By Victor L. Morales, former Legal Resources Manager, Association of Corporate Counsel
Overview
Within a small legal department, an in-house counsel may find herself in the situation where she has to decide whether to recommend that her client seek patent protection for an intangible asset. However, what are the factors to be weighed in making that determination? How does the current legal landscape play a role in the reality of being able to enforce one's patent rights once obtained? In order to advise the client and help them make an informed decision, it is important to first understand what each protection offers, then review the requirements to obtaining a patent, and contemplate how it realistically interacts with the client's business operations.
Patent
A patent grants the owner the right to exclude others from making, using, offering for sale, or selling the patented invention until the patent expires (35 U.S.C. § 154(a)(1)). A patent will generally provide 20 years of protection to allow the inventor the option to fully develop and market the product commercially (35 U.S.C. § 154(a)(2)). There are three types of patents: 1) utility (covering new and useful processes, machines, manufactures, compositions of matter, or improvements); 2) design (covering new, original, ornamental design embodied in or applied to an article of manufacture); and 3) plants. Once an invention is determined to fall into one of these categories, it is examined to see if it is either obvious (35 U.S.C. § 103(a)) or already used in the public for more than one year (35 U.S.C. § 102(b)). Laws of nature, natural phenomena, and abstract ideas are not patentable (Alice Corporation v. CLS Bank International, 134 S. Ct. 2347 (2014)). If filing a patent, it is important to ensure that all these conditions are met prior to undertaking the arduous process.
The cost of filing a patent in the United States can be a significant challenge for smaller companies ("SME"). The general range for the total cost of the application can be between $15,000 and $30,000 (Mastering the Game: Business and Legal Issues for Video Game Developers, David Greenspan, WIPO, 2014, at 97). However, a SME could qualify for a 50% reduction in fees paid to the US Patent and Trademark Office ("USPTO") under the "small entity status." To be considered a small entity, a SME, including its affiliates, would need to certify that they do not exceed 500 employees (13 C.F.R. § 121.802(a)). There are additional expenses at certain points during the life of the patent (the 3rd, 7th, and 11th year) as well, called "maintenance fees." In addition, a SME can file a provisional patent for a fraction of the cost prior to formally filing. This will allow the use of the term "patent pending," while preserving the priority date for the invention. The inventor would then have up to a year to test the market, further develop the product, and raise money before filing for official review by the USPTO. Lastly, the 20-year term of the patent begins when the formal application is submitted for review.
For companies also operating outside of the United States, the Madrid Protocol exists as a streamlined system for filing a patent application that can be used to pursue patent protection in foreign jurisdictions. Under the Patent Cooperation Treaty ("PCT"), an inventor can have at least 30 months from the priority date to choose amongst 147 countries for patent protection in addition to the United States. While it may be more cost-effective and efficient in the long term to file directly to the countries if already known, the PCT filing process builds timing flexibility for the SME (PCT Basics: Obtaining Patent Rights Around the World, Gene Quinn, 2012). It is important to remember is that an U.S. inventor cannot file in any foreign country without first filing in the United States in order to obtain a Foreign Filing License (35 U.S.C. § 184(a)).
Trade Secret
A trade secret is any information (i.e., program, device, method, technique, etc.) with actual or potential economic value, not readily ascertainable, and is the subject of reasonable efforts to maintain its secrecy (Unif. Trade Secrets Act § 1(4)(i)-(ii)). A well-known example is KFC's 1940 Original Recipe, which consists of 11 ingredients used to season chicken sold in all KFC locations. The recipe is recorded only on a hand-written note, locked in a vault with its combination known only to three unknown executives that do not travel together (KFC to Relocate Secret Recipe, The Food Channel, 2008). Trade secrets provide legal protection against misappropriation, which is defined as an acquisition of a trade secret by a person who knows or has reason to know that the trade secret was acquired by improper means, disclosure, or use of a trade secret of another without express or implied consent (Unif. Trade Secrets Act § 1(1)). Although there is technically no cost to maintain a trade secret, a company should take into account the costs in providing security of the trade secret, as it is vital to the company's success and an essential element the courts analyze in enforcing trade secret protection under common law.
