Innovation is important to achieve, maintain, or improve profi tability, through the creation of improved products and services which can demand higher prices in the marketplace, and/or reduce costs of doing business.
However, innovation is not fi nancially meaningful, and its value proposition is never realized, unless the innovator is able to recoup R&D costs by correspondingly pricing invention-embodying products and services. Preferably, the pricing is suffi ciently high to earn substantial profi ts, and not merely recoup R&D costs. Certainly, at the very least, there must be at least some comfort that the innovator will enjoy the right to exploit the innovation in the marketplace.
The presence of a competitive marketplace threatens the value proposition for innovation. If competitors are able to replicate the original innovator’s efforts by deliberate copying or reverse engineering, without having to incur the scale of R&D costs suffered by the original innovator, they enjoy greater freedom in entering the marketplace at a lower price point versus the original innovator. As a result, the risk is that the competitive marketplace may force the price below the point at which the original innovator is able to recoup R&D costs, thereby economically punishing the original innovator.
The marketplace is dynamic, and competitors are potentially proceeding with their own independent development towards the same or similar innovation, along with the intent of securing patent protection covering their innovation. In this respect, competitors also threaten the value proposition by potentially blocking the innovator from the marketplace, even when the innovator is fi rst to develop.
To protect itself from the pricing pressures of the competitive marketplace, and to protect its right to commercialize the innovation, the innovator must rely on naturally occurring competitive advantages, trade secret protection, or patent protection, in order to create monopoly-like conditions.
Deciding between these tools is not so straightforward, especially where technology innovation is susceptible to alternative forms of protection, such as in the chemical and metallurgical process industries. For example, many innovations in the chemical and metallurgical process industries relate to processes whose commercial exploitation does not require their public disclosure, and which are diffi cult to reverse engineer from the ultimate commercial product deriving from such process. In addition to relying on naturally occurring competitive advantages, such technologies could be either patent protected or protected as a trade secret. Impressing on this is the importance of preserving the right to use the technology, which imports the consideration of defensive publication.
AVAILABLE TOOLS FOR SECURING COMPETITIVE ADVANTAGES
Naturally Occurring Competitive Advantages
Naturally occurring competitive advantages (or, “non-IP competitive advantages”) include:
- first mover advantages;
- excessive time lag before competitors recognize market opportunity;
- signifi cant R&D catch-up hurdles;
- brand power;
- network effects; and,
- oligopolistic market conditions.
First mover advantages are those advantages realized by a business organization being fi rst to occupy a market segment. Business organizations also enjoy monopoly-like conditions when there is a delay in recognition, by competitors, of a market opportunity. Even when the invention is publicly know, and market opportunity is recognized, existing market participants are protected from new competitors if signifi cant R&D hurdles are present which slow competitive entry (eg. aircraft industry). The existence of any brand power also frustrates new competitors who have been unable to develop signifi cant goodwill and reputation (eg. Coke, Kleenex). Network effects become operative when the value of a business organization’s product or service increases merely because more people are using it (eg. telephone, Facebook). Under oligopolistic market conditions, because of the relatively few market participants, there is a greater likelihood of pricing discipline amongst market participants, permitting pricing of goods and services above that which would ordinarily be seen in a competitive marketplace (eg. OPEC).
Independently of any patent or trade secret protection, these competitive advantages render it more diffi cult for competitors to keep pace with the original innovator and infl uence rapid price erosion in the marketplace. With these competitive advantages, the original innovator enjoys, at least for an initial period, some freedom in setting higher prices in the marketplace, and thereby increasing the likelihood of recouping R&D costs and earning substantial profi ts. This initial period becomes more drawn out when the advantages are more signifi cant.
Trade Secret Protection
Trade secret protection operates by denying competitors information that is necessary for practising and commercializing technology. In order to be operative, the innovator must prevent dissemination of this critical information to its competitors. Without this information, competitors are unable to provide a product or service offering incorporating such technology. As a result, competitors are placed in a competitive disadvantage versus the original innovator, and the original innovator has greater freedom in demanding higher prices in the marketplace. Trade secret protection is, potentially, perpetual. However, once the information underlying the trade secret becomes public, whether derived from the original innovator, or independently developed, trade secret protection, and its associated competitive advantages, become permanently extinguished.
