Start-Up Companies – Never Too Small for Trade Secrets

Secrets — Start-up trade secrets are at least as important as the trade secrets of much larger companies. In contrast to patents, a start-up company likely has trade secrets dating from its formation, and it only gets more of them over time. When start-ups don’t protect their trade secrets, they may find company value just blowing away.

A start-up might not have a patent for well longer than a year after it begins operations, and the start-up might not have enough capital to litigate the patent for a much longer period of time.

Of course, a start-up technology company should probably have some patents, too. The situation is absolutely not an “either or” one.

Trade Secrets Defined

A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers. The scope of trade secrets is virtually unlimited.

A trade secret is therefore defined as any information that is:

• Not generally known to the relevant business circles or to the public. The information should also not be readily accessible.
• Confers some sort of economic benefit on its owner. This benefit must derive specifically from the fact that it is not generally known, and not just from the value of the information itself. It must have commercial value because it is a secret. Commercial value encompasses potential as well as actual value.
• It must have been subject to reasonable steps by the rightful holder of the information to keep it secret. What is reasonable can vary depending on the specific circumstances.

A trade secret continues for as long as the information is maintained as a trade secret. However, information may no longer be considered to be a trade secret once it becomes easily accessible, is no longer properly protected or has no commercial value.

Trade Secrets & Early Stage Companies

The vast majority of start-up companies are pure IP companies, having only intangible assets of real value.

This situation is true regardless of where the start-up resides in the value chain or in which layer of their particular ‘stack’ they reside, whether down in the tools and libraries layer, in the central layer developing the core fundamental technology or up the higher layers working on taking the technology and applying it to specific use cases across various industry sectors.

It is therefore imperative that such companies take intellectual property and IP management most seriously. I would argue that they should pay special attention to one particular form of IP, namely trade secrets.

Patents vs Trade Secrets

Trade secrets involve no registration costs unlike patents, although there may be some costs related to keeping the information confidential. Trade secrets have immediate effect whereas patents have to be first drafted, then filed, and prosecuted, before being granted. Trade secret protection does not require compliance with formalities such as disclosure of the information to a Government authority. The scope of trade secrets is virtually unlimited which is not the case for patents.

Apart from some of the issues associated with patents listed above, the typical early stage companies may also face some additional challenges with the patenting process.

The inventive ideas of many early stage companies are still in their infancy, still being shaped and formed. Patenting the inventive idea too early may result in a granted patent which no longer properly describes the actual inventive step contained within the product or service which the company has brought to market as the nature of the idea changed.

Most early stage companies will reach out to an external Legal/IP Firm to draft, file and prosecute the case with the relevant IP Office. However, it is sometimes the junior attorney who is assigned to this case by the Firm as the early stage company is not a major client of the Firm.

Many early companies are designing and developing products and services which are software in nature. Some care is needed when patenting software-related inventions to ensure that the inventive idea is truly protected now and in the future. I should stress that despite what others may say, it is not impossible to patent all software-related inventive ideas. The patentability potential for any given invention needs to be reviewed by a qualified attorney, of course.

All that said, there are some concrete disadvantages of protecting confidential business information as a trade secret, especially when the information meets the criteria for patentability.

However for many early stage companies, trade secrets are one form of IP which should be given special consideration for the reasons outlined above. Of course smart early stage companies will take a holistic view of IP and utilize patents, trade secrets plus other forms of IP and even publications.

Challenges Maintaining Trade Secrets

Many early stage companies fail miserably when it comes to protecting their trade secrets. Deciding to keep something secret is not the end, but rather the start of an interesting journey.

Here are a few of the areas where the typical start-up company drops the ball in terms of its trade secrets:

• Start-ups are just not good at keeping things secrets and readily divulge all sorts of information to third parties, without first thinking.
• Start-ups often lack an understanding and appreciation of legal agreements, even simple ones like Non-Disclosure Agreements.
• Start-ups often lack any process internally to manage such trade secret assets especially in such areas as access control and protection mechanisms.

Of course, as we have described in many other articles, this situation can be remedied and it can typically be rendered without too much cost in terms of cash and corporate executive time.

Hazel Helps Companies Identify Rank & Protect Their Trade Secrets

The Hazel Trade Secret Asset Management System may help your company manage its trade secrets and trade secret processes. Hazel can keep track of your corporate trade secrets and help you determine an appropriate level of protection for each trade secret recorded. Hazel can record who in your organization is responsible for a given trade secret, who is responsible for protecting the trade secret, and who has access to the trade secret, among other things. Contact the Hazel Team today to learn more.

For Secrets, I’m Donal O’Connell.

Credits:

Blowing away by Public Domain, Link