A few weeks ago, Taiwan’s second largest LCD panel-maker, AU Optronics (AUO), accused two of its former executives of selling AUO’s valuable manufacturing secrets to China’s second largest panel-maker, China Star Optoelectronics. AUO sued and Taiwan’s authorities launched a criminal investigation, but the former workers have both accepted employment with China Star and now AUO will presumably face a tough battle to prevent its competitor from using its secrets.

Some may wonder, if the secrets were so valuable why didn’t AUO patent them? After all, patents – not trade secrets – seem to make all the big headlines and manufacturing processes are patentable in most countries, provided they meet the basic requirements for patentability.

The answer is that patents tend to capture more glory than trade secrets, but each method of protection has distinct advantages and disadvantages. Neither is superior in all cases. A prudent company will choose one method or the other, in each particular case, based on a careful analysis of various factors.

To start with, the two methods are fundamentally different.

A patent is a limited monopoly granted by the government, which excludes others from manufacturing, using, or selling an invention for a certain period, in exchange for public disclosure of the invention. A trade secret, on the other hand, does not require any application process or public disclosure, but nor does it provide a monopoly. Instead, so long as the owner of a trade secret takes reasonable measures to keep the information secret, third parties are prohibited from unauthorized use or misappropriation of the secret. In most cases, that means one can’t disclose the information in violation of a confidentiality agreement or acquire it from one who did.

In fact, most patents start out as trade secrets. Prior to issuance of the patent, the invention has economic value that derives from being not publicly known and efforts are made to maintain its secrecy. But sometimes a decision is made to patent the trade secret . . . and sometimes that decision is not made. Below are some factors that may influence that decision.

Factors favoring Patents:

• Easy to develop independently or through reverse engineering. Unlike a patent, trade secret law does not prohibit third parties from developing secret information independently or learning it through reverse engineering. Thus, Coca Cola, KFC and WD-40 all protect their formulas as trade secrets, but patent protection may be preferable for mechanical or electronic products that can be more easily taken apart and figured out. Moreover, with trade secrets a competitor who develops the same information independently or through reverse engineering may then patent it and require you to license your own invention – another point in favor of patents.

• Hard to protect. If disclosure of the information may be restricted to just a few people, who will first sign confidentiality agreements, and otherwise it will be protected by strict security measures, trade secret protection may work. But if it will be necessary to share the secret with many potential customers, suppliers, employees or others, on a regular basis, so risk of unauthorized disclosure is great, patent protection may be more appropriate (provided the information is patentable).

• Disclosure during enforcement actions. Ironically, when litigating over misappropriation of trade secrets, one may be required to publicly disclose the secrets in the lawsuit, ensuring that the information will no longer be secret and will lose its protected status (as Apple discovered in its battles with Samsung). That’s not an issue with patents.

Factors favoring Trade Secrets:

• Not patentable. If the secret can’t satisfy the basic criteria required to obtain a patent (eg., new, useful and non-obvious), then a patent won’t be granted, so the information will have to be protected as a trade secret.

• Short life-span. If the information is likely to have significant value for only a year or two, by the time a patent issues it will have already lost its value, so protecting it as a trade secret may make more sense.

• Very long life-span. Patent protection lasts 20 years. After that, anyone is free to use the invention. On the other hand, Coca Cola’s formula has been protected as a trade secret for 120 years; KFC’s for 80 years. While those cases are extreme, if it is conceivable a particular secret may require more than 20 years of protection, that’s something to consider.

• Not worth the cost of a patent. Obtaining a US patent may cost $10,000 – $20,000. Patenting the invention world-wide will cost significantly more. Then there are maintenance costs, which can quickly add up. While protecting information as a trade secret may involve its own costs (e.g., for security measures and costs of confidentiality agreements), trade secret protection is usually cheaper.

• Hard to detect unauthorized use. If it will likely be difficult detecting unauthorized use of the information (e.g., it relates to internal business methods as opposed to finished goods) it may be less prudent to publicly disclose the invention in a patent application than to protect it as a trade secret.

So, which is better? It depends on the circumstances.

A company should perform IP audits from time to time, interviewing key personnel from various functions, such as R&D, marketing, sales, legal and financial, in order to compile a list of the company’s sensitive information. That list should describe the types of information, means of protection, persons with access, approximate value of the information, cost to develop the information, ease of duplicating the information without authorization and the like.

After performing the IP audit, one can then develop a rational plan of protection, deciding to patent certain ideas and protect others as trade secrets, depending upon the types of factors described above. Of course, those factors are not exhaustive. For example, one may wish to also examine the laws in various jurisdictions to learn the precise availability and requirements of trade secrets, non-competition agreements, injunctive relief, and the like, to ensure that legal protection will be adequate. By acting in such a manner, one can ensure that a company’s secrets will receive the most appropriate means of protection.

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For assistance with trade secrets, please contact a Taiwan business lawyer.