A Comparative Study of Trade Secret Protection and Patent Protection

Preface

In traditional Chinese culture, the protection of trade secrets is highly valued. Core trade secrets are often passed down only to one’s son, a phenomenon humorously described in ancient novels as “passing down to sons, not daughters, and to sons, not daughters-in-law.” However, with the introduction of the modern patent system to China, the number of patent applications has increased year by year, and more and more enterprises and individuals are seeking patent protection. Broadly speaking, both protection paths safeguard technological innovations. So, what are the similarities and differences between the two systems, and how should one choose a protection path?

Trade secrets are a type of intellectual property protected by laws such as the Criminal Law and the Anti-Unfair Competition Law, typically including two main categories: technical secrets and business secrets. Patent rights are intellectual property rights granted and protected based on the provisions of the Patent Law. Both trade secret protection and patent protection play a crucial role in modern technological development. They are both significant in protecting core competitiveness, promoting technological progress, and economic development. The following comparative study of the two protection paths provides a reference for the intellectual property protection of technological innovations.

I. Differences Between the Two Protection Paths

Trade secret protection and patent protection are two common intellectual property protection paths. Both involve the protection of innovative achievements, meaning the objects of protection both involve technical solutions. Both require proactive measures to ensure the effectiveness of rights protection. Trade secrets need to possess “secrecy, confidentiality, and value” to be protected, while patents require authorization and the stability of the rights. When rights are infringed, both trade secrets and patents need to be remedied according to relevant laws and regulations. Trade secrets are primarily remedied under the Anti-Unfair Competition Law, while patents are primarily remedied under the Patent Law. In practice, trade secret protection and patent protection also have some complementary and complementary relationships.

Despite the above commonalities and connections, the two protection paths differ significantly in terms of the objects of protection, acquisition of rights, disclosure, territoriality, timeliness, and exclusivity.

First, the objects of trade secret protection are mainly technical information, including product design, manufacturing methods, processes, formulas, test data, and technical indicators. Compared to patents, trade secrets offer broader protection. Any technical information that can be proven to possess “secrecy, confidentiality, and value” can be protected as a trade secret. The subject matter of patent protection, however, is defined in Article 2 of the Patent Law. Patent applications that do not meet these requirements will be rejected by the patent office or may be declared invalid, making patent protection difficult.

Secondly, the acquisition of rights differs between the two protection paths. Trade secret rights are acquired based on reasonable confidentiality measures taken by the individual; they do not require authorization or registration from relevant administrative or judicial authorities, nor do they require payment of fees. Patent rights, on the other hand, are granted by the administrative authority managing patents and are based on legally granted exclusive property rights. After patent authorization, the administrative authority issues a certificate of rights and announces it to the public. Annual fees are required after patent authorization; failure to pay on time will result in the expiration of the rights.

Thirdly, trade secrets must possess secrecy and confidentiality. Therefore, if confidentiality measures are inadequate and the information is leaked, it becomes public technology, loses its value, and can no longer be protected through patent application. The fundamental principle of the patent system is “disclosure for protection”; therefore, patent authorization necessarily implies disclosure.

Fourth, trade secrets are not geographically restricted because secrecy means that others do not know them. Once disclosed in a certain region, they are no longer secrets. Patent rights, however, are geographically limited. For example, a US patent is only protected within the United States. To obtain protection in other regions, it is necessary to enter into international conventions such as the Paris Convention or the PCT.

Fifth, trade secrets have no time limit. As long as proper confidentiality measures are taken, a trade secret can remain protected as a trade secret indefinitely. A well-known example is the Coca-Cola formula. Patent rights, on the other hand, have a time limit. For example, the term of an invention patent is 20 years from the application date. After expiration, it becomes public technology, and anyone can implement it.

Sixth, trade secrets are not necessarily exclusively obtained. For example, if three people independently know a trade secret, as long as they take reasonable confidentiality measures, all three can secretly implement it and all can receive protection. Patent law stipulates that only one patent right can be granted for the same invention. Therefore, patent rights are exclusive rights.

As shown above, trade secrets and patents each have their own characteristics, complement each other, and together constitute an important part of the intellectual property protection system.

