What Are Patents and Trade Secrets?

Trade secrets and patents, typically utility patents, are two of the best resources that companies have to protect their ideas. While patents protect a product for 20 years, trade secrets can legally be copied.

Trade Secrets: What are They?

Trade secrets follow the Uniform Trade Secrets Act (UTSA). They make up two parts:

  • They are information that has value from not being widely known.

  • The company follows reasonable efforts to maintain secrecy.

One example of a trade secret is the recipe for Coca-Cola. If anyone outside of the company knew the recipe, all of Coca-Cola's competitors could make its beverage and sell it – putting the company out of business. There are plenty of myths around this beverage, including the one that no one who makes the product knows the full recipe. They only know the parts that they are asked to blend. According to the Harvard Business Review, the recipe is stored in a vault in the basement of the company's downtown Atlanta office, and only a handful of executives have ever seen it. This proves that Coca-Cola is taking reasonable steps to keep its recipe a secret.

Interestingly, trade secrets do not require any government authority. Any company can have protected trade secrets, and most of them do.

Patents: What are They?

Patents are as old as America itself. The Founding Fathers included patents in Article 1, Section 8 of the Constitution. This states that "The Congress shall have Power To … promote the Progress of Science … by securing for limited Times to … Inventors the exclusive Right to their respective … Discoveries."

Following the 1790 Patent Act, which gives exclusive rights to inventors and their ideas. Some lawyers prefer patents because they will hold up better in court. This is because a patent will hold up against accidental copying as well as theft.

The U.S. Patent Office uses four criteria to determine whether or not an item can be protected.

  • Congress must have listed the subject as patentable (like a machine or algorithm).

  • The idea must be new.

  • The idea must be useful (and companies should be able to profit from it).

  • The idea must be non-obvious (or common knowledge).

These criteria prevent people from trying to patent basic ideas – like using water and soil to grow plants – to become rich.

Unfortunately, applying for a patent can be a slow process. According to the USPTO, getting a patent approved take more than two years. In the time being, the inventor receives "patent pending" status, which offers some protections before the actual patent is approved.

Why are Patents and Trade Secrets Important?

The goal of patents and trade secrets is to limit the spread of sensitive information. In the wrong hands, this information can make a company lose investors or go out of business entirely.

Some lawyers suggest that companies interview employees regularly to make sure that company trade secrets aren't being spread around. All it takes is one employee to leak important information, and the company will take a hit. If too many people know about sensitive information, it may be time to patent it.

Reasons to Consider Using Trade Secrets

Even if you apply for a patent, your company is already taking advantage of trade secrets. According to the American Bar Association, all patents start out as trade secrets. As soon as an idea is created, it is considered a trade secret. While it might take months or years for a patent to be approved, the business can defend the product or process as a company secret.

According to the World Intellectual Property Organization, there are two kinds of trade secrets:

  • Ideas that can't be patented (customer lists, for example).

  • Ideas that can be patented and the organization has not done so.

Despite the risk, there are multiple advantages to choosing trade secrets over patents:

  • Trade secrets aren't limited to the 20-year protection of patents (they never expire).

  • The business that owns them doesn't have to go through the process of filing for patent protection, which can be expensive and time-consuming.

  • Trade secrets go into effect immediately because there's no application process to slow it down.

Reasons to Consider Not Using Trade Secrets

To determine whether an item can (and should) be patented, the Harvard Business Review created a list of questions for companies to ask before starting the patent process:

  • Will the invention still be useful in 20 years (like CD players and fax machines)?

  • Could other companies reverse engineer the product or process?

  • Is the invention a process or a product itself?

  • Could the invention be independently discovered?

While the original patent for the telephone by Alexander Graham Bell was invaluable, today's phones look nothing like the original. Technology changes so quickly that a relevant invention today could be useless in two decades.

There is one other important element of trade secret law to remember: It does not protect against reverse engineering.

For example, a cookie company could save its best-selling recipe as a trade secret. If another company tries multiple recipes until it creates the same cookie and starts selling it, the first company isn't protected. This is because the second company figured out the recipe on its own.

Disclosure is also an important aspect of trade secret law. During litigation, a company might be required to disclose its trade secrets to prove whether or not they had been stolen – ironically defeating the purpose of keeping them in the first place.

Examples of Choosing Patents or Trade Secrets

Some experts suggest when it comes to technology, patents are the best way to go. For example, robots are often made up of software, hardware, and tools for repair. All of these need to be patented. In that industry, some companies file patents to keep their competition from taking the idea. If a company can file the patent first, it can stop other developers from making a similar product. This also helps the companies sell its ideas to investors, which is the difference between making millions and leaving broke.

In some cases, a company would have no choice but to file a patent. For example, the states of Massachusetts, North Carolina, and New York have not adopted the Uniform Trade Secrets Act (USTA). The states do have their own trade secrets laws, though. It might be in your company's best interest to file a patent on your ideas if you are based in one of those states, especially if your competitors are based across state borders.

Every company has to decide whether it wants to patent their ideas or keep them as trade secrets. If you're unsure which option is best for your business, you can post your patent or other legal needs here and get free custom quotes from the top 5% of lawyers on UpCounsel. to help you decide which option gives you the best protection for your ideas.