When Not to Use Trade Secrets

Even though trade secret has a number of advantages, it has some disadvantages as well. In the following scenarios, patent would be a better option than trade secret.

1) The technology can be reverse engineered or invented independently

If the technology can be taken in parts and be analyzed, it is not a good idea to keep it a trade secret. One example is hardware. If Apple wants to know how Samsung Galaxy S4’s processor works, they can take the smartphone apart and understand exactly what’s inside. Apple can manage to produce something very similar, and then release the new product to the market in order to compete with Samsung. Another example is software. Reverse engineers can use several tools to disassemble a program. If someone else has developed the technology, he can claim ownership over it by filing a patent, even though you are the one who first come up with it.

2) Licensing the technology out

If the firm wants to license out the invention, it would be harder to manage keeping the technology a secret if the licensor fails to maintain the secret. What’s more, a licensor would be more attracted by patented technologies since the rights are clearly defined by patents.

3) It is costly or too difficult to maintain the trade secret

Again, using Coca-Cola as an example, the firm is really good at protecting its secret formula. It’s known that the piece of paper containing the recipe lies deep inside a vault in Atlanta.

“To protect the formula only a few corporate executives know the exact recipe, and each is bound by oath not to reveal its contents. When one of these individuals die, the others approve a successor. These keepers of the recipe travel separately to ensure that a single accident won't eliminate all of them.”

The amount of work required to protect trade secret can be highly costly. Costs include restricting physical access to the secret, and a lot of contract costs associated with the duty not to disclose. Nonetheless, even as careful as Coca-Cola, the firm had an insider, Joya Williams, a former secretary who was convicted of trying to selling the formula to Pepsi in 2007. Managing employees to not disclose or sell the trade secret can be the most challenging task.

4) Risks involved with utilizing trade secret

The value of trade secret can be wiped out overnight once it’s disclosed to the public. A company can easily lose its core competency if its sales and operations are depending on the trade secret. Firms definitely need to be extra careful regarding choosing between trade secret and patent. 

When to Use Trade Secrets

When should the inventor use trade secrets? There are a few scenarios when trade secrets would be favorable:

1) When other competitors cannot reverse engineer your invention

A classic example would be the secret formula for Coca-Cola, which cannot be reverse engineered. This is because even though we might be able to identify most of the ingredients, there are a few that are hard to identify since their tastes are so similar; plus, it would be impossible to figure out the exact amount of usage and conditions of these ingredients, even though we can’t really differentiate the tastes among different mixers.  

2) Trade secret can theoretically last forever unless there is a disclosure

Patent will only remain in force for 20 years since the filing date of the patent application, but trade secret protection has the advantage of not being limited in time.  If the inventor of Coca-Cola formula had applied for patent protection, this formula would be made public a long time ago and became accessible by anyone. However, keeping this formula as a trade secret has allowed Coca-Cola to continually dominate the soft drink industry over one hundred years. 

3) Something that is not patentable

In the case of customer lists, sources of supply or manufacturing process, these are clearly not patentable. Firms however would love to keep information like these secrets to protect their businesses.

4) The ownership of the technology has short duration

If it takes longer for a patent to be issued than the technology to be used, obtaining a patent has very little or no use for short-lived and soon-to-be obsolete technology.

5) Trade secrets do not need to be registered

This means first of all, the inventor doesn’t need to pay for the expensive registration costs. Costs involved with filing a patent include:

-          Patent search with detailed patentability assessment

-          Provisional patent application prepared and filed

-          Filing fee to the USPTO

-          Nonprovisional patent application based off provisional filing

-          Filing fee to the USPTO for nonprovisional patent application

-          Professional illustrations for nonprovisional patent application

Costs vary based on the technology involved. Some simple inventions may cost under $10,000, but for a complex technology, the cost can easily go up to $15,000 to $30,000 and more.

On the contrary, trade secrets need none of these above. Yet, be mindful, depending on what kind of information it is, the costs to keep the information confidential can be extreme high in some situations.