Patent protection derives from legislatively-created rights. These rights are designed to provide an original innovator with the right to block competitors from making, using, and selling the invention covered by the granted patent, and the right to exact fi nancial compensation from competitors who infringe these rights. Presumptively, this creates a chilling effect, deterring competitors from entering the marketplace with their version of the invention. If patent-infringing competitive activity does arise, the patent-owning innovator may exercise its rights to block the competitive activity, thereby ridding the landscape of free-riding competitors and re-establishing the monopoly-like equilibrium. Either way, the intent of patent protection is to enable the innovator to enjoy greater freedom in pushing prices higher in the marketplace so as to at least recoup R&D costs.
Securing patent protection is not inexpensive, as it requires fi ling of applications for patent with governmental authorities in those jurisdictions where protection is desired. Further, unlike trade secret protection, the duration of patent protection is statutorily limited. In many jurisdictions, the period of patent protection is 20 years, measured from the date of fi ling of the patent application. Once patent protection expires, the original innovator no longer enjoys the right to block competitors, and competitors are free to commercialize the invention and compete with the original innovator.
Patent applications are typically published 18 months after fi ling, resulting in public disclosure of the invention. In some jurisdictions, early publication of the fi led patent application may be requested. Early publication may be requested for the purpose of creating immediate and widespread prior art consequences versus any competitor’s inventions (rather than waiting 18 months for this to happen). This assists in preserving the innovator’s right to use and commercialize her invention (see further discussion below on the merit of “defensive publication”). The mere fi ling of a patent application also triggers prior art consequences, but usually only in those jurisdictions in which the application, or any subsequent application claiming priority from such application, is fi led. In this respect, prior art consequences of early patent application publication, or any other form of publication of the invention (eg. scientifi c journal, or by self-publishing) are wider, thereby rendering invention publication a stronger tool than a patent application fi ling in preserving an innovator’s right to use.
Requesting early publication, or effecting another form of publication of the invention in parallel with a patent application fi ling, should be approached with caution, especially if prior art consequences have not otherwise been triggered by other behaviour (eg. public use or sale). Any publication of the invention functions, or at least eventually functions, as prior art versus any later developed improvements by the inventor. If development of improvements is foreseeable, the value of more immediate and widespread prior art consequences created by invention publication in parallel with a patent application filing should be weighed versus the potential costs associated with loss of patent protection to future improvements, before deciding whether such publication should be triggered or whether further time should be afforded to develop and patent improvements.
If early publication is being considered for the purpose of protecting the right to use, there is a slight bias towards effecting this by means of patent application publication. In comparison to a non-patent publication, a patent application publication is more likely to be accessible by a patent examiner, become relevant to prosecution of a competitor’s patent, and thereby block, or at least interfere with, a competitor’s patenting activities.
CHOOSING BETWEEN AVAILABLE TOOLS FOR SECURING COMPETITIVE ADVANTAGE
The available tools for securing competitive advantage are far from being mutually compatible. Generally, choosing patent protection means foregoing trade secret protection, as the patent protection route necessarily results in the public disclosure of the invention. This is because patent applications, and/ or resulting granted patents, are published after fi ling. By defi nition, such publication extinguishes any trade secret protection associated with the invention.
To complicate matters further, impressed on this decision-making are considerations of competitive patenting behaviour, and how the original innovator’s protection choice may affect whether the original innovator may later be blocked from commercialization by a later-inventing competitor’s patent.
Bias Towards Defensive Publication for Marginally Valuable Innovations
For marginally valuable innovation, or where signifi cant naturally-occurring competitive advantages are present, there is a justifi able bias to effect defensive publication (ie. the intentional publication of information describing the invention) while, in concert, relying on naturally-occurring competitive advantages for protection. Defensive publication assists in preserving the innovator’s right to use the invention by creating prior art that renders it more diffi cult for competitors to patent the same invention and block the original innovator (hence the characterization of the publication as “defensive”).
