Maximizing Intellectual Property Protection: Balancing Patents and Trade Secrets for Startups

Exclusive Rights: Patents offer exclusive rights, allowing startups a limited monopoly for their covered innovations, which is instrumental in establishing a market foothold.
 
Legal Protection: Patents provide robust legal protection, empowering startups to enforce their rights and defend against potential infringers. This is particularly vital in industries prone to intellectual property disputes.
 
Monetization Opportunities: Patents can be monetized through licensing agreements or outright sales, providing supplementary revenue streams for startups to support research, development or expansion. For companies that have technologies that apply to different markets, a startup focused on one particular field can also use licensing as a strategy to allow companies in other fields to use its technology in return for royalty payments, while retaining exclusivity in the startup’s primary field. For example, consider a company that has created a new battery chemistry that plans to target power generation back-up systems as its main market. That company may consider licensing its technology in the automotive industry for EV applications, as that may not compete directly with the startup’s primary field and the startup doesn’t have the bandwidth (time and money) to enter the EV market on its own. Being able to divide patent licenses by field allows a startup with limited resources to permit others to leverage its technology in other fields, providing for an income stream while also keeping the startup’s technology exclusive in the main market of interest.
 
Investor Attraction: Patents serve as valuable assets, signaling innovation and attracting potential investors and partners interested in backing groundbreaking technologies.
 
Strict Liability: Patent infringement is a strict liability offense, meaning a patent can be enforced against “innocent infringers” unaware of the patent. Copying is not necessary. This also is advantageous over trade secret protection for technologies that can be readily reverse engineered from a publicly available product or service. Trade secret liability is limited to misappropriation through improper means, not legitimate reverse engineering. In contrast, a patent protects against a competitor’s unlawful use of the technology, regardless of whether the use was through reverse engineering.
 
Presumption of Validity: In court, patents are presumed valid. That means a challenger bears the burden of proving the U.S. Patent and Trademark Office (USPTO) should not have granted the patent, such as by proving the patented invention was not new or was obvious to persons of ordinary skill in the art. That is in contrast to trade secrets, where the trade secret owner bears the burden of establishing its trade secret rights, including proving the trade secret information is secret and not readily ascertainable to the public.

Expensive: Obtaining patents can be costly, potentially straining startup financial resources, especially in areas like the medical device sector, where research and development costs are substantial. Worldwide protection can become extremely expensive, as foreign countries have specific requirements, filing costs, translations costs, and retention of counsel in each jurisdiction and the like.
 
Patent Drafting Quality Matters: While the general view is that patents encourage and protect inventions based on their innovative quality, that is not entirely the reality. Patents protect what the inventors “claim” as the invention, and a claim refers to the specific words in the patent that define the metes and bounds of the invention. Essentially, the claims are like the land boundaries on a deed; they inform the public what is protected by the patent, and everything else is fair game. Indeed, the legal adage often repeated by courts is “the claim is the name of the game.” The claims are put together between the inventor and patent counsel, and typically solid, experienced legal guidance is needed to do that correctly to provide the most coverage of the invention. A poorly drafted claim that does not cover all variations or permutations of an invention leaves those open for copying and competition. The words matter, just like they do in any other legal document, increasing the costs of doing the job right to protect the full scope of the invention and all its variations.
 
Time Consuming: Patents can typically take 3-5 years to issue from the USPTO, and the results of examination can be uncertain if the applicant is not fully aware of what art may be uncovered during the patent examination process. In fast-moving areas where obsolescence is an issue, some technologies may be outdated by the time a patent is eventually granted. There are options, such as requesting accelerated examination, but that increases costs.
 
Limited Duration: Patents have finite durations (usually 20 years), after which the protected invention enters the public domain. This time-constraint may be unfavorable for startups with long-term plans for specific technologies that require significant financial investment.
 
Public Disclosure: Patent applications necessitate detailed public disclosure of the invention, which can be risky, as it can provide insights to competitors or encourage workarounds. Also, if the patent is not granted, the publication of the application itself will place the details of the invention in the public domain for others to use freely.

Not Limited To “Inventions”: Trade secret law protects a broader range of subject matter than patents. For example, trade secrets can protect technical subject matter that may not be eligible for patent protection, such as data compilations, algorithms that are too abstract for patent protection, manufacturing information like drawings, tolerances, and the like. But trade secret law also protects non-technical information, like customer lists, marketing plans, pricing and cost information, supply sources, etc.
 
No Expiry Date (Potentially): Trade secrets can endure indefinitely as long as they remain confidential, offering substantial benefits to startups with long-term competitive advantages. Thus, proprietary algorithms, manufacturing processes or other technologies that cannot be readily discerned by inspection of a publicly available product or service may be able remain secret indefinitely. However, once the secret is known to others, whether by disclosure or by others in the industry eventually discovering the same information or technology, then trade secret protection ceases to exist.
 
