Trade Secrets Or Patents?

By Mike Fuller & Kim Kennedy

Biotechnology companies are in an exceptionally competitive field, with multiple companies competing against each other for a chance to market similar innovative therapeutics. This competition can result in some companies struggling to decide how to best protect their IP.

Patents provide robust protection from competitors but require disclosing the invention to the public. Trade secrets protect innovation by keeping that innovation secret. But trade secret protection is lost once the trade secret becomes known to the public. Biotech companies should have a strategic plan for evaluating each innovation and deciding whether to protect it from competition through patents or trade secrets.

Utility patents protect a variety of inventions, including compositions of matter, processes, products, and machines. However, patents don’t last forever. They are only valid for a limited term (in most countries) of 20 years from their first filing date. To obtain a patent, the application must disclose enough information to enable others to make and use the invention. That’s the tradeoff for a patent: The innovator receives a 20-year limited monopoly to the invention in exchange for disclosing sufficient information for others to use the invention once the patent has expired.

Patents are offensive weapons. They prevent a competitor from being able to make, use, or sell the patented invention during the patent’s 20-year term, even if another party independently develops the invention. Patent owners who believe a competitor has infringed on their patent can file a patent infringement lawsuit to shut down the competitor’s manufacture of the product and receive damages for the competitor’s improper sales of patented products.

In contrast, trade secret protection does not require any government intervention. A trade secret can cover various types of innovation — from methods of making a specific compound or protein, to a vector used to make a certain biologic, to the structure of a molecule. Trade secret protection can cover any type of information, with the only requirements being that the information has potential economic value and the company used reasonable efforts to keep the information secret. These efforts may include educating employees on what information is to be kept secret, limiting access to the secret information, and/or requiring employees and others to sign confidentiality and nondisclosure agreements (NDAs). Trade secrets theoretically can have an infinite lifespan but will be lost if the information being protected becomes known to the public.

Unlike patents, trade secrets do not provide any protection if a competitor reverse engineers or independently discovers the trade secret. If trade secret information is wrongfully obtained by a competitor, the owner can sue for damages and may seek an injunction to prohibit the use of the wrongfully obtained information. However, these efforts may be futile if the secret becomes widely known.

Because patents require the invention be disclosed to the public, and trade secrets require the invention be kept secret, the same invention generally cannot be protected both ways. Despite this tension, companies can find ways to secure complex innovations with multiple forms of protection. For example, a company developing a new drug product may protect the product’s chemical structure with patents, but protect the complicated process developed to commercially manufacture that product with trade secrets.

SECRET MANUFACTURING PROCESSES VERSUS PUBLICLY AVAILABLE PRODUCTS

Processes for commercial manufacturing are often very difficult to develop, especially scaling up manufacturing of complex biological molecules, such as antibodies. For companies that have developed complex manufacturing processes that confer an advantage over competitive processes, trade secrets may be the best protection.

Even if a patent can be obtained on a manufacturing process, these types of patents can be difficult to enforce. It is often impossible to determine whether a competitor is using the patented process simply by examining the final product. Even if the patent owner is sure a competitor is using the patented process, it may be difficult to obtain evidence showing that the competitor is infringing. Although some discovery of the process will be made in litigation, that can be very expensive and time-consuming. And sophisticated competitors may choose to manufacture the product oversees in a country where the discovery process in litigation is nonexistent or improbable.

However, manufacturing processes can often be effectively protected as trade secrets. This works best where the process is not easily discernable from the product that is sold. If determining the process from the product is challenging, then it can be possible to keep a manufacturing process under wraps and enjoy trade secret protection for an unlimited amount of time.

In contrast, it is usually better to protect product information, such as product formulations or structures, through patents. Normally, the components of a product or formulation can be determined by a careful analysis of the product itself. For this reason, trade secret protection of a formulation may not be viable because the secret will be exposed once the product is sold to the public. Patent protection is usually more appropriate for protecting this type of invention.

WHAT TO CONSIDER WHEN CHOOSING BETWEEN PATENTS AND TRADE SECRETS

1. Risk of reverse engineering — Can this invention be used without giving away its secrets to competitors? For products that would be easy to reverse engineer, patent protection is a better fit. For processes that are easy to keep secret, trade secret protection might be appropriate.

2. Patentability and strength — Would it be possible to claim the invention in a way that others could not design around or challenge the validity of the patent? If an invention would be difficult to describe and claim in a way that would both pass U.S. Patent and Trademark Office (USPTO) examination and cover potential competitors’ products, then trade secret protection may work better.

3. Other roles of patents — Is acquiring patents necessary to demonstrate the company’s value or commercial advantage to investors or business partners? Patents are often crucial for companies to raise funding or be acquired. If keeping the company’s inventions secret would cripple its ability to secure funding or business partners, then patent protection is probably a better choice. This is likely to apply to small companies that don’t yet have any products and where the value of the company lies primarily in its patents. Also, obtaining patents can sometimes deter competitors from developing similar products. If so, patents may be the right choice.

4. Can you keep a secret? — Is the company prepared to take reasonable measures to keep the invention secret? There is a considerable cost in maintaining trade secrets. For instance, companies with trade secrets should educate employees on what information is a trade secret, limit access to trade secrets, and require NDAs. It can be especially hard to keep track of employees who have learned a trade secret then left the company. Managing confidentiality and employee relationships can be more burdensome than obtaining patents.

5. Enforcement — Can infringement be easily detected and proven? Would the company enforce its patents against any infringers? Litigation is costly and time-consuming, and trying to obtain evidence from foreign entities adds extra complications. If a company will not be able to identify infringement and/or enforce its patents if infringed, it may be better off keeping inventions as trade secrets.

Carefully consider all options when deciding what form of IP protection to use when protecting your innovation. Patents are crucial for protecting products that may be easy to reverse engineer, and trade secrets can be critical for preventing competitors from using valuable process innovation that is difficult to protect with patents.

MIKE FULLER is a partner at Knobbe Martens. He has expertise in obtaining, licensing, and managing IP portfolios on molecular biology and computer science patents.

KIM KENNEDY is an associate at Knobbe Martens. Her practice focuses on technology litigation, including patent, trademark, and unfair competition claims.