Introduction : All inventions do not necessarily require filing a patent immediately after they have been conceived. It is a common tendency for inventors and their counsel to opt for patents as the primary form of intellectual property protection; however, numerous instances of business practice, such as the recipe of the popular soft drink Coca-Cola or the ranking mechanism used by Google in its search engine algorithms, have proven that competitive advantage could sometimes lie in concealing the invention entirely. The foremost concern that arises before the matter of possible infringement and enforcement of rights pertains to the initial method of protection to be adopted – a patent, trade secrets, licensing, or a combination of the three.
Once this choice has been made, there is no possibility of turning back since a patent application involves a permanent disclosure of the invention in exchange for limited time exclusivity, while a company choosing to use trade secrets protection will lose any possibility of obtaining any registered exclusive rights but will be able to conceal its invention indefinitely. This blog provides a critical examination of the elements that must be considered when determining a strategy for IP commercialization from a legal perspective based on the UK and US statutes and case law.
Legal Provisions
A. The Patent Laws of the United Kingdom
According to Section 1 of the Patent Act, 1977 (UK), an invention has to be new, it has to contain an element of inventive step, it has to have a capacity of being put to industrial use, and it cannot be one of the inventions that fall under the exclusion clause mentioned in Section 1(2), which includes discoveries, scientific theories, methods of calculation, and, importantly, “programs for a computer as such.” Under Section 14, the applicant must describe the invention in sufficient detail for a person skilled in the art to perform it, and Section 25 grants twenty years’ protection from the date of filing.
B. Patent Law in the USA
Patentable subject matter includes any new and useful process, machine, manufacture or composition of matter, as well as improvements thereof, excluding the judicial exceptions for laws of nature, natural phenomena, and abstract ideas, under 35 U.S.C. § 101. Section 102 requires the condition of novelty, whereas Section 103 requires non-obviousness; Section 112 prescribes the written description sufficient to enable a person skilled in the art to practice the invention. Under Section 154, a utility patent confers a term of twenty years from the earliest effective filing date.
C. Trade Secret Law – UK and US Approaches
In the UK, trade secrets are protected under the principle of breach of confidence from common law of equity, and under the Trade Secrets (Enforcement, etc.) Regulations 2018, which transpose Directive 2016/943 of the European Parliament and require information to be secret, to have commercial value because it is secret, and to have been subjected to reasonable steps by its rightful holder to keep it secret. In the USA, the Defend Trade Secrets Act of 2016 (18 U.S.C. § 1836) has established the federal civil remedy for trade secret misappropriation, supplementing the Uniform Trade Secrets Act adopted at the state level by the vast majority of US states.
D. Licensing Regime
The patent licensing regime in the UK is covered in Sections 30 to 33 of the Patents Act,
1977 relating to Registration of Licensees and Effect of unregistered License on Subsequent Purchasers. In the US, patent licensing is primarily carried out using the principles of contract law and patent exhaustion doctrine, whereas the licensing of trade secrets and know-how information is conducted in accordance with the terms of the licensing agreement as well as relevant state or federal trade secret law. In both cases, a license does not confer ownership of the right but rather gives the licensee a negotiated set of rights to use the technology either exclusively or non-exclusively in return for payment of royalties.
Legal Analysis
A. Patentable Subject Matter
The first question that needs to be addressed in determining a strategy of commercialization of a technology is whether it is patentable in the first place. In Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014), the United States Supreme Court found that a claim of patent covering an abstract idea, namely the fundamental economic practice of intermediated settlement, does not become patent-eligible simply because it uses a generic computer for implementation. The ruling has had a very chilling effect on the filing of patents in relation to software and business methods in the US, leading to more technological firms seeking trade secret protection of algorithms that do not fit into the Alice framework. In the UK, there is an equivalent but slightly different exclusion of computer programs ‘as such’ under Section 1(2) of the Patents Act of 1977. This follows the test set out in the four-part test in Aeritel Ltd v Telco Holdings Ltd [2006] EWCA Civ 1371 where the contribution is tested to see if it makes a technical contribution beyond the excluded subject matter. In case of a pure data-processing process, scoring algorithm or an abstraction that is not patentable in both jurisdictions, then the only practical protection could be trade secrets.
