Do Tuan Anh and Nguyen Minh Chinh[1]
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| Products of Simexco DakLak, a specialty coffee brand, are displayed at the Vietnam Amazing Roast Master 2023 Contest in Dak Lak province__Photo: Hoai Thu/VNA |
In the context of businesses racing in research and development activities, the requirement for intellectual property (IP) protection is more important than ever. When a company has a new invention, the owner can choose either of the ways to protect IP ownership: applying for patent protection or protecting it as a trade secret. From a perspective of Vietnam’s law, both these are subject matters of industrial property rights. However, while patent application has been widely applied, it seems that many companies in Vietnam remain unclear about trade secrets. This article focuses on analyzing some advantages and drawbacks for companies when choosing to protect an invention as a trade secret.
Trade secrets bring numerous advantages to businesses…
When a company chooses to have its invention protected as a trade secret, the protection of that trade secret is not limited in time because there is no provision limiting the term of protection of trade secrets. Meanwhile, as per Law 50/2005/QH11 on Intellectual Property dated November 29, 2005 (as revised in 2009, 2019 and 2022) (the IP Law), invention patents[2] each has a validity period starting from the grant date and expiring at the end of the period of 20 years after the filing date (Article 93.2). After the expiration of the protection period, the invention will no longer be the exclusive property of the company (it will fall in the public domain) and other organizations can utilize such invention legally. It can be clearly seen that the beneficial side of trade secrets here is that the company can keep and protect its trade secrets indefinitely as long as the protection conditions are satisfied. The conditions for protection are specified in Article 84 of the IP Law, under which a trade secret may be protected if it satisfies the following three conditions:
• Being neither a common knowledge nor easily obtained;
• Being capable, when being used in business activities, of bringing about advantages to its holder over those who do not hold or use it; and,
• Being kept secret by its owner with necessary measures so that it can neither be disclosed nor easily accessible.
It should be noted that the validity period of the ownership of a trade secret arises immediately (automatic protection). Indeed, Article 6.3.c of the IP Law stipulates that ownership rights to trade secrets “may be established on the basis of lawful acquirement and confidentiality thereof”. Compared to the patent application process, which is considered to be complicated, time-consuming and costly, protecting IP as a trade secret will theoretically help the company save its resources even though the actual cost incurred by such protection may far exceed the application cost.
In addition, in the process of protecting trade secrets, the company will not have to carry out any procedures that may lead to the disclosure of information about the subject invention. As for the procedures for application for patent protection, Article 102 of the IP Law sets out the requirement that a patent application must include a description of the invention and an abstract of the invention that mentions principal features of its nature. In particular, Article 102.2 provides for the description of the invention as follows: “Fully and clearly disclosing the nature of the invention [...]”; “briefly explaining the accompanying drawings, if it is required to further clarify the nature of the invention”, and “clarifying the novelty, inventive steps and susceptibility of industrial application of the invention”. Therefore, the company will have to disclose most of the nature of the invention if it wishes to obtain an invention patent.
Meanwhile, Article 110 of the IP Law states that the notice of application is published in the Official Gazette of Industrial Property within 19 months from the filing date or the priority date, as applicable, or at an earlier time as requested by the applicant. As such, information that is likely to affect the company’s competitive advantage will be disclosed to the public and any organization or individual will have access to such information[3]. Obviously, in this case, trade secrets offer an important advantage because when the information or technical details of the invention is/are not disclosed, the company can maintain product differentiation and even monopoly in the market, thereby better protecting its income and brands.
... But there remain some limitations
It is not difficult to point out the benefits of IP protection in the form of trade secrets. However, it is impossible to ignore certain risks for the company when choosing to use this method to protect its inventions. First and foremost, if a company’s invention is created as an innovative product, secrets contained in that product can be discovered through “reverse engineering” and then be used legally. “Reverse engineering” can be understood as the process of analyzing and studying in detail the operation and production techniques of an existing sample product, and thereby using or improving them to form and manufacture new products. With this technique, the company’s competitors will analyze and evaluate limitations that can be learned from the prototype and develop products that are similar but even more advanced. Moreover, competitors can apply for patent protection for those products which directly affect the exploitability and competitive advantages of the company. Worthy of note, Article 125.3.e of the IP Law stipulates that the IP rights holder does not have the right to prohibit other persons from “disclosing or using trade secrets obtained by analyzing or evaluating lawfully distributed products, unless otherwise agreed upon by analyzers or evaluators and owners of such business secrets or sellers of such products”. In other words, the law recognizes the legality of “reverse engineering”.
