You couldn’t sleep. You recently worked through the night on your bench experiments, even when the security guard told you to go home, painstakingly perfecting the process to align with your company’s plans for a chemical manufacturer to scale your product. As the morning light peeked across your lab bench, your overcaffeinated fingers clicked the analytical results tab. You could hardly believe the results. Your new process (“New Process”) required half the solvent, the reaction occurred at twenty degrees cooler, and only slightly elevated pressure. But it worked! You just synthesized your lead chemical candidate at half the cost compared to when you founded this company.
Commercializing inventions requires not only capital but also an emotional investment by the inventors. Visionaries like yourself, who dream about an improved tomorrow, typically pay for that ambition with insomnia, time away from family, job insecurity, and opportunity costs. Founders, and the investors backing them, want insurance that some less-deserving company will not copy, or worse steal, the fruits of your sweat-filled labor. Intellectual property is a type of insurance against others copying or stealing. It provides a risk mitigation strategy. But just as one’s insurance needs mature and evolve over time with the acquisition of assets and liabilities, so too should one’s intellectual property portfolio evolve as one acquires or improves upon their proprietary technology. When is patent protection enough, and when is trade secret protection a better option?
A patent excludes anyone from copying your ideas ― that is, from making, using, selling, offering to sell, or importing your invention. A trade secret, on the other hand, protects your confidential information from individuals who are not authorized to use or access such information. While the protection it provides is more focused, trade secret protection is relatively inexpensive compared to patent protection. So, what is the right balance of rights for your chemical company? If value is defined as utility relative to acquisition costs, when is the utility of a trade secret and the cost of patent protection so high that the better value proposition is the trade secret?
When you started this company, you had a new chemical that did something amazing, and a laboratory scale process for making it (“Old Process”). But you needed capital and resources to grow. And few investors would devote their time and money without any assurance that they would recoup a portion of such investments should your efforts fail. At this stage, you prioritized patents to protect the new chemical and the Old Process, as you should. You could not predict every threat, but you did know that patent infringement is costly for competitors. You secured valid and enforceable composition-of-matter patents as well as process patents for the Old Process based on what you knew then. That was the best tool to mitigate the risk of being overwhelmed by competition after you launched.
But times have changed. You now have strong composition-of-matter patents for the new chemical itself and process patents for the Old Process, investors on board, and a capable and agile team of scientists and engineers. What you need now is a partner-manufacturer (“Partner”) who can get you over the finish line and distribute bulk quantities of your patented chemical products to consumers. The New Process is so inexpensive, no other chemical supplier could compete with you at cost unless they knew your trade secret; all publicly known synthetic methods are far too expensive to be cost-competitive.
Trade secrets do not prevent others from reverse engineering your secret information. Nor do trade secrets protect you if others independently invent what you did. But what if no one could reverse engineer your New Process simply by purchasing your product? And what if the prospective Partner was the one best positioned to independently invent the New Process or a similar process? In this scenario, is it better to patent your New Process or keep it a trade secret? It may be the latter.
Patent applications are published eighteen months after they are filed, typically well before you have any certainty that your application will be granted as a patent. Will you tip off all manufacturers worldwide to your process when your application is published? Will you need to argue over your original patent filings to get your New Process patented? And even if you get a patent and intend to license it to a partner-manufacturer, will your license be limited by the term of your granted patent? If the answer is yes or even probably, it may be preferable to keep your New Process a trade secret.
If the company most likely to copy your New Process is your prospective Partner, licensing your process to them as a trade secret may be preferable. For one, you can license your New Process confidentially. Less capable chemical manufacturers will not be tipped off to your improvement by a published but not granted patent. All they will have to follow is your patented Old Process that is too expensive for them to compete with you at cost. If you do share your trade secret process with the prospective Partner, and they attempt to steal it anyway, it may be easier to get injunctive relief, at least in the United States, for trade secret misappropriation than for patent infringement. Any royalties you negotiate with the partner-manufacturer won’t be limited by the expiration of a patent term. Trade secrets can have indefinite terms so long as they are kept secret. The recent $222,000,000 judgment against Walmart in Zest Labs Inc. et al v. Wal‐Mart Inc., Case No. 4:18‐cv‐00500 (E.D. Ark.) (discussed in our previous blog here) is a testament to the strength of leveraging trade secrets during licensing negotiations with a much larger partner. When Walmart was found liable for copying source code offered by Zest Labs during unsuccessful licensing negotiations, Walmart found themselves on the wrong side of a sizable damages award.
If you already have strong composition-of-matter patents covering your lead candidate, anyone who makes, uses, sells, offers for sale, or imports your chemical product during the composition-of-matter patent’s term will infringe your patent. This means you will still have overlapping patent protection should a competitor try to make your patented chemical product, either by a more expensive process or by your trade secreted process, should that information somehow get misappropriated. But if the risk of misappropriation by anyone other than your Partner is low, because you have the right security protocols in place, spending the time and money to secure follow on process patents may not be the most strategic decision when what you really need is to have the Partner scale your newly improved, cheaper, process for making your already patented chemical.
Trade secret plaintiffs won 84% of the time in 2024, with top ten judgements ranging from greater than $14,000,000 to $285,000,000, not to mention injunctive relief (Mcelroy, K. and Fisher, L., 2024 Stout Trends in Trade Secret Litigation, Volume 3). While many companies focus singularly on patents when procuring their portfolio, judgements like these serve as reminders that IP portfolio managers who don’t layer trade secret protection on top of patents are doing themselves a disservice. When you need to license an improved process to a partner-manufacturer for an already patented chemical, a trade secret that has no term limit may be the strategic choice over additional patent protection.
