Factors To Consider In Protecting Software With Trade Secrets

Law360, London (August 17, 2023, 12:12 PM BST) --
Dave Clark
Dave Clark
Each year there are more and more cases involving trade secrets and software.

This growing list of cases not only spells out the increasing role trade secrets are playing in protecting the fundamental elements of various software platforms, but also many competitors' willingness to openly and legally challenge these secrets to bolster their own competitive advantage.

While new cases are being launched on a weekly basis by companies of all sizes, it has been interesting to note the size and profile of the organizations involved.

It is clear that trade secrets are now a mainstay of many multinationals' intellectual property strategies with — among others — Acer America Corp., Motorola Solutions Inc., Ford Motor Co. and Tesla Inc., all very publicly prepared to fight to preserve the trade secrets underpinning their software and, increasingly, artificial intelligence-based inventions.

Launching these actions in court, even if they subsequently settle, along with the magnitude of the awards — millions or even billions of dollars — has understandably attracted interest from mainstream media outlets.

So why are trade secrets playing such an important role in the protection and commercialization of software?

Historically, a patent has been regarded as the gold standard of protection for inventions. However, patents are not always the best option when it comes to software.

First, software patents in some fields are notoriously tricky to obtain, particularly in Europe. One can of course patent software, but to do so, strict criteria must be met.

Moreover, the patenting process requires the disclosure of the details of an invention and that disclosure may not be in the inventor's best commercial interests.

With this in mind, trade secrets often offer software developers a viable alternative to patents.

Trade Secrets a Popular Choice For Software Developers

At the highest level, trade secrets can protect subject matter that would not otherwise be eligible for a patent.

The reason these can be protected by trade secrets is that any piece of know-how — and know-how covers formulae, algorithms, practices and code, all of which are fundamental to software — can be protected as a trade secret as long as it can be shown that the secret in question will retain its commercial value as long as it is kept secret.

Trade secrets also offer additional benefits for software developers.

The first is the disclosure factor. If any aspect of the software could be placed at risk by being made public, then trade secrets will mitigate these risks.

By definition, trade secrets ensure key elements are never made public. Similarly, trade secrets can also prove useful when there is the potential that any infringements of a patent would be so subtle, they could pass undetected.

From a more practical perspective, trade secrets have the potential to last forever, again as long as they are kept secret, while patents have a defined 20-year lifespan.

Another reason trade secrets are so popular with software companies, many of whom will either be just starting out or still operating on a shoestring budget, is they are much more cost-effective than patents.

There are no drafting or filing charges. They are also more time-efficient as they can be put in place almost immediately. This makes trade secrets ideal for fast-moving technological fields like software, particularly as there is a risk that the underlying tech will have moved on by the time that the patent process has concluded.

When it comes to deciding whether the best course of action is to pursue a patent or take advantage of trade secrets, the devil is of course in the detail. Every case is different. It depends on not only the composition and construction of the software in question, but also on the owner or inventor's commercial objectives and business plan.

For many software developers the optimal intellectual property strategy is a combination of patents and trade secrets. The patents will protect the key and most valuable technical innovations and functionality. The trade secrets would protect the more specific — and perhaps unpatentable — aspects.

However, it must be stressed that we are speaking in general terms.

Key Points to Consider

While weighing up the pros and cons of using trade secrets as opposed to patents to protect software, the following points should be considered before making a final decision.

Identifying and Classifying Trade Secrets 

Exactly which aspects of the software are valuable and unique will need to be confirmed. This can include proprietary algorithms, elements of the code, the design of the architecture, or any other specifics that give the software a genuine competitive advantage.

Maintaining Secrecy ​​​​

Trade secrets can only remain secrets if they are kept secret. There must, therefore, be total confidence that the internal controls required to ensure the trade secrets maintain their secrecy can be put in place.

This could involve putting nondisclosure agreements in place with employees, contractors and partners with access to the software. In addition, specific clauses can be added to employment contracts in case people move or even talk too openly to competitors.

Looking longer term, noncompete agreements may also be considered. An employer can ask their employees, contractors and consultants to sign a noncompete agreement to prevent them from using what they know in a competitive context when their employment or service agreement ends.

Labeling Trade Secrets

Trade secrets need to be labeled correctly in order to underline that the information is confidential. This is essential and requires specific wording depending in which legal jurisdiction the secret is being held. Without the required labeling, there is no legal basis for the protection of the secrets.

