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The changing trade secret and patent equilibrium

TechCrunch TechCrunch 20/06/2016 Manny Schecter

It is no secret that trade secrets are essential to the success of many businesses. Nearly all of us are aware of examples of highly treasured trade secrets, such as the recipe for Coca-Cola, the formula for WD-40 and the methodology for creating the nooks and crannies in Thomas’ English Muffins. Less-known is the growing importance of trade secrets and the role they play in our economy, including their impact on the patent system.

Trade secrets are by definition valued by their owners. Secrecy preserves a source of competitive advantage that generally cannot be recovered once secrecy is lost. Although secrecy may be lost inadvertently through carelessness, disclosure is often the result of wrong-doing and sometimes even the actions of sophisticated international industrial espionage.

Trade-secret laws allow for the recovery of monetary damages from, or even criminal penalties against, those that steal trade secrets. Annual losses to the U.S. economy from international theft of trade secrets has been estimated to exceed $300 billion. An effective system protecting trade secrets thus enhances the economy and promotes national security.

Our government recently enacted the Defend Trade Secrets Act (DTSA), a milestone for trade-secret protection. The DTSA creates a federal civil cause of action so that companies will no longer need to navigate a maze of state laws to enforce their rights when their trade secrets are stolen. In addition, the DTSA enhances remedies available to victims — in particular by providing for ex parte seizure orders under appropriate circumstances to limit further disclosure of the trade secrets. The DTSA is a great achievement that should both deter potential wrongdoers and ease the burden of enforcement on those that have been wronged.

The DTSA is also a “wake-up call” to companies that value and protect their intellectual property as trade secrets. Companies now have increased incentive to identify, capture, inventory and protect their potential trade secret information. Failure to do so now could forego the ability to leverage the DTSA downstream.

Trade secrets and patents are not mutually exclusive.

Technology and markets also are trending toward increasing importance of trade secrets. The commoditization of computer hardware drives innovation into computer-implemented software. The implications extend well beyond the computer and information technology industry because, in addition to being directly incorporated in devices such as medical diagnostics and automobiles, computer software technology is used in the development and design of virtually everything today — from computational biology to 3D printing to computer-aided design.

More and more innovation is moving behind the “firewall,” meaning that it is invisible to the public (e.g. digital 3D designs now most often reside out of reach in the cloud instead of on a local disk drive [and subject to reverse engineering]).

Ironically, while this trend toward reliance on secrecy is rational behavior, without changes to our patent system, it may have the unintended consequence of slowing the overall pace of innovation. Trade secrets and patents are different forms of intellectual property, both of which play an important role in a comprehensive intellectual property strategy. Secrecy protects innovation by reducing the likelihood that others possess it. On the other hand, patent protection requires the publication of a complete written description of a patented invention, thereby enhancing public knowledge and reducing the need to “reinvent the wheel.”

Unfortunately, recent court decisions have dramatically narrowed the eligibility of computer-implemented inventions for patenting. As a result, companies developing software-centric solutions are likely to rely more heavily on trade secrets to protect product innovations that can no longer be patented.

Companies may even choose to market their innovations in a way that favors trade-secret protection, i.e. by delivering innovations as services rather than products to avoid bringing the innovations out from behind their firewall (e.g. Google search services that do not reveal search algorithms or software delivered as a service).

The combination of technology and market trends and recent court decisions on patent eligibility has altered the trade secret and patent equilibrium. Enhancement of trade-secret protection via the DTSA helps offset patent system contraction for innovators, and is likely to lead to increased focus on protecting innovation through trade secrets and a reduction in patent applications. The consequences for our innovation economy as a whole are significant.

The relative shift will reduce innovation sharing and is likely to lead to reduced investment in technologies currently deemed ineligible for patent protection and which cannot be maintained in secrecy when commercialized. Notwithstanding the rational behavior of our government to enhance trade-secret protection and our businesses to use this protection, the contraction of the patent system undermines our innovation economy, especially for less-flexible industries.

Trade secrets and patents are not mutually exclusive — each can be of value. The DTSA improves trade-secret protection. Now that the DTSA is in place, we should turn our attention toward achieving a better innovation ecosystem by reversing or legislating away recent harmful court patent decisions so we restore the proper balance between trade secrets and patents. To best promote innovation, we need both strong trade-secret protection and strong patent protection going forward.

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