II. Choosing a Reasonable Path for Protecting Technical Solutions

Both trade secret protection and patent protection are important paths for companies to protect their intellectual property. However, the choice of which protection method to use depends on the specific circumstances. Several factors need to be considered when choosing between trade secret protection and patent protection. The following are some key considerations and their impact on the choice:

First, the legal and competitive environment needs to be considered. Different countries and regions may have different legal and competitive environments, which may affect which protection method is more suitable. As mentioned earlier, the granting of patent rights has strict requirements regarding the subject matter. Therefore, for technical solutions that do not meet the requirements for the subject matter of the patent, only trade secret or other paths of protection can be considered. In some countries or regions, patents may be easier to obtain and maintain validity, while in other regions they may be more difficult. Therefore, when inclined to choose the patent protection path, the former has a higher priority than the latter. If a company needs to quickly obtain protection and prevent competitors from entering the market in a highly competitive market, then patents may be a better choice. On the other hand, if market demand is low or competition is not intense, then trade secrets may be sufficient, as competitors may have no incentive to enter the market.

Secondly, it’s necessary to return to the technology itself. The nature of the technology, its use cases, life cycle, and competitive advantage are all important factors in determining the protection path. Some technologies may be more suitable for patent protection, while others may be more suitable for trade secret protection. For example, for some highly innovative and disruptive technologies, patent protection may be necessary to prevent competitors from quickly copying them. For some routine, mature technologies with inconspicuous improvements, trade secrets may be sufficient. Trade secrets typically only maintain a competitive advantage for a certain period, because once others obtain the technology through other means, the competitive advantage disappears. For technologies with short life cycles or rapid updates, patent protection may be more valuable because patents provide legal protection against unauthorized use.

Thirdly, the difficulty and cost of maintaining secrecy need to be considered. Trade secret protection is generally applicable to areas where the technology is not easily disclosed through patents or other forms, but is still critical. If a technology is easily obtained by others through observation or reverse engineering, or requires significant resources to maintain secrecy, then patent protection may be more valuable because patents provide legal protection against unauthorized use. Applying for a patent incurs costs and time, which can impact a company’s finances and strategic plans. In contrast, protecting trade secrets typically requires no cost; the only requirement is to ensure the technology is not disclosed.

Of course, the specific choice depends on the actual situation. Factors such as risk tolerance, intellectual property strategy, potential litigation risks, and the value of intangible assets can all be significant influencing factors. Companies need to make the best decision based on their specific circumstances and strategic goals.

III. Conversion Between the Two Protection Paths

The conversion between the two protection paths is unidirectional. The patent system operates on a “disclosure for protection” basis; therefore, public disclosure is a necessary condition for patent granting. Disclosure is irreversible; once disclosed, it can no longer constitute a trade secret. Trade secrets, however, can be converted into patents. Patent granting conditions include that the technology is not prior art or prior design. Therefore, broadly speaking, all patents are highly likely to be trade secrets before public disclosure.

In practice, there are two main scenarios for converting trade secrets into patents. The first is the conventional scenario, where the patentee proactively applies for a patent for the trade secret. For example, from the perspective of intellectual property protection strategy, if a product is about to be publicly sold or offered for sale, the technical solution is not suitable for protection as a trade secret. Therefore, a patent application should be filed before the product is publicly sold or offered for sale (a grace period for novelty applies in special cases). Or, it has been protected as a trade secret for a long time, and with the change of the industry development stage, it is hoped to obtain the exclusive right to the technology through patent protection.

Another situation is that the trade secret is infringed and a patent is applied for and published in the form of a patent text. This situation is becoming increasingly common and has become one of the three main types of patent ownership disputes, which cannot be ignored. For example, in the patent ownership case of “tread component feeding system”, VMI Netherlands claimed that Sachs infringed its trade secret and applied for a patent, requesting confirmation that the patent right belongs to VMI Netherlands. The court of first instance did not fully consider that the basis for VMI Netherlands’ patent right in this case was the infringement of its trade secret, and failed to support VMI Netherlands’ litigation request. The court of second instance determined that Sachs obtained VMI Netherlands’ prior confidential technology by improper means and then applied for and was granted the patent in question, and ruled that the patent right belonged to VMI Netherlands [1]. Although VMI Netherlands ultimately won the patent rights, the leakage and disclosure of its trade secrets is an irreversible fact.

Therefore, when it comes to the conversion of trade secrets into patents, it is necessary to focus on the timing of proactive conversion. At the same time, it is also necessary to avoid the risk of passive conversion due to the leakage of trade secrets.

IV. Conclusion

Only by continuously strengthening intellectual property protection can enterprises achieve long-term development and industry prosperity. Trade secret protection and patent protection help improve the competitiveness of enterprises. By protecting the core technologies of enterprises with intellectual property rights, enterprises can gain more competitive advantages in the market, thereby attracting more customers and investors. The protection of these technologies and products can also help enterprises establish a good brand image and reputation, attract more customers and partners, and thus promote the long-term development of enterprises and the improvement of industry standards.

References:

[1] Supreme People’s Court, (2020) Supreme Court Intellectual Property Civil Final Judgment No. 661.