Trade Secrets vs. Patents - When Silence is Stronger Than a Filing

Introduction

Consider two firms simultaneously developing a revolutionary process for industry. The first hurries to the patent office, files a patent application in full detail, and receives the exclusive right to the process for twenty years. The other firm does nothing. It simply creates a wall of secrecy and moves forward.

Twenty years down the line, the patent granted to the first firm expires, and all the information is available to its competitors, courtesy of the law. Meanwhile, the second firm remains safe and dominant, because the secrecy surrounding its revolutionary process is still intact.

Such scenarios happen in real life and knowing how to navigate them can mean the difference between making a smart decision and making a costly mistake when it comes to your IP management.

The Basics - What are We Actually Comparing

The right granted by a patent enables its owner to monopolize the commercialization of an invention for a period of twenty years. Under the Indian patent system as outlined in the Patents Act, 1970, this right is conditional on the disclosure of information about the invention. The government grants you a monopoly for sharing your invention with the world. After expiration of the patent, your invention becomes part of the public domain and can be used freely by anyone.

Unlike patents, trade secrets do not involve any sort of application or registration. It is also non-terminating and extends as long as the secrecy remains intact. Unlike the US, India lacks a specific trade secrets law although the country passed the Defend Trade Secrets Act in 2016. Instead, there are multiple legal protections including contractual agreements, principles of equity, and confidentiality provisions. The Indian courts have recognized trade secret cases under breaches of confidentiality action or the IT Act, 2000.

Internationally speaking, according to Article 39 of the TRIPS agreement, members have the duty to protect undisclosed information, which must be secret, has commercial value by being secret, and has taken reasonable measures to ensure its secrecy. India satisfies the requirements of this article mainly through judicial decisions, but not through legislation, and this leaves a lot of room for uncertainty.

The Disclosure Dilemma

Now, here is the fundamental paradox of patents: To obtain protection, you need to forfeit your secrets forever. On the day that your patent is published, which happens 18 months after filing your application in India, every bit of detail regarding your invention will be known to your competitors. They cannot use it for copying while it lives.

However, on Day 1 of Year 21, every bit of that technical detail is now open for their free use. Your competitors do not need to spend a single penny in development or research; all they need is patience.

“The patent system asks investors to make a peculiar bargain: reveal everything now in exchange for a temporary monopoly. The question is whether that bargain always makes sense.”

On the other hand, a trade secret is one where there is no such exchange, and it does not expire either. If your trade secret remains yours, it can be protected indefinitely.

When Silence Wins

Coca-Cola's secret recipe is perhaps the most famous trade secret in history. This formula is supposed to be known by just two people at any one time, kept in a vault and never patented. As far as Coca-Cola was concerned, it was better not to patent the formula and give it away to PepsiCo in 2006 than to have a 20-year patent monopoly. The trade secret has thus far served the company well for more than a hundred years.

Three things have helped make trade secrets successful. Firstly, the technology must be hard to reverse engineer. An example would be a manufacturing process that results in something, but which does not leave its mark in the product itself. Secondly, there should be no need to disclose the technology to gain commercial advantage from it. Thirdly, there must be a means of enforcing internal security.

NDAs in India can be considered binding on account of the Indian Contract Act, 1872, if they fall within the definition of reasonableness concerning their duration and coverage. There have been instances where courts have issued injunctions against the former employees to prevent any unauthorized use of confidential information about the business.

But there is also another instance where keeping silent proves victorious – that is, when the innovation cannot be patented at all. For example, as per Section 3 of the Patents Act, 1970, India does not recognize many areas for patenting, such as business methods, mathematical methods, computer programs, discoveries of natural phenomenon, and more.

When a Patent is The Smarter Bet

Please don’t misunderstand this as an attempt to argue that there should be no patents at all. There are numerous situations when not only a patent but also patent protection is a must.

For example, consider the pharmaceutical industry. No matter what, a drug manufacturer simply cannot keep its molecule a secret. All the components of a pill will easily be analyzed by a moderately equipped laboratory once the pill goes out on sale. The whole concept of keeping your information safe as a trade secret falls apart immediately after the product hits the market; and the only way to proceed is through patents - which are also extensively elaborated upon in the Indian jurisdiction in the case of pharmaceuticals such as the case of Novartis AG vs. Union of India.

Patents are favored when disclosure creates its own competitive advantage. The act of publishing a patent gives a clear signal to the market, indicating ownership of the area. It opens possibilities for making money through licenses without having any product in mind. Lastly, it helps build a patent portfolio that can help defend you in a lawsuit.

