EU IPO Observatory study finds trade secrets rule the roost over patents in Europe

The AmeriKat after a night awake reading
trade secret studies

Whether it is due to the ever-changing weather or unpredictable days, the AmeriKat has not been sleeping so well recently.  So when she can't sleep she turns to the nearest stack of papers in the hopes that it will lull her to sleep.  This morning's 2:30AM hopeful sandman was the EU IPO Observatory's publication entitled "Protecting innovation through Trade secrets and Patents - Determinants for European Union firms".

The work follows from Mannheim's Centre for European Economic Research (ZEW) research published in 2016 that examined the impacts of German firms protecting innovation via trade secrets and patents.  In this recent report, the Observatory investigated a number of factors that were considered to influence the use and preference of trade secrets and patents.  The study focused on the complementary role of the two methods of protection, finding, unsurprisingly, that they are not substitutes.  The study aims to provide a basis for policy makers to further develop polices in this area following the adoption of the European Trade Secrets Directive in 2016 (see previous reports here).

The Study examined factors relating to performance impacts of protecting innovation through the use of patents and trade secrets in almost 200,000 firms operating across Europe.

The Study found that:

• Innovating firms use both patents and trade secrets.    

• Use of trade secrets is higher than patents in most types of companies in all Member States - the weighted average of 24 Member States had trade secrets preferred at 52.3% to patents' 31.7%.  Larger companies prefer trade secrets 69.1% compared to 52.8% with patents (the figures are 51.2% and 30.4% for SMEs).    

• Italian innovating firms use trade secrets a third more than those in Croatia.  The smallest gap between patents and trade secrets was in Belgium and the UK, with the largest differences in Finland, Hungary, Lithuania and the Netherlands. 

• They are both likely to be used in companies with high R&D spend and when the innovation is art changing. 

• Trade secrets are preferred where the innovation is new to the firm.  

• Trade secrets use is very high in engineering/technical testing and computer programming and related activities sectors, as compared with patents.  

• Patents are more likely used when the product is a good (and subject to reverse engineering), rather than a service. 

• Trade secrets are more likely used to maintain a competitive edge.  

• Trade secrets are preferred in markets with strong price competition (commodity-type markets where differentiation is rare and margins are only enhanced with cost/process innovation).   

• Both are used in markets with strong quality competition.  

The Study recognized that the results uncover relationships, but they are not to be construed as conclusive proof of cause-and-effect relationships.  More in-depth research and better data is required.  Indeed, that is a problem that plagues trade secrets.  Unlike other areas of IP, trade secrets have been neglected in terms of studies and economic impact, in particular with that and patents.

As Member States begin to implement he EU Trade Secrets Directive into national law, the AmeriKat hopes the more studies into the use of trade secrets and patents are conducted in order to assess the economic impact of different modes of protection on the innovation landscape.   Indeed, the Study concluded that:

"Reliable indices of trade secrets and patent strength regimes could help to further understand the different preferences for appropriability mechanisms among innovating firms in the EU Member States and help illuminate how differences in legal frameworks could influence observed differences in the use of trade secrets."

With the introduction the EU Trade Secrets Directive it will be interesting to see if the preference for trade secrets over patents alters in the coming years as, hopefully, the approach and treatment of trade secrets becomes more harmonized.