The EUIPO (European Union Intellectual Property Office) has published a study reporting a trend among SMEs to rely on trade secrets rather than patents to protect their innovations. In this article, we explore the benefits of trade secrets and the legal and commercial considerations when deciding how to protect knowledge and innovations.

The report

The EUIPO published a study in July 2017 on Protecting Innovation Through Trade Secrets and Patents, based on a survey of around 200,000 European companies of varying sizes across a number of industries.

The report concludes that the use of trade secrets for protecting innovations is higher than the use of patents, particularly among smaller SMEs.

The study also found that trade secrets are commonly used to protect processes and service innovations in markets with strong pricing competition, whereas patents are more popular to protect physical goods in markets with strong quality competition.

Similarly, the study found that businesses were more likely to rely on trade secrets where the innovation is either not obviously patentable (either by its nature or because it is too early in the innovation process) or not considered to have enough commercial value to warrant patent protection.

The report is a reminder that trade secrets can be an effective alternative to intellectual property rights when protecting business essential information and innovation.

What are trade secrets?

A trade secret is confidential business information with a commercial value that the information holder has kept secret.

This broad definition means that trade secrets come in many forms, such as technical innovations (including drawings, designs and prototypes), manufacturing and industrial processes and commercial information relating to pricing, customers and suppliers.

Unlike a patent, trade secrets are not an intellectual property right. Instead, they are protected against violation by operation of the law protecting confidential information.

Why rely on trade secrets?

Innovations that cannot be patentable may be protected as a trade secret and some innovations may be protected by either.

  • Trade secrets have the following benefits, which are particularly attractive for smaller SMEs:
  • They cover a broad subject matter;
  • They are not formally registered, saving time and cost and withholding information from the public domain;
  • Protection is immediately effective and arises early in the innovation process, prior to being 'ready' for patent protection; and
  • Protection is indefinite (while it is still a secret), as opposed to the 20 year patent limit.

However, if the innovation is capable of patent protection, it is worth bearing in mind that:

  • Trade secrets do not protect against infringement (only against unauthorised disclosure);
  • Enforcement of a trade secret is much more difficult than that of a patent;
  • Third parties can make use of any publicly available information (for example, a product could be 'reverse engineered' even if the manufacturing process is a trade secret);
  • If and when the information becomes public throughout whatever means, it is no longer protected;
  • There is no protection against independent discovery; and
  • There can be costs and practical issues involved in protecting the secret.

Decisions, decisions

In situations where an innovation is patentable, whether to rely on a trade secret or to seek patent protection is a commercial decision that depends on the nature of the innovation and the priorities of the business.

For example, where the innovation is a developed product and the business is concerned about competitors, a patent is likely to be more appropriate. However, where the innovation relates to a process and the business is more concerned about information leaking than infringement, it is likely to be more appropriately protected as a trade secret.

Practical considerations

The protection of trade secrets is becoming increasing difficult due to changes in commercial culture and technology that makes the misappropriation of confidential information more likely. For example, we have seen more digitally stored and transported information, a tendency towards longer supply chains and more mobility in commercial and employment relationships.

The protection of trade secrets is also particularly important to smaller SMEs and start-ups, where the early stages of innovation are critical to their long-term success and there can be time and cost pressures on the business.

With that in mind, although trade secrets are protected by the law, businesses should also consider taking practical steps to protect their trade secrets. They can do this by:

  • Limiting the number of individuals with access to trade secrets;
  • Implementing secure IT systems and information security;
  • Ensuring that individuals with access to trade secrets know they are confidential;
  • Considering using confidentiality agreements in employment contracts and with business partners; and
  • Keep an accurate record of the information, where possible.