In the EU, trade secrets are referred to as "confidential business information" and are protected only at the member state level like the United States. Its elements are similar in that the information being protected must be valuable, confidential, and kept secret (Mastering the Game: Business and Legal Issues for Video Game Developers, David Greenspan, WIPO, 2014, at 97). More broadly, 158 countries have agreed to provide protection for "undisclosed information" that must also be valuable, confidential, and kept secret the under the Trade-Related Aspects of Intellectual Property agreement (Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), §7 art 39 (2)(a)-(c)).
Patent vs. Trade Secret Analysis
When determining whether to use patent or trade secret protection to a particular subject matter, the two circumstances that lead to an easier decision are subject matters that are not patentable or subject matters that are arguably patentable. For subject matters that are not patentable, the only other protection available is to keep it a trade secret. For subject matters that are arguably patentable, the company needs to weigh the risk of exposing the subject matter against the significant cost and substantial amount of time to invest in filing for a patent. For subject matters that are clearly patentable, the question centers on the level of public exposure, and whether it can be reversed engineered (Choosing Between Trade Secret and Patent Protection, Dean W. Russell, Russell A. Korn, and Christopher M. Durkee, at 4). Because patents are public documents, companies regularly consider whether the disclosure of a specific invention through a published patent application is in the company's best interest (Giving Innovation Wings: How Boeing Uses its IP, Catherine Jewell, WIPO, 2014, at 1). A subsequent analysis should be the patent's profitability. Would the monopoly benefit the company directly or indirectly by licensing to non-competitors? Or is it an area that is hotly contested with litigation like software patents? Further, is it an area that is often targeted by other companies and non-practicing entities? These factors should be carefully weighed with the company leaders in determining the best course of action for the business. In addition, carefully reviewing a complex innovation process can reveal the possibility of both obtaining a patent for a component of the overall innovation and retain the rest as a trade secret (Mixing Patents and Trade Secrets for Complex Innovations, Paul Belleflamme, 2013). To assist your client in making these decisions, the USPTO created a helpful "IP Awareness Assessment Tool" consisting of a quick and full assessment questionnaire that will point the user to available educational materials most suited to their needs.
Generally, trade secret law is considered to be weaker than patent law when a company has the option to choose between the two protections (See Patents or Trade Secrets, WIPO). However, this is truer for patents in more established industries that aren't undergoing rapid innovation. Some argue that due to the recent government actions and court decisions like Alice Corp. v. CLS Bank, software patents are now more difficult to obtain and to defend against validity claims due to the established scope being weakened. The result is trade secrets becoming the preferred method of protection to patents, especially if Congress is successful in establishing a federal standard. Patent reform is often a topic of great interest as well in legislature due to the increasing difficulty for patent seekers and owners.
Another major factor deserving substantial discussion is the nature of consumer preferences in the company's industry. It can be rather difficult for a SME to raise necessary capital to file a patent in a timely manner if developing a product or service that is truly just a consumer fad. Even if a SME had the cash to file an application, the timeline for a successful patent prosecution is measured in years. If the SME were developing a mobile game, for example, the product might be commercially irrelevant before the application receives a first office action. Therefore, it is recommended that the company carefully evaluate the patentable product and considering beginning with a provisional patent to see if the patentable subject matter is viable for long-term success and how well it can be monetized through protection.
In sum, it is important to advise your client of the pros and cons when there is interest in patenting a particular intangible asset. The client should understand that the process to obtain and retain patent rights is an intensive long-term commitment and an informed decision should only be made after researching the political, legal, and business landscapes. By keeping these goals in mind, you can effectively temper expectations and develop an efficient strategy to protect your company's intangible assets.
About the Author
Victor L. Morales is a former Legal Resources Manager at the Association of Corporate Counsel and Law Student at George Mason University School of Law.
Additional Resources
Giving Innovation Wings: How Boeing Uses its IP, Catherine Jewell, WIPO, 2014
Mastering the Game: Business and Legal Issues for Video Game Developers, David Greenspan, WIPO, 2014
Mixing Patents and Trade Secrets for Complex Innovations, Paul Belleflamme, 2013
Patents or Trade Secrets, WIPO
PCT Basics: Obtaining Patent Rights Around the World, Gene Quinn, 2012