Is Trade Secret Protection Becoming More Attractive?

January 24, 2012, 12:35 PM

One of the many changes in patent law brought by the recently-enacted America Invents Act might make trade secret protection more attractive than patent protection, at least in some circumstances.

Many inventions can be protected by either trade secret law or patents. Which form of protection is best depends on a variety of factors. One factor that to date favored patent protection has been the real risk that a trade secret user could be sued for patent infringement by someone else who independently and subsequently discovered the same invention and obtained a valid patent on it. Under the Patent Act, the trade secret was not prior art that could invalidate a patent, this so precisely because it was used in secret and not publicly known. Therefore, prior trade secret use was not a defense to infringement claims. There was only one exception, a prior use defense that applied only to business methods, and that limited exception was added to the Patent Act a few years ago. Because of the risk of being sued for using your own trade secret, many inventors chose patent protection, securing defensive patents, designed more to protect against such claims than to enforce patent rights against others.

Amended Section 273 of the Patent Act enacted by the America Invents Act expands this changes this calculus by significantly expanding the prior use defense to all types of inventions: New Section 273 reads in part:

(a) In General- A person shall be entitled to a defense under section 282(b) with respect to subject matter consisting of a process, or consisting of a machine, manufacture, or composition of matter used in a manufacturing or other commercial process, that would otherwise infringe a claimed invention being asserted against the person if--

(1) such person, acting in good faith, commercially used the subject matter in the United States, either in connection with an internal commercial use or an actual arms length sale or other arms length commercial transfer of a useful end result of such commercial use; and

(2) such commercial use occurred at least 1 year before the earlier of either--

(A) the effective filing date of the claimed invention; or

(B) the date on which the claimed invention was disclosed to the public in a manner that qualified for the exception from prior art under section 102(b).

Because of the amendment, inventors who choose trade secret protection and qualify for the defense do not face the risk of a patent infringement claim from someone who subsequently secures a patent on the invention. To the extent the defense is available, defensive patents are not so important.

Some suggest that this amendment may cause many to favor trade secret rather than patent protection. Perhaps so, but the prior use defense remains limited in other ways, and will not be available in many settings. Further, it will be difficult to invoke successfully. Among the limitations to the defense, as set out in amended Section 273, are the following:

  • The trade secret must have been in actual commercial use; with some exceptions (nonprofit laboratory use and pharmaceutical clinical trials) trade secret inventions in research and development will not qualify.
  • The trade secret must have been in commercial use at least a year prior to the filing of the application for the claimed patent or the patentees public disclosure of the invention. One will never know what others will do in the year to come, and in the new first-to-file world the risk of delay is significant.
  • The defense extends only to the particular person or entity that uses or directs the commercial use of the trade secret, meaning ancillary participants may still face exposure.
  • The defense is personal. It is available if the trade secret is transferred along with the entire business, but is not available if the trade secret is separately licensed or assigned.
  • Trade secret use is locked in place. Even when transferred as part of an entire business, the trade secret is entitled to the defense only if it is used where it was used prior to the transfer or prior to the filing date of the opponents patent.
  • Where the defense is available, the trade secret user carries the burden of proving it, and by clear and convincing evidence.
With such statutory limitations and factual uncertainties, Section 273 probably will not tilt many towards trade secret protection. Other considerations -- such as the ease of maintaining and duration of trade secret protection on one hand and the ease with which a patent can be designed around on the other -- should and likely will weigh more heavily in the deliberations of most inventors.

Chris Mugel practices intellectual property law from Kaufman & Canoles Richmond, Virginia office.--Christopher J. Mugel