Covering Trade Secrets

An important part of maintaining trade secrets is educating employees. The existence and importance of trade secrets must be explained. Each employee's responsibilities must be clearly set out to protect them, including any formal internal policies that have been put in place.

Once training has been made available, the company should then make sure their written trade secret policies and procedures are made available to all employees. Provisions should be put in place to ensure employees are reminded of, and updated on, these policies and procedures at regular intervals.

The company should also appoint a trade secrets' officer to oversee the delivery of this training as well as the maintenance, updating and accessibility of the supporting information.

Respecting a Need-to-Know Basis

Limited disclosure is the key to maintaining trade secrets. The number of people who know the secrets must be kept to a minimum and access to the secrets must be restricted from anyone who has not signed the appropriate agreements.

Physical Security

Tangible security measures to protect the trade secrets in software must be implemented. This would include access controls, encryption and firewalls, and any other measure to prevent unauthorized access or theft.

Internal Security Measures

All of a software company's managers and directors must be prepared to put a rigorous internal security framework in place, take responsibility for ensuring it is followed and know what they need to do should any of the protocols be breached.

Again, this will involve correctly labeling each secret and storing it with the sufficient care to maintain its confidentiality. However, there are other measures required to maintain a trade secret's confidentiality. These include, but are not limited to:

  • Documents, physical objects and even undocumented information containing or constituting trade secrets may never be left in plain view or be accessible to anyone without official access.

  • Documents containing trade secrets must be kept secured when they are not in use and also outside regular business hours.

  • Only a finite number of copies of the documents should be produced, and those persons authorized to access them should be required to sign them in and out within a specified period and forbidden to make additional copies.

  • Trade secret information stored in computers or other electronic formats should be encrypted and password-protected, with their transfer strictly prohibited.

  • Employees must be reminded of their confidentiality obligations no less than twice annually.

  • Any electronic or paper documents containing details of trade secrets that are no longer needed should be destroyed immediately.

  • Everyone in the business must know that trade secrets must never be disclosed to anyone who does not have legal obligations to maintain their confidentiality, i.e., via a nondisclosure agreement or a noncompete agreement.

Monitoring and Enforcement of Trade Secrets

For a software expert, putting measures in place to continuously monitor usage and access to software to detect any unauthorized activity should be straightforward. However, if trade secrets have been breached, the owner or inventor will need to take immediate action to legally enforce their rights.

This may look like a long list, particularly as initially trade secrets were presented as a cost-effective and time-efficient alternative to patents. However, it cannot be stressed highly enough that trade secrets can only remain protected as long as they remain secret.

As soon as the information becomes publicly known or is independently developed by others, trade secret protection will no longer apply. This means that for the owner or inventor of the software, all the measures outlined here are absolutely critical to establishing successful trade secret protection for software.

Choosing Between Patents and Trade Secrets

It cannot be emphasized strongly enough how crucial is the decision whether software or trade secrets would be the best way to protect a software-based invention. Protection will not only ensure the invention's future safety, but also the performance and success of the software business behind it.

Making this decision will involve questions such as:

  • How valuable is the invention to the company? 

  • Is it worth the time and expense required to seek patent protection? 

  • Will the final scope of the patent be commercially valuable or restrictive? 

  • How valuable would the invention be if it were to fall into the hands of competitors?

  • Could it realistically be reverse engineered? 

  • How valuable would the invention be to the company's income, i.e., via investment or licensing?
     
  • How easy or practical would it be to spot if or when the patent is infringed? 

  • Is a patent likely to be granted in the most important market territories? 

  • Will the owning company have the internal capacity to implement the required secrecy infrastructure?

These questions will provide a software company with an initial but invaluable steer as to whether patents or trade secrets offer the best way forward. However, in our experience the best solution is almost always a combination of patents and trade secrets, and very possibly other forms of intellectual property.

Conclusion

Generally speaking, the patent or patents would protect the most valuable and most essential technical innovations and functionality, while trade secrets protect the more specific and less patentable elements, e.g., the underlying algorithms.

However, as with all intellectual property, the right solution will be wholly dependent on the exact circumstances surrounding the invention and the way the owner or inventor plans to commercially leverage their invention.



Dave Clark is a patent attorney and partner at Potter Clarkson.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

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