Cost-Effective: Trade secret protection does not entail registration or ongoing fees, making it a cost-effective option for startups, particularly in software and medical devices, where resources are often allocated to research and development.
 
Competitive Edge: Safeguarding innovations as trade secrets can yield unique selling propositions, as competitors lack access to the same knowledge or technology, enhancing a startup’s market position.
 
Flexibility: Startups have greater flexibility in selecting which information to keep as trade secrets, allowing them to adapt strategies based on evolving market dynamics without patent law constraints.
 
Potential for Criminal Action: Trade secret theft can also be reported to the authorities and prosecuted as a federal crime under the Defend Trade Secrets Act.

Risk of Disclosure: The primary risk with trade secrets is public disclosure. Once information becomes public, it loses its protection, potentially enabling competitors to exploit the knowledge.
 
No Protection Against Reverse Engineering: Unlike a patent, a competitor is free to reverse engineer a publicly available product and use what it learns from that. If the trade secret can be discerned by reverse engineering, that is fair game for competitors and a defense to a claim of trade secret misappropriation. In contrast, patent infringement is a strict liability offense, meaning a patent can protect against competing designs developed through reverse engineering.
 
Challenging Enforcement: Enforcing trade secrets in court can be complex and costly. The trade secret owner generally bears the burden of proof on all issues.
 
Maintenance of Reasonable Measures to Protect Trade Secrets: Trade secret cases are often lost not because the idea is not protectable as a trade secret, but because the owner failed to take adequate (and documented) measures to adequately protect the secret. Typical measures include strong confidentiality agreements, limiting access to the secret information to those who “need to know,” education of employees on the importance of safeguarding company information, limiting supplier access to information, and the like. While trade secrets are less expensive in the short term than patents, protecting a company’s “crown jewel” secrets can require significant efforts as the company grows, adds more employees, develops a supplier and customer base, and the like.
 
Detection: Trade secrets by their nature are secret. Thus, it can be difficult to detect if a competitor has misappropriated a company’s trade secret from inspection of a product or service alone.

Utilize Patents for Core Innovations: Identify the core innovations or breakthroughs within your technology that can be adequately protected through patents. Patents provide strong legal protection, exclusivity and the potential for monetization. By patenting these key elements, you firmly establish your ownership rights and protect them from direct competitors for a period of time.
 
Leverage Trade Secrets for Supporting Technology: While patents require public disclosure, supplementary or proprietary details can be maintained as trade secrets. This may include software algorithms, proprietary manufacturing processes or design intricacies. By safeguarding these as trade secrets, you maintain indefinite protection without public disclosure, granting your startup a competitive edge for the longer term as competitors expend resources attempting to develop the missing pieces needed to commercialize the invention.
 
Strategic Synchronization: Develop a strategy to synchronize patenting and trade secret protection effectively. Ensure that patent applications are filed for the most critical aspects of your technology while keeping the remaining details confidential. Similarly, because certain technologies can be readily reverse engineered, those are better protected via patents. Conversely, because other technologies are difficult or impossible to detect from a publicly available product or service, those typically lend themselves better to maintaining as a trade secret.
 

Identify and Prioritize: Clearly identify and prioritize the information or technology that constitutes trade secrets within your organization. Collaborate with your legal team to ensure that your choices align with your business strategy.
 
Access Control: Limit access to trade secrets on a need-to-know basis. Implement strict access controls and user authentication measures to prevent unauthorized access and be able to identify who has accessed the information and when.
 
Training and Awareness: Provide comprehensive training to employees on the importance of trade secret protection, confidentiality and best practices for safeguarding sensitive information.
 
Security Measures: Implement robust physical and digital security measures, including encrypted storage, access logs and secure facilities where trade secrets are discussed or stored to be able to recreate the chain of custody if needed.
 
Confidentiality Agreements: Require all employees, contractors, and partners to sign confidentiality agreements that clearly outline their obligations to protect trade secrets and the consequences of breaches. Make sure that your agreements are enforceable, especially for employees. Legal experts in employment law are invaluable in this area, as the permitted scope and enforceability of employment agreements varies from state to state and evolves. Also be sure to do exit interviews to make sure employees are reminded of their confidentiality obligations as well, and document those interviews.
 
Don’t Blindly Trust Confidentiality Agreements: Even if you have the most iron-clad NDA in the world, just don’t share the company’s trade secrets with others or give access to those in the company that don’t need to know. Rarely does engagement in a contractual relationship require disclosure of every detail of a company’s technology. For example, if you make a battery, a customer might need to know what chemicals are inside it; but the customer does not need to know how much of each ingredient is inside it, the brand names, how they are reacted, etc. Share what you need to accomplish your business goals, but no more than that. Likewise, the marketing team does not need access to the company’s engineering files; nor do the engineers need access to the company’s pricing lists and financial data. Don’t let them have that access. Prevention is the best way to stop trade secret theft.