Because of their inherently marginal value (ie. monopoly profi t potential is not signifi cant – for example, alternatives with comparable utility are or can become available), or because of the existence of signifi cant naturally-occurring competitive advantages, it is relatively more diffi cult to justify incurring the expense of patent protection, or the costs of any future patent enforcement actions. For the same reasons, it may not warrant assuming the risk of future patent infringement liability by choosing trade secret protection. This risk exists because choosing trade secret protection necessarily means that, in at least some countries (including Canada and, in some cases, the United States), the original innovator’s inventive activity, is never recognized, or becomes disqualified, as prior art versus future third party patent applications covering the same invention. As a result, third party competitors, who later, and independently, develop the same invention, are permitted to secure patent protection for the same invention.
In some jurisdictions (eg. some European states), prior user rights are recognized. Generally, prior user rights protect persons who have been non-publicly using an invention in a jurisdiction from patent infringement liability to a competitor who has subsequently patented the same invention in that jurisdiction. In this respect, prior user rights preserve the rights of prior users of an invention to continue using the invention. However, in jurisdictions that do not fully recognize prior user rights (neither Canada nor the United States fully embrace prior user rights- for Canada, see section 56 of the Patent Act, which does not appear to recognize prior user rights for “methods/ processes”), such patent rights could be asserted against the original innovator / prior user who has chosen not to publicly disclose her invention.
In this respect, if trade secret protection is chosen, there is a risk that the original innovator, who has maintained secrecy about the invention, could be blocked from the marketplace by a competitor’s later patent, thereby extinguishing the original innovator’s right to use the invention. There is a greater bias against assuming this risk when the invention is not particularly valuable. Of course, this patent infringement risk is tempered by the fact that a laterdeveloping competitor could choose, instead, to rely on trade secret protection, for the same reasons that are biasing the original innovator in this direction. Also, even if the later developing competitor chooses patent protection, patent infringement risk is tempered by virtue of the fact that, because the nature of the subject technology is amenable to trade secret protection, infringement is more diffi cult to detect in these circumstances. Having said that, the potential consequences of infringing the later-innovating competitor’s patent may be suffi ciently signifi cant (eg. business failure ) that assuming the risk that a competitor could later-develop and patent the same invention, and be able to detect infringement, may not be justifi able, thereby eliminating the trade secret option from consideration.
By publicly disclosing the invention, prior art consequences are created and competitors become blocked, to some degree, from patenting the same invention (incidentally, such public disclosure by an inventor also functions as prior art, at least eventually, versus the inventor’s future improvements). By creating prior art consequences, the original innovator’s right to commercialize the invention is preserved. However, the extent to which these prior art consequences are created to effect the blocking of patenting by competitors depends on the nature of the public disclosure. Prior art consequences are triggered in a wider number of jurisdictions when the public disclosure is elevated to the form of a “publication”. Public disclosure that occurs in one country, but does not qualify as a “publication” (such as public use or selling activity that does not extend beyond the territorial borders of a single country), may attract prior art consequences in the country in which it occurs (eg. Canada), but does not necessarily attract prior art consequences in other countries (eg. United States). If, however, the public disclosure takes the form of a publication, prior art consequences are more widespread, and not jurisdictionally limited.
In proceeding with defensive publication, it may be worthwhile considering effecting this by fi ling a patent application disclosing the invention, and requesting early publication of such patent application. As discussed above, relative to a non-patent publication, a patent application publication is more likely to be accessible by a patent examiner, become relevant to prosecution of a competitor’s patent, and thereby block, or at least interfere with, a competitor’s patenting activities. Of course, there are additional costs involved with effecting the patent application fi ling, but these could likely be kept to a minimum, since the usual time and effort spent in drafting patent claims, and optimizing the disclosure for patent application purposes, would not be required.