However, should your invention be so obvious to competitors as soon as they see the product, keeping your idea under wraps as a trade secret will give you no protection. Patents give you the legal right to pursue action against someone who steals your idea.

The Legal Risk of Silence

One significant weakness that trade secrets share but not patents is their vulnerability to independent invention. If a rival invents an equivalent process by itself and without having been given access to any of your confidential information, there is nothing legally you can do about it. You cannot use your trade secrets against such a rival. Patents could have protected you from such rivals.

Mobility of employees is another problem area. When your high-ranking engineer moves to a rival firm, what exactly does he take away? Post-employment restrictions in India must withstand the challenge of Section 27 of the Indian Contract Act, under which any agreement restraining one from trading in anything is illegal. Courts have ruled in most cases that a pure non-compete clause will be void after employment, but a confidentiality obligation may stand.

The task of enforcement also becomes difficult. A patent infringement is statutorily defined wrong, while a trade secret misappropriation in India involves assembling a claim under contract law, breach of confidence, and even tort – a process which is costly, time-consuming, and unpredictable.

The Strategic Decision Framework

So, how do you make the choice? Before doing anything, answer these four questions first:

• Is it possible for your competitors to replicate this based on the end-product you developed?

Yes - file a patent. No - maybe you should treat it as a trade secret.

• How long is the useful lifetime of your idea?

More than 20 years - trade secret approach is better. Within 20 years – perhaps a patent’s lifetime will be sufficient.

• Is there a possibility that you can really keep it secret?

If not and your organization will inevitably leak the information, it won't make sense to pursue a trade secret strategy.

• Do you have to disclose your innovation to benefit from it?

If yes, you need a patent. If not and the output speaks for itself, be silent.

In fact, some organizations do both. For instance, while filing patents on their design, they protect their trade secrets by keeping their manufacturing processes or partnerships private. Apple patents its hardware designs while keeping its manufacturing processes and supplier relationships confidential. The two strategies aren't mutually exclusive — they're complementary layers of protection.

The Bottom Line

It’s not true that either patents or trade secrets are always the better choice. Patents are strong rights, but they are temporary rights that rely on mandated disclosure. Trade secrets, on the other hand, can last forever, but they are dependent on a precarious condition - namely, secrecy.

The problem lies not in the choice of which strategy to implement, but in making the choice without proper reflection – patenting without thought, or keeping information secret out of sheer complacency without determining whether doing so is helpful to your invention.

When it comes to IP strategies, as is the case with many things, a well-thought decision will always be superior to any action taken out of mere instinct or impulse.

Author: Charvi Toshniwal , in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

Endnotes :

1. The Patents Act, 1970, No. 39 of 1970, § 53 (India).

2. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, art. 39.

3. The Patents Act, 1970, No. 39 of 1970 (India).

4. Information Technology Act, 2000, No. 21 of 2000 (India).

5. The Indian Contract Act, 1872, No. 9 of 1872, §§ 27, 73 (India).

6. Saltman Engineering Co Ltd v Campbell Engineering Co Ltd (1948) 65 RPC 203 (CA).

7. John Richard Brady v Chemical Process Equipments Pvt Ltd, AIR 1987 Delhi 372.

8. American Express Bank Ltd v Ms Priya Puri, (2006) 110 DRJ 106.

9. Diljeet Titus v Alfred A Adebare, 2006 (32) PTC 609 (Del).

10. Burlington Home Shopping Pvt Ltd v Rajnish Chibber, 61 (1995) DLT 6.

11. Novartis AG v Union of India, (2013) 6 SCC 1.

12. The Patents Act, 1970, No. 39 of 1970, § 3 (India).

13. WIPO, ‘Trade Secrets and Confidential Business Information’ (World Intellectual Property Organization) https://www.wipo.int/tradesecrets/en/

14. WIPO, ‘Understanding Patents’ (World Intellectual Property Organization) https://www.wipo.int/patents/en/

15. Coca-Cola Company, ‘Our Heritage’ https://www.coca-colacompany.com accessed [Date].

16. World Trade Organization, ‘TRIPS Agreement – Article 39: Protection of Undisclosed Information’ https://www.wto.org

17. Richard A Posner, Economic Analysis of Law (9th edn, Wolters Kluwer 2014).

18. David S Levine and Sharon K Sandeen, ‘Here Come the Trade Secret Trolls’ (2015) 71 Washington and Lee Law Review Online 230.

19. Mark A Lemley, ‘The Surprising Virtues of Treating Trade Secrets as IP Rights’ (2008) 61 Stanford Law Review 311.

20. Apple Inc., Intellectual Property Portfolio and Supplier Responsibility Reports, available at https://www.apple.com