Trade Secrets, Opportunities and Trends From a Business Perspective

Introduction

Challenging times give rise to new opportunities. There are currently significant and turbulent changes and challenges in the global economy, political alliances and with respect to the environment. Such changes impact and concern us all. In a maritime conference in Norway earlier this year, one of the questions to the US chargé d’affaires (diplomat) was about how the US is dealing with risks related to these uncertain times. The reply was, in part, to take steps to identify and protect intellectual property.

It is expected that AI will continue to move into our daily lives during 2024. The rapid proliferation of AI along with AI-driven innovation creates new business models, changes our lives in unexpected ways and illustrates that legislators did not have AI in mind when the legislation was created, although in relation to legal protection for inventions, most countries have concluded that AI cannot be the inventor.

In addition to AI, the UN’s ESG reporting will also have a great impact on our lives. A consequence of ESG is the creation of new untraditional co-operations between companies to develop new solutions to fulfil ESG requirements. Yara, a well-known global company developing and offering fertiliser, now owns Yara Birkeland, the world’s first fully electric and autonomous container vessel with zero emissions. With this container vessel set on water in 2023, Yara will reduce diesel-powered truck haulage by 40,000 journeys a year.

Furthermore, according to statistical research at Statistics Norway, in 2022 the number of patent filings in Norway decreased by 11% since 2021, and slightly lower in 2023. Independent of the reasons for this decrease, the trends in patent filing should be taken into account when considering the increasing focus on trade secrets.

All of this has an impact on the role of trade secrets in IP strategies, aiming for a robust IP protection for companies’ competitive edge. In the US, trade secret litigation has increased, whilst this has not been the case in Norway after the Trade Secret Act 2020 came into force (nor before), as there have been just a handful of court cases relating to trade secrets for Norwegian courts. However, Norwegian companies and IP practitioners have an increased focus on identifying and protecting trade secrets alongside other forms of confidential information, with this being a particular focus for companies with current or potential foreign investors.

The key question within an IP policy has often been if an invention should be patented or kept as a trade secret, or alternatively if there should be a publication of the invention. However, a more nuanced question is how to combine patents and trade secrets to create an even stronger barrier around the invention, which will make it even more difficult for others to enter the market.

What is the difference between trade secrets and patents?

To acknowledge the interplay between trade secrets and patents, we need to understand what trade secrets are and the difference between trade secrets and patents.

What is the subject for patents and trade secrets?

A granted patent gives the inventor legal ownership of the invention (technical solution) – the product itself (product patent), how a product is made (process patent) and how it works.

Trade secrets are not limited to inventions with a technical solution, but embrace most kinds of information. In particular, information such as:

• know-how – a deep understanding of how to perform specific tasks, in-house processes for making the right business decision, methods to utilise and maintain machines, technologies and data, processes for management of people, and knowledge of failure/what does not work;
• technical information – drawings, production processes, software, recipes, and chemical compounds; and
• commercial information – client lists, supplier lists, prices and costs market studies, market intelligence, and launching date.

Legal requirements

For an invention to be patentable it must be new; ie, the invention cannot be published before the filing date of the patent application, and it must have an inventive step (ie, not be obvious to someone in that field), and have an industrial use.

For information to qualify as a trade secret, it needs to be of “commercial advantage” and it is required to take “reasonable steps” to keep the secrecy. If a competitor uses another company’s trade secrets and this damages the company’s competitive edge, it is regarded to be of “commercial advantage”. “Reasonable steps” to keep the secrecy involves digital and/or physical access restrictions, internal guidelines on how to handle trade secrets, and a contractual duty of confidentiality, both for employers and third parties. In Norway there may also be an implied duty of confidentiality in certain circumstances.

Establishing patents and trade secrets

In order to achieve a patent, it is needed to draft, file and prosecute the patent application in the relevant jurisdictions, whilst a trade secret needs to be identified by the company and handled in accordance with the company’s guidelines/policies on how to keep the secrecy. It is not possible to register a trade secret in Norway.

Publication

The patent application is published (18 months after the priority filing), and after the patent has expired, anyone, including competitors, can, in principle, legally produce a similar product. Publication is the trade-off by getting the exclusive right for 20 years, so others can use the invention for further innovation.

