Sometimes, a trade secret is the only way to go. It’s understandable that companies like Kentucky Fried Chicken, Coca-Cola, and Bush’s Baked Beans want to keep their recipes secret without filing a patent, which would mean their recipes eventually become publicly available. But in many other cases, the choice between filing a patent or just keeping an innovation secret is more complicated.
However, because of legislation that has contributed to the erosion of the patent system, more and more companies are turning to trade secrets instead of formal patents. This is hurting businesses now — and will hurt the whole economy in the future.
The problem with relying on trade secrets instead of patents is that a trade secret can be hard to define, hard to prove, doesn’t benefit society as a whole, and, as exhibited in at least one recent case, can be easy to fake.
In March 2018, a San Antonio jury reached a $706 million verdict against title insurer and property evaluator Amrock. Amrock was found responsible for allegedly infringing on trade secrets from HouseCanary, a real estate technology company. The problem?
It wasn’t ever really clear if any trade secrets had been stolen or if they even existed at all.
Unlike a patent, where the inventor files paperwork explaining their idea, a trade secret is much more nebulous. Naturally, this can lead to legal trouble. Trade secrets are so ripe for abuse that it only makes sense for government policies to favor patents.
To make matters worse, because of the large verdict in the Amrock case, there is likely to be more cases like this in the near future. And, because of legislative changes to the patent system, trade secret usage is rising.
As trade secret usage increases, trade secret litigation will continue to rise. And the potential for abuse will increase dramatically if further precedent such as the dubious $706 million Amrock verdict are established, promising massive paydays for suspect trade secret claims.
What we really need is to fix how the patent system handles software patents.
A fixed patent system would provide companies with proper incentives to protect their innovations with patents while at the same time letting the world benefit from their invention when the patent expires. A patent is real intellectual property and much easier to defend than a shady trade secret.
Fortunately, there is a lot of good work going on in the U.S. Patent and Trademark Office to fix what has been broken, and there is also promising work happening in the Senate under the leadership of Sen. Thom Tillis, R-N.C., and Sen. Chris Coons, D-Del. In fact, the Senate Judiciary Committee recently held promising hearings on Section 101, which concerns software patents.
If both the USPTO and Congress are successful in restoring strong patent protections to the software industry, the industry could switch back from secrecy to its stated goal of promoting progress.
Cases like Amrock’s might never go away. But if the industry regularly filed patents instead of keeping trade secrets, then fewer of these runaway verdicts would happen.
Hopefully, the Trump administration and Congress will continue working to support innovators and the patent system. Their support will prove key to a brighter future.
Charles Sauer is the president of the Market Institute, an organization that advocates on behalf of business and limited government.
