Trade secrets: a strategic element in the life sciences and biotechnology industries

Viviane Trojan

Kasznar Leonardos, São Paulo

viviane.trojan@kasznarleonardos.com

A secrecy regime might be the most effective strategy for protecting certain technological knowledge when: (1) there are foreseeable challenges during patent prosecution, significantly reducing the likelihood of a patent grant; and (2) enforcement of potential patents is likely to be difficult within a specific jurisdiction.

The most compelling reason to choose secrecy over patent protection is often the desire to conceal knowledge from competitors. This allows the company holding the secret to maintain a competitive advantage, even if it later decides to pursue patent protection.

Trade secrets require a strategic approach. Companies must carefully consider what information can realistically be kept confidential. For instance, in pharmaceuticals, the active ingredient in a drug cannot be a trade secret because it is revealed during the approval process. However, trade secrets can be valuable for protecting testing or production methods. Similarly, biotech companies can leverage trade secrets for valuable improvements that may not qualify for patents.

The life sciences and biotechnology industries face a distinctive challenge: a highly competitive environment with frequent movement of professionals between companies. Implementing adequate measures to maintain secrecy requires addressing this challenge head-on.

Core elements of trade secret protection

Despite variations in terminology (eg, trade secrets, know-how, undisclosed information), and the local legislation around the world, the core principles of trade secrets protection remain consistent, as outlined by Merges et al (2018).[1] These are:

• the information must be valuable to be protectable;
• the information must be confidential to be protectable; and
• the taking of information must be improper to be actionable.

The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires member countries of the World Trade Organization (WTO) to protect trade secrets. Article 39.2 of TRIPS defines a trade secret as:

• secret – not generally known or accessible within relevant industry circles;
• commercially valuable – because of its secrecy; and
• subject to reasonable safeguards – the owner has taken steps to keep it confidential.

Countries have some flexibility in how these principles are implemented.

In the United States, for example, the Defend Trade Secrets Act (DTSA) of 2016 defines ‘improper means’ of acquiring a trade secret as including theft, bribery, misrepresentation, breach, or inducement of a breach of a duty to maintain secrecy. Espionage through electronic or other means also falls under this definition. It does not include reverse engineering, independent derivation, or any other lawful means of acquisition.[2] Additionally, the DTSA establishes a federal cause of action for misappropriation of trade secrets, allowing cases to be brought in both federal and state courts. Notably, the majority of US states and territories have enacted their own trade secrets legislation.

In the European Union, the Trade Secrets Directive 2016/943/EU establishes a harmonised set of minimum standards for EU Member States and deals only with civil remedies against unlawful acquisition, use and disclosure of trade secrets.[3] EU Member States also have their own laws and regulations on criminal and civil legislation.

China’s Anti-Unfair Competition Act (AUCL), last updated in 2019,[4] is the main law protecting trade secrets. The AUCL prohibits businesses from stealing trade secrets and applies to individuals and organisations alike. Notably, the law goes beyond the immediate actors and holds third parties liable if they knowingly benefit from a misappropriated trade secret.

Choosing between patents and trade secrets

Companies face a complicated choice between patents or trade secrets when protecting intellectual property (IP). This decision hinges on such factors as business model, target market, the invention’s nature (novelty, complexity), and the competitive landscape.

Trade secrecy becomes especially valuable in biotechnology for inventions which may not qualify for patents, such as test procedures, formulations, or other valuable know-how.

While both patents and trade secrets offer a market advantage by protecting technical knowledge, patents provide a stronger legal shield. Patents grant exclusive rights, preventing others from using the invention even if discovered independently. Trade secrets, however, rely on confidentiality. If a competitor can reverse-engineer the information, they can legally exploit it.[5]

The patent system: balancing disclosure and protection

Disclosure is at the heart of the patent system. By disclosing the invention, the applicant grants others access to the technical solution they seek to protect. This knowledge exchange fuels innovation.

While patents grant exclusive rights for a limited term (typically 20 years), the application details become publicly available after 18 months. This ensures eventual public benefit from the disclosed knowledge after the patent expires.

To qualify for a patent, an invention must be:

• novel – new compared to existing solutions (state of the art);
• non-obvious – not easily foreseeable by someone skilled in the field (PHOSITA); and
• industrially applicable – capable of being produced and used in an industry.

Once granted, a patent gives the holder exclusive rights to exploit the invention for the term. Legal remedies are available to enforce these rights and prevent infringement.

Trade secrets

Unlike patents, trade secrets offer protection without public disclosure or expiration deadlines. However, this secrecy comes with a caveat: there’s no legal barrier preventing others from using the secret knowledge if they acquire it legitimately.

As Fekete outlines,[6] for information to qualify as a trade secret, it must meet the following criteria:

• secrecy – while not completely inaccessible, the information should be kept confidential, sharing it with employees or suppliers bound by confidentiality agreements is permissible;
• non-obvious – the information should not be readily apparent to someone skilled in the relevant field;
• business applicability – it must be relevant to a commercial activity;
• economic value – it must offer a competitive advantage;
• legality – it cannot be illegal;
• non-patent protection – it should not be publicly disclosed through a patent filing; and
• transmissibility – it must be transferable to others within the business.