It is also necessary to clarify that the task of protecting trade secrets will largely depend on owners of those trade secrets. Although patents only have a validity period of 20 years, the IP Law’s provisions on invention protection in the form of patents seem to be stricter and may bring higher (if not absolute) protection efficiency than those on trade secret protection. In this regard, it should be noted that when a dispute arises over a trade secret, the owner is obliged to prove that the trade secret fully satisfies the above conditions, however, this is not easy in practice.
Solutions for companies
To date, the question of whether businesses should choose protection of an invention as a patent or a trade secret seems to have no clear answer. Around the world, billion-dollar enterprises such as Coca-Cola, KFC and Google often choose to protect their inventions in the form of trade secrets. This is understandable as (i) they are multinational corporations, (ii) they have strong financial resources, and (iii) they have effective strategic measures to protect information security. However, reality shows that even very small businesses also have their own trade secrets. Therefore, in order to have an appropriate direction for sustainable development, whether it is a large corporation or a small- or medium-sized enterprise (SME), it is necessary to clearly define essential aspects before choosing the protection of inventions as trade secrets. First and foremost, a business needs to ensure that its inventions meet the law-specified conditions for protection for trade secrets. When satisfying this requirement, the business should determine whether or not its invention is part of its long-term business plan. If it is still useful after the 20-year period, the business should protect that IP subject matter as a trade secret. The second question the business needs to answer is whether competitors have the ability to “reverse-engineer” the “original” and independently create another “copy” that is similar but more advanced than this one. If the answer is “yes”, the business should no longer think about protecting it as a trade secret but needs to find a less risky solution, i.e., applying for patent protection. Finally, it is vital to consider whether the invention is part of an internal manufacturing process. The prime characteristic of the internal process is that the invention is less likely to be reverse-engineered, so it is safer for the business to choose protection of the invention in the form of trade secret.
Businesses also need to accept the fact that their trade secrets can be disclosed despite taking proactive IP protection measures. For that purpose, the preparation of plans and scenarios in advance to deal with possible risks will be a necessary step to minimizing damage to businesses.
How to minimize risks?
Typically, businesses will maintain and endeavor to protect their own trade secrets. One of the most common methods is to store/keep trade secrets in a safe location. These include Coca-Cola, the leading multinational corporation in the beverage industry, and its actions on Coca-Cola beverage recipes, one of the most closely guarded secrets in the business world. After anticipating that the corporation would need to exploit this formula permanently, Coca-Cola chose to treat its formula as a trade secret so that it could fully protect its competitive advantage instead of using patents. They have protected this recipe for more than a century by storing it in a secret safe located underground at the World of Coca-Cola in Atlanta, USA. Only a few CEOs have access to only part of the formula.
A serious problem for businesses defending trade secrets is that their own personnel are the main source of information leakage. To handle this problem, businesses can limit the number of people (executives, employees, workers or other stakeholders) allowed to know or have access to their trade secrets. Moreover, businesses can combine this approach by separating a trade secret into small stages, processes and elements. As a result, each individual can only access and know a very small part of the trade secret.
Furthermore, a rather risky method used by large corporations is that they might not need to protect trade secrets but keep developing those trade secrets’ processes and formulas to make it very hard to duplicate or imitate them by other businesses.
In addition, one of usual procedures businesses can use to protect their trade secrets is to make “non-disclosure agreements” (NDAs) with their employees. They may include such an NDA in employment agreements signed with their employees. Article 21.2 of the 2019 Labor Code states that “When an employee performs a job that is directly related to a trade secret or technological secret as specified by law, the employer has the right to sign a written agreement with the employee on contents and duration of protection of the trade secret or technological secret, including benefits and compensation in case of breach”. Thus, in the event that the two parties have reached an agreement and the business sets terms in the employment agreement, the latter will have the right to enforce the agreement and claim compensation if the employee violates it.
Though the protection of an IP subject matter, i.e., an invention, as a trade secret can bring outstanding benefits compared to patent protection, businesses should weigh and be cautious with possible risks. IP rights holders should also find a right balance between information security and the ability to collaborate and share intelligence to promote development and creativity in the business environment.-
[1] Management of Enterprise and Technology (MET) Program, Hanoi School of Business and Management (HSB), Vietnam National University. The authors would like to thank Dr. Bui Duc Giang, Lecturer in Law, HSB for his pertinent comments on an earlier draft of this article. All errors remain the authors’ own ones.
[2] Inventions can be protected by the mode of grant of invention patents or utility solution patents. The conditions for granting the former are stricter than those for granting the latter. This article focuses on invention patents only.
[3] Technically speaking, the owner may try to limit the scope of such disclosure. However, in principle, the essential information about the invention must be contained in the disclosure documents.