Defensive Publication vs. Trade Secrets in Chemical/ Metallurgical Process Industries
For example, technologies in the chemical or metallurgical process industries that are susceptible to trade secret protection, but also warrant consideration for defensive publication, may include laboratory equipment and methods, internally-used material handling equipment, minor improvements to chemical or metallurgical processes, or simple non-core technologies. Bias to either one of trade secret protection or defensive publication depends on, amongst other things, the likelihood and consequences of infringing a competitor’s future patent and the likelihood of detection of such infringing activity. For laboratory methods or internally-used material handling equipment, competitive patenting activity is more likely to be low, infringement detection is more likely to be diffi cult, and the consequences of infringement are not likely to be signifi cant. In such cases, there may be a justifi able bias towards maintaining trade secrecy. On the other hand, where potential infringement consequences are higher, such as for marginally improved chemical/metallurgical processes, and especially where relatively little value is likely to be extracted from protecting the technology by trade secret, such as in the case of simple non-core technologies, the bias may swing towards defensive publication.
Bias Towards Patent or Trade Secret Protection for More Valuable Inventions
When the stakes are higher, or other naturallyoccurring competitive advantages are not signifi cant, the decision-making typically moves towards choosing between patent and trade secret protection. In some cases, this decision becomes moot because of the nature of the technology which incorporates the innovation. If commercialization of the technology necessarily requires public disclosure of the technology, and the invention is capable of being reverse engineered by competitors, then patent protection is the only realistic choice. If, however, the invention could be maintained non-public while deriving commercial value from the innovation in the marketplace, then trade secret protection is a realistic option, and a choice must be made between this and patent protection. This is because, generally, patent protection is incompatible with trade secret protection, as choosing the patent protection route necessarily dictates, by virtue of the patent application process, public disclosure of the invention, thereby wiping out its value as a trade secret. Having said that, it may be possible to patent protect some aspects of the invention, while maintaining trade secrecy to other aspects. Of course, innovators should be mindful of legislative requirements for patenting, requiring disclosure of certain information in the patent application, and that the violation of these requirements results in defective patent rights. Maintaining trade secrecy about certain aspects of an invention while, in parallel, attempting to patent protect the invention, could undermine the patenting objectives. In this respect, innovators should proceed with caution if considering maintaining trade secrecy about how an invention is made or used. This is because the requirement to describe, in the patent application, how to make and use the invention is universal (or at least almost universal). As well, in some countries (eg. United States and, to some extent, Canada), there is a requirement to disclose, in the patent application, the best mode for practicing the invention, thereby making innovation protection strategies less straightforward for those considering maintaining trade secrecy about the best mode.
Patents vs. Trade Secrets
As with any decision-making process, the choice between patent and trade secret protection necessarily involves a comparison between the foreseeable value of patent protection versus the foreseeable value of trade secret protection.
a) Value Proposition for Trade Secret Protection
Trade secret protection is valuable so long as the innovation is maintained a secret. As discussed above, trade secret protection could potentially last forever, Of course, trade secret protection is fragile, and various forces conspire to extinguish its value, some of these being beyond the control of the original innovator. Once the innovation becomes available to competitors, whether through the original innovator, by inadvertent disclosure or otherwise, or by independent development or reverse-engineering by competitors themselves, the trade secret becomes permanently extinguished, and the invention can be freely exploited by competitors (of course, the original innovator may be able to exact fi nancial compensation if there is theft of confi dential information or breach of confi dentiality obligations, but there is no way of putting Jack back in the box). This results in downward pressure on pricing towards that seen in a competitive marketplace, although naturally occurring competitive advantages may slow the rate of this price erosion. As well, in some cases, an independently developing competitor may secure patent protection for the invention. In such cases, the original innovator will not only suffer the loss of trade secret protection but, in some jurisdictions, may also be blocked by, and risk becoming fi nancially liable to, the later-developing competitor.
Accordingly, estimation of trade secret protection value requires an assessment of the likelihood of any loss of trade secret protection event and when such event will occur (and, perhaps, whether price erosion after the trade secret loss event is slowed by any naturally occurring competitive advantages). Additionally, evaluation of the trade secret value proposition should consider whether the trade secret protection loss event may be tied to the grant of patent protection to a competitor, and how likely the original innovator’s continued use of the trade secret is detectable and then potentially terminable upon exercise of the patent rights by the competitor, and the extent to which blocking the original innovator from practising their invention hurts their business.