If the trade secret is disclosed without no duty of confidentiality, it will no longer be considered as a trade secret. To maintain legal protection of the trade secret, it must be kept secret.

Costs

Prosecution of a patent application may take many years and can involve significant costs, in addition to the annual renewal fees, especially if it is required to obtain patents in multiple international jurisdictions.

At first glance, the initial cost of a trade secret seems to be minimal compared with the costs of a patent. However, trade secrets need a system and a strategy to ensure that they are identified and correctly handled. This may include internal polices giving guidelines on how to handle them from a legal and technical point of view, educational awareness programmes for employers and employees, and confidentiality agreements. The cost for protection via trade secrets should still be significantly lower than filing a patent family and securing granted patent rights in multiple countries.

Lifetime

A patent typically expires after a maximum of 20 years, whilst trade secrets have no time limit as they can persist forever if they are not disclosed to the public or others, without an obligation of confidentiality. Trade secret protection will last as long as they stay secret.

Licence

Licences are an essential tool for technology transfer and exploitation of intellectual property rights. Both patents and trade secrets can be subject to a licence. Since patents protect technical solutions and trade secrets can protect know-how, licences combining trade secrets and patents can result in robust protection. Licence terms should be carefully drafted in order to control the handling of information that is protected as a trade secret, such as by restricting access to a specific set of employees of a licensee company and/or by setting minimum security requirements for IT systems.

Legal basis for litigation

Patents provide the owner with a right to exclude others from making, using, selling, offering to sell, or importing the invention. The patent owner can use the patent as a legal basis for claiming infringement of the owner’s patent rights.

Trade secrets can be the basis for preventing others from misappropriating (ie, stealing) the trade secret. In other words, the ownership to a trade secret is not violated by someone who independently invented or reverse engineered the same technology.

The right to a trade secret can also be asserted against someone who illegally obtained or disclosed the trade secrets. Typically, breach of a contractual duty of confidentiality can result in trade secret infringement.

Trade secret or patent?

When deciding on filing a patent application or keeping a trade secret, it is important to take into account the commercial goals and context of the company.

A relevant factor to take into consideration before filing a patent application, is how easy it is for others to reverse engineer the invention once it is placed on sale. If reverse engineering is easy, it may be wise to file the patent application to avoid others having a free ride on your innovation, and, in the worst-case scenario, filing a patent application which may cause problems for your freedom to operate.

It may also be important to consider the ability to identify an infringement. For example, innovative products/services implemented using AI are often operated at least partly in the cloud, or otherwise remotely located from the user. In that case there are difficulties for reverse engineering and it may not be possible to detect if a third party is using a patented invention, since the relevant technical details are often not available for inspection.

For products that have a longer lifespan and cannot be reverse engineered, and/or for situations where an inability to detect infringement could reduce the benefit of patent protection, a well-guarded trade secret can provide protection without competition even after 20 years and at minimal cost.

If a new innovation is not regarded as inventive then it may not be worth drafting and filing a patent application, but rather consideration should be given to keeping it as a trade secret instead.

However, trade secrets protection requires that employees or third parties to whom the information is disclosed, can be trusted to understand and fulfil the duty of confidentiality. In principle, breach of confidentiality can be more difficult to prove than patent infringement as the initial source of the breach may be unclear. For this reason it is highly important to have a strong set of internal policies supported by suitably worded contracts/agreements.

Publication

An alternative and opposite option to trade secrets is publication of the information to prevent competitors gaining an exclusive patent right or trade secret. In this way a company can try to ensure freedom to operate, whilst avoiding any significant expense. The published information will be available for competitors to use freely on the market, but the publication blocks later filed patent applications that may bar others from the market. However, there is a risk that a Patent Examiner could overlook the publication or that a competitor may develop the initial innovation in a way that is unexpected, but gives them a commercial advantage.

Publishing can be achieved in several ways and through specific databases and online companies that Patent Examiners search through. Details of an invention on a public database that registers the time and date of publication can be used as an independent source of evidence against patent applications.

If a patent application is filed then the application can be withdrawn before the publication and the invention kept as a trade secret or abandoned to save costs. Or it may be allowed to publish since once published this will be a hindrance for other similar inventions submitted at a later date.