B. Reverse Engineerability and Product Exposure
The second determining element, which is usually decisive when advising, is whether the invention can be reverse-engineered or independently discovered when it has been developed into a product. The search ranking algorithm developed by Google is illustrative of how this works: instead of patenting its ranking process, which would have involved disclosing the process in all its details under Section 112, the corporation has relied considerably on the doctrine of trade secrets, since the algorithm runs on Google’s servers and is never sent to the user in a format that can be reverse-engineered. The rationale behind keeping Coca-Cola’s formula secret, allegedly protected as a trade secret for a period exceeding one hundred years, in spite of the tremendous commercial value of the drink, is the same: the formula is relatively hard, but not impossible to reverse engineer in a product sold in a closed bottle. At the same time, a mechanical invention that reveals its construction and function upon sale,
e.g., a consumer product that can be taken apart and examined, does not offer any substantial benefits from being a trade secret because a competing company will be able to lawfully reverse-engineer the device and reproduce it.
C. Duration, Enforcement, and Risk of Loss
Patents provide for monopoly rights that are limited in duration, but strong in enforcement: the granted patent prevents an independent inventor from utilizing the invention independently, even when there is no misappropriation, and infringement occurs simply through unauthorized use of the claims, without proof of copying. The trade secret, on the other hand provides absolutely no protection against independent discovery or reverse engineering, which is legal. The commercial implications of the breach of secrecy were demonstrated clearly in the US District Court of Appeals, Northern District of California, in the case of Waymo LLC v Uber Technologies, Inc., an interesting case involving allegations of trade secret misappropriation in which Waymo claimed that a former employee downloaded thousands of trade secret files regarding the development of self-driving car LiDAR technology prior to his joining Uber. The case settled in 2018, with Uber agreeing to pay out a sizeable equity stake to Waymo. The case demonstrates both the acute exposure of trade secrets to employee turnover risks and the remedy that could be obtained under the
Defend Trade Secrets Act of 2016 if misappropriation can be proven. In the UK, the case of Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31 was heard by the Supreme Court and found that a defendant was liable for misusing confidential information even where the defendant used a trade secret and did not obtain it itself through dishonest means if he knew, or should have known, that the information came through a breach of confidence.
D. Licensing as a Commercialisation Strategy
Licensing is a different option from patents or trade secrets. Instead, it is a way to commercialise something that we already have the right to protect. One practical example of licensing is with Kentucky Fried Chicken and its Original Recipe, as they have never patented their secret mixture of 11 ingredients. KFC has offered licensing to worldwide cake shops to use its original recipe under strict conditions of confidentiality. It could also mean that the company has many suppliers who have no relation to each other, and they all make their own blend of spices to ensure that no one supplier has the complete one. This type of commercialising enables companies to gain from licensing while keeping their process secret, which no patenting could allow them. However, the specifics will be different if we are talking about licensing a patent: in this case, the patent owner makes licensing agreements with other parties while retaining the ownership of the patent and the right to sue anyone for the infringement of the patent.
E. Commercial Plans Hailed as the Factor of Organization
In the end, the choice made must rely on the actual commercial plan of the innovator rather than on a static list of legal conditions. If a given company wants to give licenses for the use of technology to several third parties, especially to parties whose confidentiality practices cannot be controlled, it is better to patent it because patent protection guarantees the rights of the inventor regardless of the existence of any contracts, while trade secret protection is based on the strength of the weakest link of confidentiality obligations. If a company wants to use technology internally in one facility or with a very small number of trusted people, then it becomes beneficial to use trade secrecy, as it does not involve any costs or delays that patenting always entails. Additionally, industry norms and the stage of product development also matter.
Relevant Judicial Precedents
The case of Alice Corp. v. CLS Bank International, 573 U.S. 208 (2014): The Supreme Court ruled that a computer-implemented abstract idea, including intermediated settlement, will not attain patentability merely by being implemented by means of a general-purpose computer, greatly limiting the potential for patenting software or business-method inventions in the United States.