The following circumstances increase the risk of loss of trade secret protection:
- extent to which the invention is easily visible in the marketed product or service, or is susceptible to reverse engineering;
- existence of relatively high employee/ contractor mobility or competition for key employees;
- government regulation requires disclosure of information to a government authority;
- sales process requires information exchange between vendors and customers;
- existence of many potential customers and concomitant increased opportunity for information exchange;
- customers receive on-going technical support thereby creating opportunity for further information exchange;
- nature of the original innovator’s business requires regular collaboration with third parties;
- business strategy includes licensing of invention to third parties;
- problem solved by the innovation is something which pervades the industry, and there is a high probability that competitors are continuing, in parallel, to expend R&D efforts, searching for a solution to this same problem; and
- existence of signifi cant market opportunity, attracting competitors to develop same invention.
The first circumstance is dictated by the nature of the marketed product/service. Any of (2) through (8) present possible sources of leakage of trade secret information, rendering the trade secret vulnerable to a loss of trade secret protection event, notwithstanding any agreements in place which may impose confi dentiality obligations. Either of (9) or (10) open up the possibility of a trade secret protection loss event through independent development by a competitor.
Assuming that a trade secret protection loss event occurs, some residual monopoly pricing power may continue to exist for at least some period of time, depending on the strength of any naturally occurring competitive advantages existing at the time of the trade secret protection loss event. Accordingly, the value of trade secret protection should be assessed having regard to the nature of the marketed product/ service, and if and when any of (2) through (10) will occur, and whether any naturally occurring competitive advantages would continue to remain operative beyond the trade secret protection loss event and for how long.
Innovators, who choose trade secret protection, should also consider the risk and consequences of later being blocked from using their technology by competitors who independently invent the same invention and patent protect it. I
ndependent invention by competitors is impossible to control. Assuming this eventually happens, and the later-inventing competitor chooses to seek patent protection, then blocking of the original innovator by the later-inventing competitor becomes a real possibility (although, perhaps, not very likely) in some jurisdictions. Of course, the later-inventing competitor can only assert their patent rights against the original innovator if the original innovator’s use of the patented invention is detected. Detection is generally diffi cult if the same reasons, that drove the original innovator to choose trade secret protection, continue to remain operative. However, as the original innovator and later-inventing competitor begin sharing the same customers, the risk of detection increases. In this respect, this risk is exacerbated in smaller and more geographically concentrated markets.
Successful assertion of a later-inventing competitor’s patent rights against the original innovator discounts the value proposition of the trade secret protection decision by the original innovator. One of the potential outcomes is that the original innovator is forced to pay royalties to the later-inventing competitor in order to continue using the innovation. Another potential outcome is that the original innovator is forced to substitute a non-infringing technology, assuming that is possible. In the extreme, the original innovator could be forced out of business. If the potential consequences are suffi ciently signifi cant, this could eliminate trade secret protection option from consideration.
b) Value Proposition for Patent Protection
Like trade secret protection, the value proposition for patent protection also depends on several factors. A patent is only valuable if it enables the patentee to enjoy a monopoly-like position in the marketplace. This monopoly-like position is enjoyed if the marketplace is free from competitive products and services. For example, the marketplace is free of competitor’s products and services if competitors are deterred from entering the marketplace by knowledge of the patent and have concerns that the patentee is able to detect infringement and then enforce patent rights to block the competitor. A patent may also become valuable as a licensing tool, enabling the innovator to earn revenues from inaccessible markets, and to realize bargaining power during cross-licensing negotiations versus competitors asserting their own patents against the innovator. Although trade secrets are also potentially licensable, from the licensee’s perspective, uncertainty relating to their defi nition and resultant scope, as well as the increased risk of their extinction which necessarily follows the sharing of the protected trade secret information incidental to the licensing transaction, generally renders them, relative to patent rights, of lesser value as a licensing vehicle. For the same reasons, from the licensee’s perspective, licensing of an invention covered by a trade secret is less attractive versus one covered by a patent. There may also be some value derived from patents as enablers of collaborative activity with third parties, leading to the development of improvements to the basic invention. Similarly, patents may promote knowledge spillover, and thereby trigger third parties to independently develop improvements which could be useful to the original innovator.
