Patents and trade secrets serve a common purpose of promoting scientific progress and competition, but they fulfill this Constitutional mandate through opposing means. While trade secrets rely on nondisclosure, the fundamental quid pro quo of the patent system involves disclosure in exchange for the right to exclude. Some commentators have predicted that trade secrets will become the next frontier in intellectual property (IP), which raises the question of whether they might displace patents as businesses’ preferred mode of IP protection.
Trade secrets have become an increasingly appealing option when viewed against the backdrop of the past few decades of patent law. A string of patent cases have narrowed the scope of patentable subject matter. The two-step test from Mayo Collaborative v. Prometheus Labs and Alice Corp. v. CLS Bank — which asks first whether a claim is directed to an abstract idea, and next whether it contains an inventive concept which transforms the abstract idea into a new and useful process — leaves the patentability of algorithm- and artificial intelligence (AI)-based innovations uncertain. Meanwhile, the Supreme Court’s landmark decision in KSR Int’l Co. v. Teleflex, Inc. broadened the scope of the nonobviousness analysis and made patents more vulnerable to invalidation. The KSR Court faulted the Federal Circuit for using an excessively rigid test for obviousness, warning that “[t]he diversity . . . of modern technology counsels against limiting the analysis in this way.” The United States Patent and Trademark Office reiterated the expansiveness of the obviousness inquiry in its most recent set of nonobviousness guidelines, which are based largely on the decision in KSR.
In light of these heightened standards for nonobviousness and subject-matter eligibility, individuals and smaller companies may find it difficult to justify the upfront investment required to patent their inventions, especially in sectors where rapid technological change causes short product life cycles. A technology may easily become obsolete over the 20 months that it takes on average to obtain a patent after filing (and that period does not include the time it takes to prepare an application). Within the AI space in particular, the state of the art is evolving at a rate that appears incompatible with patent timelines.
In contrast, trade secrecy covers a much broader scope of subject matter and requires no initial examination process. Companies incur fewer upfront costs in pursuing this form of protection. While trade secret plaintiffs must demonstrate that they made reasonable (i.e. cost-justified) efforts to maintain the secrecy of their information, they need not have built an “impenetrable fortress” of secrecy; see E.I. duPont de Nemours & Co. v. Christopher, 431 F.2d 1012 (5th Cir. 1970). (After all, as Judge Posner noted in Rockwell Graphic Systems, Inc. v. Dev Industries, Inc., 925 F.2d 174 (7th Cir. 1991), optimal security does not always mean maximum security. Considerations of efficiency caution against a stringent standard for “reasonable efforts,” and courts are wary of encouraging plaintiffs to take excessive precautions.) Additionally, trade secret plaintiffs under the Defend Trade Secrets Act (DTSA) may now choose between a state and federal forum and can use supplemental jurisdiction to press a state-law misappropriation claim alongside a federal DTSA one. Put together, these factors make trade secrecy a potentially more flexible and accessible method of guarding proprietary knowledge.
The ascendancy of trade secrets may call on the Supreme Court to reassess its statements in Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470 (1974). That opinion characterized the relationship between trade secrets and patents as complementary rather than at odds, holding that “the extension of trade secret protection to clearly patentable inventions does not conflict with the patent policy of disclosure.” At the time, the Court evidently saw little risk of inventors forgoing patent protection in favor of trade secrecy. The latter, it reasoned, functions differently as a “sieve” compared to patent law’s complete “barrier,” and offers much weaker protection.
However, Justice Marshall’s concurring opinion in Kewanee Oil cast doubt on that view. Marshall saw trade secrets as a possible “disincentive to entrance into the patent system” that may threaten to “depriv[e] society of the benefits of public disclosure . . . which it is the policy of the patent laws to encourage.” If inventors begin to regard the hurdles of the patenting process as prohibitive and come to widely prefer the trade secrets route, Justice Marshall may be vindicated in his view.
Of course, trade secrecy can only encroach so far upon the patent system. It remains a serious drawback that trade secrets, unlike patents, provide no remedy when competitors access protected information through proper means, such as independent invention or reverse engineering. For this reason, corporations that protect their IP with secrecy alone operate under the constant danger of competitors obtaining and exploiting their information through entirely legal methods.
In addition, many inventions are virtually impossible to keep secret. In the pivotal Mayo case, for example, if the pharmaceutical company Labs had not patented its diagnostic test, its competitors would have found it relatively easy to reformulate the process. Patent law will thus continue to represent the gold standard in those areas of innovation where secrecy is not a viable option.
That leaves the question of to what degree a corporation may implement both forms of IP, combining trade secrets and patents to its competitive advantage. The major assumption underlying Kewanee Oil is that inventors will settle on one or the other avenue of protection. But this mutual exclusivity is not a given.
In Celanese Int’l Corp.. v. Int’l Trade Comm’n, decided August, 12, 2024, the Federal Circuit evaluated whether the sale of a product made by a secret process invalidates a later patent on that process by triggering the on-sale bar of the America Invents Act (AIA). Celanese, a chemical company, sought to protect a patented process that it began using in secret to manufacture products more than a year before filing for the relevant patents. Celanese conceded that its patents would have been invalid under pre-AIA law. However, it argued that the revised language of the AIA altered the scope of the on-sale bar, such that Celanese’s earlier sales of products made using its then-secret process would not invalidate its later patents.
The Federal Circuit rejected this argument and found that the AIA did not disturb precedent that pre-filing date sales of products made using a secret process blocked the patentability of that process.
Celanese highlights the need for individuals and businesses to carefully weigh the costs and benefits of trade secrets and patents as divergent means of protecting knowledge. If trade secrets consistently emerge from that analysis as the preferable mode of IP protection, secrecy may become the new status quo—one that undermines Congress’s longtime policy in favor of disclosure.