When performing a technology assessment on a new technology, we take an in-depth look at the company’s intellectual property (IP) portfolio and consider how the IP relates to the company’s product offerings, business model, and the market and competitive landscape. The IP portfolio consists of patents, copyrights, trademarks, and trade secrets.
A trademark is an identifying design or expression that identifies a company or product, while a copyright is protection of original works of authorship. It’s less common that we see these in a technology assessment, although original software code and algorithms are automatically copyrighted at creation without requiring registration. Patents, on the other hand, often make up a large portion of the IP portfolio and tend to be the most valuable and most easily valued assets. However, trade secrets differ from all of these in that they are, by definition, not publicly known.
What are trade secrets?
Trade secrets are IP rights on confidential company information that provides a specific competitive advantage. A trade secret is defined as any propriety process, formula, design, or information that meets the following criteria.
- The information is not known to the public, but more likely only known to a limited group of individuals.
- Reasonable effort is actively made to conceal the information from the public; this can potentially include confidentiality or non-disclosure agreements.
- The information has economic value because it is secret.
Generally, the hallmark characteristic of trade secrets is that they are only disclosed on a strict “need to know” basis. In a company of 50 people, for example, if everyone has access to the information, regardless of position or department, then it’s not a trade secret. The main requirement of a trade secret is that it provides the company a competitive advantage and is kept classified from others who could potentially profit from its use. Additionally, companies with such information must take necessary measures to protect the information by limiting access and implementing appropriate confidentiality processes.
Trade secrets vs. patents
Patents and trade secrets both offer protections for IP, but the similarities end there, with the key difference being a trade secret is protected by keeping it confidential, while a patent is a public disclosure of the invention. Where trade secrets are not publicly known, patents are public, legal documents that grant exclusive rights to the inventor of the patented design, process, or innovation, in exchange for complete, detailed disclosure of the invention. A patent protects the inventor and prevents others from making, selling, or using the invention without express permission.
Generally, patents are appropriate for things you can see and reverse engineer, where trade secrets more often apply to processes. Consider a laboratory or factory line, for example. Using a certain pressure, ratio, or other condition – essentially the crux of what is needed to make the entity function – could be considered trade secrets. A patent, on the other hand, requires the inventor to disclose how the entity works, disclosing the conditions under which the process works, essentially giving the competition a head start. To be covered under a patent, the patent itself must lay out these details, whereas trade secrets can offer better protection in some instances.
Another key difference is that while a trade secret can be protected indefinitely, a patent’s protection lasts for a limited time, typically 20 years from date of filing. Additionally, while a patent is only granted for a specific invention, a trade secret can protect a broader range of information, possibly used across multiple processes.
When choosing patent or trade secret protections, a company should consider the nature of its technology and innovations. Those with highly confidential information that would be difficult to reverse engineer may want to keep them protected as trade secrets, while those with inventions more easily replicated may find better protection in patents. It’s also important to consider that the key to trade secrets lies in personnel, so a company needs the full cooperation of all those in the know, which can make trade secrets riskier.
Determining the value of trade secrets
Trade secrets are crucial to some companies’ competitive advantage. With this protected information fully under wraps, a company can establish its vision and make strategic decisions without the competition on its heels. Assuming the criteria above are met establishing confidentiality, trade secrets can be considered part of a company’s collateral in the process of IP evaluation.
When considering investments, it’s wise to not rely solely on trade secrets or patents, but in an ideal scenario, a company would have a combination of the two.
In addition to being an important part of a company’s IP portfolio, trade secrets are protected by the Economics Espionage Act of 1996. Under the law, the theft or misappropriation of a trade secret, including the disclosure of any proprietary or confidential information meeting the standards for trade secrets, can be prosecuted as a state and federal crime.
Because trade secret protection is relatively inexpensive and easier to obtain, as well as covering abstract ideas and lasting indefinitely, it provides undeniable benefits to growing technology companies. Trade secrets can be valuable assets in a company’s IP portfolio and an essential component in producing an advantage over the competition, as well a valuable tool in protecting that IP.