Patent or Trade Secret: Which Will Provide The Biggest Advantage?

If you are an inventor, and considering how to maximise the commercial value of your invention, a patent is not your only option. Patents are appropriate and enormously valuable in a wide range of circumstances. However, there are also instances where an invention will attract more value as a trade secret.

Patents and trade secrets are both potentially very valuable, however, there are several points of difference to consider

Patents confer on the owner the exclusive right to prevent others from making, selling, using or importing a particular product or service, in exchange for full public disclosure of the invention. On the other hand, trade secrets are formulas, processes, or other business information that derive their commercial value from remaining undisclosed, and that a company is making reasonable efforts to keep secret. Both options are open to potential licensing opportunities.

Trade Secrets

To qualify as a trade secret, the information in question must be considered ‘sufficiently undisclosed’.

Trade secrets developed by a company or employer are in many cases considered a valuable commodity. However, it is important to remember that not all trade secrets sufficiently qualify as protectable confidential information. In this regard, unique methods of production or chemical formulae are likely to be considered as trade secrets, however ordinarily a range of factors will be considered to determine whether or not information is ‘sufficiently undisclosed’. These factors include:

• the specific nature of the information itself which is claimed to be confidential
• that the information is not publicly known (that is, it is not in the public domain) and therefore, sufficiently constitutes as a secret
• that the secret itself holds actual commercial value (which may be determined by IP valuation)
• that the inventor has taken the sufficient and necessary extent of measures to guard the secret.

Where it is established that protectable confidential information exists, the law responds to the unconscionable conduct of anyone using that information without the consent of the person who confided the information.

For a trade secret to qualify for this protection, there are several requirements.

Necessary quality of confidence

First, the information must have the ‘necessary quality of confidence’. More specifically, this means that once the information has entered the public domain (which means that the information in generally accessible), it will no longer possess the necessary quality to be protected.

Where information has been created from existing publicly available materials, it may still nevertheless be considered to possess the necessary quality if something new rises from the application of the various elements. For example, a published recipe or DIY formula for a particular application would be considered to be in the public domain. However, if that recipe or formula were modified to include a confidential component or unique method or process, it could potentially be considered to possess the ‘necessary quality of confidence’.

In circumstances importing an obligation of confidence

Second, the information must have been conveyed ‘in circumstances importing an obligation of confidence’. This situation will exist if the ‘reasonable man standing in the shoes of the recipient of the information would have realised upon reasonable grounds that the information was being given to him in confidence’.

Instances that may give rise to the obligation include situations where:

• there is a confidentiality agreement
• the information is in a document, and it is sealed and marked ‘confidential
• parties are entering into a joint venture or other common purpose, and commercial or industrial information is divulged

The obligation may also arise where the particular information was given under duress or similar, that is, where the information was ‘improperly or surreptitiously obtained’.

In equity, there are several other situations that give rise to the obligation of confidence, including where the information is ‘obviously confidential (which applies to items like diaries, or similar); where it is considered to be ‘secrets of importance to national security’, and situations that involve eavesdropping.

Unconscientious use

Third, there must be unconscientious use of the information. Several situations may qualify as unconscientious use, including where the receiving party uses the information for personal gain or benefit, or where the information is published or otherwise presented in the public domain.

Consequences of breach

There is no general requirement to establish that loss or damage has occurred as a result of the breach of confidence. Damages are generally available, however, if the breach has not resulted in loss, damages are not an option.

Defences to breach of confidence claim

Where all three elements of a breach of confidence claim are satisfied, it is still not a given that trade secret protection will be maintained. Similarly, not all disclosures are considered a breach of confidence. In some cases, accidental disclosure may mean that the ‘quality of confidence’ will not apply. On the other hand, the defence will also be available where there was deliberate disclosure, however, it did not satisfy certain elements of the obligation.

There are also situations where a trade secret may be uncovered through ‘reverse engineering’, for example, a scientist taking apart a particular technical product. In short, where the information was not given in circumstances that impose the obligation of confidence, the other party cannot have breached the inventor’s confidence.

If the person disclosing can establish that disclosure is in the public interest, this may enable a defence.

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Confidential (Undisclosed) Information as a form of IP

It is now well understood that information itself is a hugely valuable commodity. Under the TRIPS agreement in Art 1, undisclosed information is recognised as a form of intellectual property. Art 1 requires members to protect confidential information in accordance with Art 39. The aim of that provision is to ‘ensure effective protection against unfair competition’ (Art 39.1).

“Undisclosed information” is defined in depth in Article 39 (2):
Natural and legal persons shall have the possibility of preventing information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices (10)so long as such information:

• is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question;
• has commercial value because it is secret; and
• has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

In addition to the TRIPS agreement, in Australia, the Federal Court has found that key hallmarks of IP can be attributable to confidential information. In Smith Kline & French Laboratories (Australia) Ltd v Secretary, Department of Community Services and Health, the court considered that confidential information can possesses the ‘necessary quality of confidence’, in certain circumstances where it is not publicly known.

Patents

Patents confer on inventors a monopoly that is legally enforceable. This monopoly enables them alone to exploit the invention, a right that generally persists for a maximum of 20 years. The right is extinguished if renewal fees are not paid.

In Australia to grant a patent, the Patent Office must be satisfied that the invention:

• is a recognised patentable type
• is novel in comparison to existing information
• involves an ‘inventive step’ – that is, that it is not obvious to someone with skills and general knowledge in the area
• is useful in that it serves some purpose, even if minor
• has not been used in secret by the inventor by someone else with authority, in Australia before the priority date

Patentee rights

A patent is very valuable because once you become a patent owner, you are conferred a legally enforceable monopoly in regards to the invention. This means that you will have the exclusive right to exploit it right throughout the life of the patent, which is usually 20 years.

This monopoly allows the patentee to:

• make, hire, sell, use or import the invention if it is a product
• use the invention if it is a method or process
• authorise another third party to use it in the same way, usually in return for a fee

Find out more about patents

Whether you patent or choose to protect and add value to your invention as a trade secret depends on many distinct factors that you can discuss in detail with your attorney.

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Author: Daniel Abraham | Registered Attorney & Principal at Platform®IP

This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.