrets are covered by an NDA.
• Whether any of the company’s present employees who signed NDAs later signed contracts that supersede the NDA.
If the company decides to treat information as a trade secret, it risks others independently discovering or developing the information, e.g., by reverse engineering.This is one of the more serious risks associated with protecting information as a trade secret, because there are no federal or state laws barring such activity. Once an entity independently and lawfully discovers the information, it is free to use the information as it pleases. Moreover, the entity discovering the trade secret may apply for a patent on the trade secret and then prevent the original owner and developer of the trade secret from using it entirely or from using it without paying royalties. Should this occur, a company can lose its investment made in the new technology.
Additionally, relying on trade secrets to protect information can lead to funneling significant time and resources into setting up and implementing policies and procedures for monitoring trade secrets to ensure that they remain secret. For example, employers would need to require employees to sign NDAs and follow up to ensure that these agreements are in place. The employer would also need to monitor the workplace to ensure that trade secrets are restricted to only those who need to know.
Should the company elect to proceed with patent protection, it must be prepared to document key dates and protect against nonconfidential disclosures. It must also be willing to expend the cost of preparing and prosecuting the application through issuance, and to maintain the patent by paying the requisite fees.
These are considerations a company needs to evaluate on a case-by-case basis in determining how best to protect its intellectual property. Most often, a team approach involving business managers, technology leaders, and a patent attorney will ensure that the best decision is made.
by Judie D. Dziezak
The author, a Professional Member of IFT, is Attorney in the law firm of Wallenstein and Wagner Ltd., 311 S. Wacker Dr., 53rd Floor, Chicago, IL 60606.