How can trade secrets and patents supplement each other?

In the early stages of R&D, before a patent application is filed and published, invention disclosure forms and all related know-how, including test results, and blind alleys, should be strictly confidential and are subjects for trade secret protection until it is decided to file a patent application, to keep it as a trade secret, or to use a defensive publication.

A relevant question is how much information should be disclosed in a patent application? The rule of thumb when it comes to disclosing trade secrets internally or externally, under the obligation of confidentiality, is to only disclose to a limited number of persons and only on a need-to-know basis. The same applies for patent applications.

To achieve a granted patent, it is required to disclose a claimed invention in sufficient detail so that the person skilled in the art can carry out that claimed invention. However, it is not necessary to provide additional information about test results that are not necessary with regard to the sufficiency requirement. When drafting a patent application, it should be carefully considered if parts of the information can be kept as a trade secret or if it is necessary to include the information in the patent application, for example, to fulfil the requirement for sufficiency.

If it is necessary to disclose trade secrets to third parties, such as investors, risks should be considered before disclosure, and a non-disclosure agreement should be signed. The right to a patent can be lost by disclosing too much information before the application is filed. Trade secrets can be totally devoid if they are improperly (or accidentally) made public, including in discussions with investors. A suitable confidentiality agreement is therefore needed, taking account of relevant legal systems (eg, being drafted specifically for use under Norwegian law if Norwegian trade secrets are involved). It can also be important to consider other forms of protection in some cases, such as allowing third parties to inspect confidential material only on a restricted basis and limiting the ability to make or send copies.

Not all types of invention are capable of patenting, and so for some inventions, a trade secret will be the only option. Business methods, computer games and software implemented innovations (using AI or otherwise) that do not create technical effect, may be difficult to patent whilst also creating challenges for detecting infringements.

Trade secrets in the digital age

The digital age has made it possible to digitally store unlimited amounts of information within systems with shared, controlled and limited access to specific persons, passwords and surveillance, and details of when the information is accessed. Innovations such as blockchain, artificial intelligence and quantum cryptography contribute to enhanced trade secret security. However, cloud computing, remote work and the home office environment, and interconnected systems across borders create new practical, legislative and technological challenges in securing trade secrets against cyber-attacks, industrial espionage, and inadvertent leaks.

Open innovation with traditional and untraditional collaborations, licensed technology, IoT, big data, and machine learning enables rapidly developed and complex technology, requiring a comprehensive and multidisciplinary approach on how to protect trade secrets.

There are, in particular, two topics in which there is an increased focus when it comes to digital innovation and trade secrets.

IoT and sensor technology enables big data, which has revolutionised machine learning and related AI-based products/services. Selection of such input and output data can be patentable if it is related to solving a problem, and cloud-based solutions and quantum-computing-based solutions may be patentable. What can be decisive is if the patent applications can adequately describe the inner workings of the technology for which protection is being sought.

However, the input and output data may be better suited for trade secret protection instead, in particular if they are not protected by the database protection or similar legislation.

The digital wave of technology is still flushing over us, and trade secret protection needs to be dynamic with a proactive and adaptable approach in the light of patents, contracts, legal, technical and organisational measures.

Trade secrets from a company perspective

On- and off-boarding

When joining a new company, HR plays an important role in communicating values and priorities within the company and regarding the new job/position to new employees, and often plays the central role in the onboarding process.

At this stage, general awareness regarding the importance of IP and trade secrets and the role they play in the company should be communicated to new employees.

Also, the company policy on how to handle trade secrets and confidential information should be presented and communicated as part of the onboarding process.

Working from home represents a security risk and specific details regarding information data security when working from home should be a part of the onboarding programme. This could also represent a potential threat to preserving trade secrets and confidential information.

In this connection it should also be noted that junior employees generally have higher job mobility and therefore the company policy and associated training should make sure to properly define where to draw the line regarding information that belongs to the company, and, as such, that it should not be shared with others after the employee leaves, as well as specifying information the employee is free to share when moving on. Defining the boundaries and identifying the company’s confidential information should be a general part of the off-boarding programme.

