ETHICS IN THE MARKETPLACE – CAN YOU KEEP A (TRADE) SECRET?

BY:KIRBY DRAKE

Topics

1. Is patent or trade secret protection available?

2. Is a patent, a trade secret, or dedicating the invention to the public best for the company/individual?

3. What are competitors doing?4. What does the public expect?

What Do You Patent?

• Computer software• Methods of doing business• New varieties of plants• Chemical formulae

What Do You Keep as a Trade Secret?

• Manufacturing processes• Ideas• Manufacturing drawings• Software• Chemical formulae and processes

The Overlap – Patents and Trade Secrets

• New innovations can be protected with patents or trade secrets.

• Cannot usually protect same innovation by both patents and trade secrets.

Patent?Trade Secret?

Both?Neither?

Why Choose Patent or Trade Secret Protection?

• Pros and Cons:• Changes in the law• Duration of protection• Exclusivity of rights

Changes in the Law

• Publication of patent applications• To have foreign rights, must publish. But

could choose to file non-publication request.

• If patent application does not issue, possibility of keeping invention as trade secret is lost.

• If likelihood of patentability is low, may want to keep as trade secret.

Duration of Protection

Uncertainty of duration may make valuation of trade secret more unpredictable

Patent Trade SecretDefinite Term No Definite Term

Limited in Time As Long as it Remains a Secret

Exclusivity of Rights

• Patents – exclusive rights– Independent development does not allow free

use of invention.

– Innocent infringement not a defense.

• Trade Secrets – non-exclusive rights– Independent development not actionable.

– Must breach non-disclosure obligation or obtain trade secret via improper means to be actionable.

Weighing Factors – The Eastman Kodak Corp.

• Patented process for making photographic film (allowing series of coatings to be cast all at once instead of one at a time via slide coating).

• Took years for industry to figure out how process worked and to effectively compete.

• Did not have to patent because trade secret could have served longer exclusive life and may have retarded rate at which technique was adopted.

Marketplace v. Corporate Interests

• Commercial life of product

• Reverse engineering

• Independent development

• Tipping off competitors

• Type of subject matter/industry

• Ease of keeping subject matter a secret

• Time needed to obtain patent

• Economic effects

Marketplace v. Corporate Interests

• Commercial life of product• Short commercial life (e.g., a new toy) – patent

may not issue until after market life expires

• Longer shelf life (e.g., Starbucks disposable beverage cup lid design) – may be good candidates for patent protection

Type of Subject Matter/Industry

• More patent activity in certain technology areas• Polymer industry – high level of patent activity

(more than 6,000 patents per year classified as “synthetic resin” patents)

• Industry change may be slow; patents likely to be used by industry

• Food industry – more likely to keep as trade secrets (e.g., processes to make food/beverages)

• Chemical Industry – fertile ground for trade secrets but also make use of patents

• Diverse industry; unique processing problems

Tipping off Competitors

• Patents require significant disclosure – public’s right to knowledge in exchange for exclusivity.

• May give competitors the information to design around invention.

• BUT also may stimulate innovation – give competitors ideas to move the technology forward.

Economic Considerations

• Patents may give a signal that IP was created – good for future investments, competitive positioning.

• However, absence of patents does not mean IP was not created.

• Less upfront investment to maintain invention as trade secret.

• However, loss of trade secret may be financially devastating to company.

Patents = Innovation?

• Patents can be viewed as helpful indicators of innovation in chemical and pharmaceutical industries.

• But others view patents as hindering innovation in these same industries.

Pharmaceutical Patents: Encouraging Innovation?

• Generally cover products that take a long time to develop (discovery to FDA approval).

• Initial investment in research is costly – recoup investments via patents.

• Risk competition from generic companies ready to enter market when patent protection lapses.

• Generic companies may drive innovators to develop new products, give consumers the benefit of new medicines.

• Allows incremental advances in the field.

Pharmaceutical Patents: Harm to Public Interest?

• Patents on pharmaceuticals may be viewed as market distortion – gives monopoly for a period of time to those who innovate.

• Work toward breakthroughs but also find ways to get around patent protection of competitors.

Innovation Based on Patents?

Patents/Trade Secrets in Corporate Portfolio

• Not an all-or-nothing proposition to choose patents or trade secrets.

• May protect certain aspects of business (e.g., formulae) with trade secrets and other aspects (e.g., manufacturing; containers) with patents.

Patents/Trade Secrets in Corporate Portfolio

• The Coca-Cola Company owns a patent on a method of making “barrier coated plastic containers.”

• Not given exclusive right to make plastic containers, but Coca-Cola has the exclusive right to use the particular method of making those containers that is described in the patent.

• Also have trade secrets – formula for Coke.

Coca-Cola: Ethics in Action

• Formula for Coke –one of the most well-known trade secrets.

• Coca-Cola recently sued former employee for trade secret misappropriation.

• Former employee had offered knowledge of formula to Pepsi but Pepsi did not use – actually brought misappropriation to Coca-Cola’s attention.• "We were just doing whatever any responsible

company would do," Pepsi spokesman Dave DeCecco said. "Despite the fierce competition in this industry, it should also be fair."

Coca-Cola: Ethics in Action

• Pepsi and Coca-Cola – common corporate priorities and respect for trade secrets.

• Competitors each can be successful and encourage innovation even while maintaining key inventions as trade secrets.

http://lambasted.blogspot.com/2007/01/coke-trade-secrets-theft-trial-begins.html

Corporate, Competitive and Public Interests?

• Patents

• Trade Secrets

• Published Papers

• Other Collaborative Activity

No single way of conveying innovation is perfect for all situations.

A Happy Medium – Public v. Corporate Interests

While obtaining patents may not directly lead to growth, “it helps create an incentive structure that encourages research and development, which in turn leads to increased innovation. Increased innovation generates greater rates of economic growth.”

2006 Economic Report of the President