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Manage your Intellectual Property in Mainland China, HongKong, Macao and Taiwan

Choosing Between a Patent or Trade Secret - Part II

Background/Case

A Dutch materials company had developed a new type of coating to bring to the China market from which they were expecting to make significant profit. In determining how best to protect their invention the SME was undecided about whether to patent their invention or to hold it as a trade secret.

The SME conducted an analysis of the coating and determined that its technical solution likely could not be reverse engineered. As a result, given the twenty year time limit on protection terms to patents and the highly innovative nature of the coating they decided to hold the invention as a trade secret. By doing so there would in theory be no time limit on the SMEs monopoly over the invention. In order to achieve this, they devised a comprehensive strategy to protect the information about the coating. The company implemented a strict internal policy with regard to handling of information regarding the formula, holding such information on a separate computer server and restricting access, they further included confidentiality clauses in their employment contracts with staff regarding disclosure of trade secrets, and split the production of the coating between different factories (who all signed NNN[1] agreements preventing disclosure) to prevent any one factory knowing the full manufacturing process.

This strategy was successful for a number of years after the invention came to market; however, in the fourth year of production another company was successful in developing a coating with a similar technical solution to the SME’s invention. The other company applied for a patent for the invention which was granted by the Chinese National Intellectual Property Office and subsequently applied through the PTC route to expand this protection to other markets in Europe and America.

 

Action Taken

The SME conducted an investigation into the background of the company that had applied for a patent for the coating and analysed the patent they had been granted with hopes of bringing a case against the company under the Anti-Unfair Competition Law (AUCL). Although recent amendments to the AUCL have made it significantly easier to bring actions for trade secret misappropriation, unfortunately the SME were unable to find even preliminary evidence that the technology had been misappropriated by the other company. As such they were faced with two choices – to discontinue sale of the coating, or to license the technology from the other company. The SME entered into negotiations regarding the royalties payable for the technology, however after several rounds of negotiations with the other company determined that it would not be economically viable for them to pay the level of patent royalties requested and retain a competitive price point for their product. As such they were forced to discontinue manufacture and sale of the coating.

 

Lessons Learned

  • Protecting important IP as trade secrets requires a thorough strategy to keep the information confidential.
  • Keeping valuable IP as trade secrets can be a cheap and immediate method for protecting IP which does not have a limit on the term of protection. If well-kept, trade secrets are a strong protection against infringement. However, if other companies can independently discover your technology either through reverse engineering your product or through their own research such companies may legally patent the technology preventing you from using it or forcing you to pay royalties.
  • Changes in the law have made it substantially easier to bring action for trade secret misappropriation, as ‘prima facie’ (preliminary) evidence of misappropriation is now enough to shift the burden of proof in the defendant to provide evidence to demonstrate that they independently developed the technology.
  • If you are protecting IP as a trade secret you should sign strong NNN agreements with other companies and factories that you may release such information to. Contractual agreements with your own staff should be similarly watertight with clear provisions on liability for breach of confidentiality.

 

 

Further reading from the World Intellectual Property Organisation on the importance of using trade secrets as a strategy for SMEs:

https://www.wipo.int/wipo_magazine/en/2017/06/article_0006.html

For more information regarding NNNs, please see our guide on contractual arrangements as follows:

https://www.china-iprhelpdesk.eu/sites/all/docs/publications/EN_Guide_to_using_Contracts_to_Protect_You_IPR_in_China_April-2012.pdf

 

[1] An NNN agreement is a non-disclosure/non-use/non-circumvention agreement. It forbids the disclosure of information, stops Chinese partner from producing the products for anyone else than the IP owner as well as forbids the Chinese partner to circumvent IP protection measures.