An explicitly defined duty of confidentiality along with non-compete clauses and other restrictive covenants must be a part of employment contracts to reduce the risk that confidential information and/or trade secrets could be spilled.

When an employee is leaving, it is important to check their computer/s for any stored data.

IP and trade secrets awareness training

It is important to work with IT on how to secure trade secrets and to prepare a restriction policy that limits access to all types of confidential and privileged information including trade secrets. In limiting the accessibility, the IT department plays a vital role.

IP awareness training should be conducted at regular intervals throughout the different parts of the organisation as it is essential that all employees understand the importance of handling trade secrets and other forms of IP in accordance with company guidelines. The IP awareness programme should be specifically designed for the different parts of the organisation.

It is especially important to understand which parts of the organisation have a role when it comes to IP, innovation and the handling of trade secrets – the “IP Triggers” in the organisation.

Product developments are generally potential IP Triggers and could also trigger the creation of trade secrets. Accordingly, it is particularly important that the parts of the organisation where product development is occurring have a general IP and trade secrets awareness training programme.

The same is the case where it comes to adaptations, optimisations of production processes, or other product developments. Quite often these adjustments or optimisations could be protected as trade secrets.

Also, when working with third parties and entering into co-operation agreements, the chance of spilling a trade secret could be high. It is therefore important that descriptions of trade secrets are very precise and that descriptions and definitions in agreements are similarly narrow so that no unnecessary information is shared.

Many companies find that C-level (chief level) and senior level are more demanding to train and here it is important to stress that a signed NDA (non-disclosure agreement) does not mean that all information can be disclosed.

When it comes to an IP awareness programme for scientists, it is important to know that scientists need to know why the relevant IP policies are important. Emphasis should therefore be put on explaining the relevance of trade secrets to the business. In this connection it is also necessary to explain that extra diligence should be exerted when working with the trade secrets of third parties.

Also important is the handling of negative know-how which is information on what did not work. That can be very relevant information to a competing company.

Additionally, risk of contamination is imperative to consider. Contamination is when a third party shares information that has not been requested by the receiving party. Such information could prevent the possibilities of validly obtaining a patent or retaining a trade secret.

With regard to awareness training of the IP department and legal department, the extent of protection that can be obtained from an NDA or confidentiality agreement should be clarified.

A basic point is also that any innovation that is going into a patent application as a general rule is a trade secret and should be handled as such even though it may be published later during the patenting process.

When it comes to IP awareness training of the department of procurement, it is important to realise that this department often has extensive knowledge of the parts, designs and requirements of the innovative parts of the organisation. Ordering specially designed parts, fittings and other items to the production line or otherwise could result in the sharing of trade secrets and IP with third parties.

Procurement often also negotiates supply and delivery agreements with third parties and in this connection may be involved in indemnification clauses. Therefore, it is very important that procurement understands the concept of IP and trade secrets and what is required in order to protect and secure them and also what to expect in terms of indemnities and liabilities when receiving products that are produced under a licence from a third party.

Remuneration programme

Many innovative companies have remuneration programmes to stimulate employee innovation. Such stimulus generally drives innovation by offering compensation or bonus programmes and is thereby designed to drive innovation in accordance with company goals.

Many such employee reward/recognition programmes focus on innovation resulting in patent applications, but as more companies learn more about trade secrets and understand the value and benefit of protecting innovation with trade secrets, it seems to be worth considering linking the remuneration programme to the innovation itself and not to whether it results in a patent application or not.

A trade secret can be a very valuable company asset if kept strictly confidential and has the very clear benefit that, contrary to patent applications which have to be published, a trade secret must be kept secret to keep its status as a trade secret. This means that other companies cannot base their innovation on the information in the trade secret. Arguably, a combination of trade secrets and patent applications, managed according to a strong IP strategy, can create a stronger protection of innovation than patent applications alone.

Therefore, a remuneration programme that focuses on the innovation itself, and not on whether it results in a patent application, trade secret, design protection or any other IP protection, is better designed to suit trends in business today.

Conclusion

The authors’ experience shows that companies need practical and straightforward advice on how to handle trade secrets, along with regular awareness training.

Disclaimer:This article is based on the authors’ experience from various in-house IP functions and current roles as IP advisers, and it does not constitute legal advice.