The case of Aerotel Ltd v Telco Holdings Ltd [2006] EWCA Civ 1371: The Court of Appeal created a four-step test to evaluate whether the invention referred to in the patent qualifies as a technical contribution sufficient to come out of the exclusion of computer programs under Section 1(2) of the Patents Act, 1977 still functioning as a basis for establishing software patentability before the UK Intellectual Property Office.
The case of Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31: The Supreme Court decided that a party is liable for the breach of confidence for the use of confidential information even if this party was not guilty of acquiring this information dishonestly provided that such party knew or ought to have known that the information was of a confidential nature.
Kewanee Oil Co. v. Bicron Corp.,416 U.S. 470 (1974). The US Supreme Court decided that state trade secret law is not impeded by federal patent law, allowing both systems to operate simultaneously. This ruling was made on the grounds that obtaining trade secret protection does not prevent people from getting patents for inventions that can be patented, a situation frequently referenced in debates about the pros and cons of patents versus trade secrets.
Practical Implications
For IT companies and IP consultants, the outcome of the case has important ramifications for financing, licensing income, and defense of competitive position. Investors and buyers tend to give much importance to granted patents in their studies of a company, being aware of patents’ significance as evidence of a competitive edge. At the same time, patents for inventions capable of remaining secrets of the business communication may deprive the innovator of exclusivity for a lengthy period after an original patent is issued, which would be advantageous in comparison to relying on trade secret protection.
Simultaneous operations across different jurisdictions in the UK and US lead to challenges associated with the diverse approaches to patent eligibility and enforcement of trade secrets, which make decision-making more difficult. In such situations, a good innovator or advisory firm does a thorough jurisdictional evaluation of the situation before making a major commitment through a patent application because the decision is irreversible.
Conclusion
In reality, the determination to avail of a patent, license, or trade secret protection is not generic but needs to be conducted on a case-by-case basis, considering all technology features and the relevant commercial strategy. This decision requires conducting a preliminary evaluation of patentability first, according to what was stated in the Alice case in the US and the Aerotel approach in the UK, followed by the evaluation of the reverse engineering viability, which can be evidenced by the example of Coca-Cola and various machines which were patented exactly because of the disclosure of their functioning principles.
Licensing does not serve as a separate independent mechanism, but rather as a commercialization mechanism that can be used together with a patent or with a trade secret, with the specific circumstances around the underlying right and suitability of the licensees needing to be considered in the process. In the end, the consultants in intellectual property commercialization need to help the clients consider and weigh such issues as whether they can patent the invention, reverse engineer it, whether they can enforce the patent rights in the future, and whether it is advisable to patent the invention.
Author : Khushi Gupta, In case of any queries please contact/write back to us via email to [email protected] or at IIPRD
End Notes
- Patents Act, 1977, s. 1 (UK)
- Patents Act, 1977, s. 14 (UK)
- Patents Act, 1977, s. 25 (UK)
- Patents Act, 1977, ss. 30-33 (UK)
- 35 U.S.C. §§ 101, 102, 103, 112, 154 (United States)
- Defend Trade Secrets Act, 2016, 18 U.S.C. § 1836 (United States)
- Uniform Trade Secrets Act (United States, as adopted by the states)
- Trade Secrets (Enforcement, etc.) Regulations 2018 SI 2018/597 (UK) implementing Directive (EU) 2016/943
- Alice Corp. v. CLS Bank International 573 U.S. 208 (2014) (United States)
- Aerotel Ltd v Telco Holdings Ltd [2006] EWCA Civ 1371 (UK).
- Waymo LLC v. Uber Technology, Inc., No. 3:17-cv-00939 (N.D. California, filed 2017) (US).
- Vestergaard Frandsen A/S v Bestnet Europe Ltd [2013] UKSC 31 (UK).
- Kewanee Oil Co. v Bicron Corp., 416 U.S. 470 (1974) (US).
- World Intellectual Property Organization (WIPO), Secrets: Creative and Innovative Management of Trade Secrets (2021).