When the nature of the invention is conducive to trade secret protection, but patent protection is chosen nonetheless, detection of competitive infringement is, generally, relatively diffi cult. Detection depends on some of the same factors as those relating to the strength of trade secret protection: visibility of invention within marketed product/service, employee mobility, tendency for collaboration, licensing activity, information leakage through sales process or technical support services to customers, existence of substantial number of customers, and the possibility of forced disclosure of business activities due to regulatory requirement. As also alluded to above, operation within a relatively small and geographically concentrated marketplace, which increases the chances of shared customers, also assists with infringement detection. An increased diffi culty in detecting patent infringement contributes to the bias against patent protecting the invention.
Patents also possess value as licensable rights. Their appeal as tools for securing licensing revenue is attractive when the invention is embodied in a technology which the innovator is unable to optimally exploit across all potential markets. As well, patents are valuable as a form of bargaining power for a business organization against whom a competitor is asserting its own patent rights. The value of patents as licensable rights increases where:
- the territorial reach of a business organization is limited;
- the invention is embodied in a non-core technology;
- the invention relates to a disruptive technology; and the patent landscape is fairly crowded and there is a concomitant increase in the risk of an infringement claim by a competitor.
Although trade secrets are also potentially licensable, the necessary incidental dissemination of information to a third party, even with confi dentiality obligations attached, increases the risk of a loss of trade secret event. For this reason, trade secrets are, generally, considered to be inferior vehicles for licensing, relative to patents.
Patents may also be valuable tools for attracting fi nancing. Where a business organization derives a signifi cant fraction of its value from technology, it is important to demonstrate to potential investors that the technology can be successfully exploited. Generally, investors feel more comfortable with investing in businesses whose underlying technology is protected by patents, as opposed to trade secrets. This is because, with trade secrets, there is a greater uncertainty about their value, owing to the fact that their value is tied to the business organization having successfully preventing public disclosure.
Patents may also be valuable as an enablement tool for collaboration. Upon securing patent protection, innovators are freed from closely guarding technology secrets, and are in a more comfortable position to engage third parties in collaborative efforts to improve on the original invention. Similarly, knowledge spillover caused by the publication of the patent or patent application may spur independent third party development of improvements to the basic invention, and this may also eventually benefi t the original innovator in terms of improved product or service offerings in the marketplace.
Weighing against the potential benefi ts of patenting is the cost of patenting. Patents have limited jurisdictional reach – each country has its own patent granting system, and the patents which are granted provide rights which are only exercisable within the borders of the country in which the patent is granted. In order to enjoy patent protection in several countries, separate patents must be secured in each one of those countries. This infl ates patenting costs, depending on the number of jurisdictions for which patent protection is required in order to adequately protect the invention. Of course, there are patent examining authorities which have been established under international treaties to streamline the patent application process for multiple countries (eg. World Intellectual Property Offi ce, European Patent Offi ce), which helps in reducing patenting costs. However, generally speaking, patenting costs increase as the number of patent protected territories increase.
c) Patent vs. Trade Secrets in Chemical/Metallurgical Process Industries
Technologies that are relatively more valuable, and that are also susceptible to both patent and trade secret protection, may include more signifi cant chemical/ metallurgical process improvements or pioneering process technologies. In these cases, a bias towards patenting exists when the technology has been jointly developed, or where licensing is a desired business strategy, or where employee mobility is likely, as these circumstances increase the risk of information disclosure that destroys trade secret protection. As well, the bias exists where government regulation requires disclosure of information to a legislated body, such as the Energy Resources Conservation Board created under provincial legislation in Alberta, which, in regulating the design and construction of new oil & gas projects in Alberta, could force the disclosure of potentially valuable trade secret information in order to help evaluate the environmental impact of the project. The bias also exists, or is further strengthened, when there is signifi cant risk that competitors will independently develop the same technology.
Independent competitive development chips away at the exclusivity previously enjoyed by the original innovator who chooses trade secret protection, thereby undermining the original innovator’s competitive position. If there is a belief that the competitor will choose to patent the independently developed technology, this, combined with an increased risk of infringement detection arising by virtue of an increased risk of information disclosure through third parties (ie. the joint developer, licensees, or former employees), increases the risk of exposure to patent infringement consequences, and further biases the decision-making towards patenting.