In addition, the owner of the secret must take reasonable measures that manifestly demonstrate the intent to keep the information secret.

Similar to patents, trade secrets can be valuable assets. They can be licensed or sold, and their worth is factored into intellectual property portfolio valuations.

There are legal remedies for breaches of confidentiality or unauthorised use of trade secrets. However, disclosure of the confidential information destroys its secret nature and renders it public domain. While significant damage awards are possible in some jurisdictions such as the US, proactive measures are far more effective in safeguarding proprietary knowledge.

Combining patents and trade secrets for comprehensive protection

An important aspect of IP strategy is understanding that patents and trade secrets can be complementary, not mutually exclusive. This layered approach offers a more robust defence for valuable innovations. Companies in highly dynamic fields such as life sciences and biotechnology often leverage this strategy due to the inherent technological uncertainty.

This combined approach starts with initial secrecy followed by strategic patenting.

Initially, most inventions begin as trade secrets. This allows for early exploration and development without tipping off competitors. For example, keeping potential drug targets confidential allows scientists to revisit them later for repurposing without alerting rivals. Once core aspects of the invention reach a certain stage, strategic patent protection can be sought for key elements. This provides a strong legal shield while potentially keeping certain details secret (eg, specific formulations or manufacturing processes).

Benefits of combining patents and trade secrets

While the optimal protection strategy remains a subject of debate, research suggests significant benefits to combining patents and trade secrets. A study by Crass et al. (2019) analysed this hybrid approach and effectiveness of patents and trade secrets designed to protect innovation.[7]

It was found that of single innovators that combine both the patent and trade secret strategies, 39 per cent of the group, tend to aim at a higher level of innovation and act in a more uncertain technological environment. Companies combining both protection methods gain significantly higher sales with new-to-market innovations, providing some evidence for a complementarity of the two protection methods.

These findings provide strong evidence that combining patents and trade secrets can be a powerful strategy for protecting valuable inventions.

Under lock and key: protecting your trade secrets

Trade secret theft poses a serious and constant threat to companies of all sizes, from fledgling startups to established giants in the biotech industry. A 2021 report by the Economist Intelligence Unit estimated that trade secret theft costs businesses around the world US$1.7tn annually.[8] In the life sciences sector alone, employee leaks are responsible for a staggering 60 per cent of these incidents.

The key to protecting trade secrets, and avoiding the associated losses seen in theft statistics, lies in implementing robust confidentiality measures both inside and outside the company. The following is a summary of areas where companies need to pay attention.

Internal measures for protecting trade secrets

• Strengthen employee agreements – revise and strengthen confidentiality agreements with employees. These agreements should clearly outline ownership of IP and ongoing confidentiality obligations. Include specific clauses addressing the responsibilities of departing employees.
• Implement access controls – information access controls are crucial. This includes restricting access to physical documents and digital data, as well as limiting the use of personal mobile phones in sensitive areas.
• Address everyday practices – pay attention to basic but often neglected security measures. These include requiring whiteboards in meeting rooms to be wiped clean after use and ensuring that project notes cannot be copied or removed without authorisation.
• Prioritise organisational measures – identify and categorise trade secrets based on their business importance. This allows for the design of a proper system for controlling access to and use of this information.

External measures for protecting trade secrets

• Non-disclosure agreements (NDAs) – secure non-disclosure agreements with business partners, suppliers, and customers who have access to your trade secrets.
• Contractual safeguards – carefully review and revise existing agreements to ensure they include confidentiality clauses that limit the rights granted (eg, licensing rights). Do not rely solely on lawyers for this. Understanding the specifics of your trade secrets and your company’s dynamics is crucial for effective contract drafting or review.

Heightened protection for biotech trade secrets

Maintaining confidentiality is even more critical for certain IP assets in biotechnology, requiring an additional layer of protection. This is particularly true in areas such as genetic improvement.

Developing new plant varieties, for example, involves significant investments in genetic resources, infrastructure, and more. However, unlike some inventions, these new varieties can be quickly and easily reproduced, making trade secret theft potentially undetectable.

Therefore, some companies take additional measures of physical access controls and security measures. Such measures implement strict access controls to the mother plant and closely monitor clone handling. Consider measures such as banning lab coats with pockets to minimise risks. Basic security measures like staff training also plays a vital role.

Tailored trade secret policy

For robust trade secret protection, a well-defined trade secret policy combined with investments in cybersecurity is crucial. This policy should consider modern threats such as the use of artificial intelligence tools, specific apps, and mobile devices.

Conclusion

In the life sciences and biotechnology sectors, trade secrets are a powerful tool. They offer a flexible and cost-effective way to shield valuable know-how, driving innovation and securing a competitive edge. However, successful implementation hinges on two key elements: (1) robust confidentiality measures of implementing strong internal and external safeguards critical to protecting confidential information; and (2) understanding the trade-offs by recognising the limitations of trade secrets compared to patents, allowing companies to make informed decisions about which method best suits their specific needs.

As the life sciences and biotechnology landscape continues to evolve, so too will the strategic use of trade secrets. Companies that effectively leverage this approach can gain a significant edge in the race for innovation.