Companies Prefer Trade Secrets To Patents To Protect Innovation, EUIPO Finds

“Despite their economic importance, and in particular their role in protecting returns from innovation, trade secrets are poorly studied and their relationship with patents is often misinterpreted,” the EU Intellectual Property Office (EUIPO) said in a study published this month. It used a survey of around 200,000 companies in Europe’s manufacturing and service industries to determine what factors influenced their choice between patents and trade secrets, as well as their overall use of both mechanisms. The results could help policy-makers, the Office said. It also holds out opportunities for innovative lawyers and intellectual property firms, said one IP management consultant.

The study, “Protecting Innovation Through Trade Secrets and Patents: Determinants for European Union Firms,” is available here.

The report builds on a 2016 EUIPO study with the Centre for European Economic Research on why German companies choose trade secrets or patents. The earlier work focused on the interaction of patenting and secrecy and how well the chosen strategy worked. The 2017 study, by contrast, was based on data from 24 EU member states, the Office said; The Czech Republic, Denmark, France and Spain did not include the questions about trade secret use in their versions of the Community Innovation Survey (CIS) on which the report is based.

While previous analyses have often treated patents and trade secrets as substitutes, the new study shows they are actually complementary, the EUIPO said. Innovating firms often use both to protect their innovations, it said. Trade secrets are used more often to safeguard innovation than patents by most types of businesses in most economic sectors and in all EU member states. Both mechanisms are likely to be used by companies with internal R&D, high innovation spending and innovations that are new to the market, it said; by contrast, where innovations are new only to the firm, trade secrets are preferred.

The survey also found that patents are more likely to be used, alone or with secrecy, when an innovative product is a physical good rather than a service, while trade secrets, often without patents, are more common for process and services innovations. Trade secrets, either alone or with patents, are likely to be used to maintain or boost competitiveness of innovations from companies involved in open innovation practices such as research cooperation, the Office said.

There is “a propensity to favour trade secrets over patents in markets with strong price competition,” but to use both protection mechanisms where there is strong quality competition, it said. Financial constraints didn’t appear to affect the choice, it added.

The EUIPO stressed that although the survey showed relationships between certain characteristics of the companies and the markets in which they operate and their choice of protection strategy, more in-depth research and better data to clearly identify the causal factors.

The Office recommended continuing CIS studies on which IP protection strategies companies use, as well as the use of panel data and information on innovation-specific strategies of multiple innovators. The CIS would be even more useful as evidence on which to base policy if it included a question on the number of innovations begun in a particular period, it said. Reliable indices of trade secrets and patent strength regimes could help to further understand the different preferences among innovators in the EU and show how different legal frameworks could influence observed differences in the use of trade secrets, it said.

“Clear Opportunity” for Creative IP Lawyers

“The findings should not be a surprise as other recent reports and studies have shown that trade secrets are of growing importance to creative and innovative companies,” said Chawton Innovation Services Limited Managing Director Donal O’Connell. Trade secrets are likely to become more important thanks to the enactment of the Defend Trade Secrets Act last year in the US and the EU Directive on Trade Secrets, which will enter into force on 9 June 2018, he told Intellectual Property Watch.

And it’s “not just the legal folks starting to pay attention to trade secrets,” O’Connell said. Tax authorities are also interested, with the Organisation for Economic Co-operation and Development base erosion and profit shifting guidelines listing trade secrets as a form of intangible asset that must be properly and professionally managed. The OECD defines base erosion and profit shifting as tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Moreover, some patent box tax regimes (special tax systems for IP revenues) have expanded to allow trade secrets as qualifying IP, said O’Connell.

The question now is how legal and IP firms, many of which don’t offer any trade secret services to their clients, will react, O’Connell said. “This clearly is an opportunity” for creative and innovative advisers, he added.

 

Image Credits: EUIPO