The Significance Of Trade Secrets Over Patents In Formula 1

Introduction

Formula 1 is regarded by many to be the pinnacle of motorsport. Apart from winning the championship itself, the points scored by the teams further translate into monetary awards at the end of the season. It is for this reason that every team incurs expenses in the millions to obtain the best resources possible and gain a competitive advantage over the rest.

As a result, the race engineers involved are required to make continuous technological upgradations and innovations. However, despite Formula 1 being the perfect breeding ground for a constant patent-war between teams, nothing of the kind has been observed, barring a few exceptions. The grant of a patent effectively guarantees a monopoly to the team to utilise the new technology or invention and thereby, gain a significant competitive advantage in the championship. However, this is often not the case.

In the absence of the financial motivator, the only other obvious benefit of patenting to the teams is the competitive advantage that it would secure them over the rest of the grid. However, applying for patent protection is not an advisable route of action for teams. On the other hand, trade secrets are a much more viable option. Protection of intellectual property through trade secrets is free from procedural formalities and offers unlimited protection.

Trade secrets in Formula 1

Trade Secrets are defined by WIPO as “intellectual property (IP) rights on confidential information which may be sold or licensed.”This confidential information must be such information that is not widely known, and such secrecy regarding the information must be maintained by taking necessary steps. The information considered to be a trade secret usually hold commercial value to the holder of such information. For example, Coca-Cola protects the formula for making its signature beverage as a trade secret, while Kentucky Fried Chicken has been able to successfully guard its fried chicken recipe due to the same reason.

In the context of Formula 1, the utilisation of trade secrets is not a recent phenomenon. Features developed as part of Formula 1 cars, such as paddle-shift gearboxes, carbon-fibre components or adaptive suspension were initially protected as trade secrets. However, now they have become parts that are widely seen in automobile manufacturing today. Trade secret protection allows teams to take immediate advantage of technical and technological innovations without having to disclose any information to the public or, more importantly, its competitors.

There are 4 main reasons for the significance of trade secrets over patents in the industry.

• Unlimited Protection Period – Patenting offers protection from infringement for a fixed period of 20 years. On the other hand, trade secrets can be protected indefinitely or until the team decides to make public disclosure. This becomes a significant advantage to F1 teams who are also commercial car manufacturers like Mercedes and McLaren, as they would be able to monetize their invention even in the development of their road cars. This would enable them to gain an advantage over their competitors in the global automobile market as well.
• Absence of Public Disclosure Requirements – Trade secrets do not even require public disclosure of the information as in the case of patents. Patent disclosures could potentially benefit competitors as they would gain insight into the patented technology. On the other hand, trade secrets ensures the maintenance of secrecy over their innovation and thereby, preserve their competitive edge.
• Development Model of the Industry – Formula 1 is an extremely fast-paced industry that follows a model of rolling upgradation or rolling development. An average season stretches on for a period of about eight to nine months and teams make upgrades to their cars after almost every race. As such, the slow process of patenting involving public disclosure and detailed documentation is not suited to this industry. Trade secrets, on the other hand, provide immediate and flexible protection.
• Implementation of FIA Regulations – The governing body of Formula 1, the Fédération Internationale de l’Automobile (FIA), itself has prohibited the use of patented technology in the sport. Additionally, the FIA Technical Working Group regulations provide teams with voting mechanism, allowing them to restrict the usage of any patented technology by a team during the season. The main argument by the FIA in this regard is that if a team secures a particular advantage a patent would restrict other teams from also making use of that technology, thereby, leading to stagnation. Hence, in its endeavour to ensure a level playing field, the FIA has actually created the perfect environment that encourages and enhances competitiveness in innovation.

Legal Mechanisms Protecting Trade Secrets in Formula 1

Unlike in the case of patents, there is no regulatory mechanism which protects innovations secured as trade secrets. Trade secrets are essentially confidential information which are privy only to the engineers and mechanics of the team. Therefore, in order to maintain secrecy, restrict the communication of this knowledge and maintain confidentiality, Formula 1 teams employ robust legal frameworks in the form of Non-Disclosure Agreements and Confidentiality clauses.

• Confidentiality Clauses – Similar to an NDA, confidentiality clauses are standard practice among Formula 1 teams in all their contracts, internal or external. Engineers, mechanics and designers within the team are bound by confidentiality clauses in their employment contract itself. Hence, they would be prevented from sharing the trade secret information even if they move to a different team. Similarly, external vendors including suppliers and testing centres, are restricted from revealing the work they do for one team to another.
• Non-Disclosure Agreements – NDAs are legally binding contracts that would prohibit any individual privy to trade secret knowledge from disclosing this proprietary information. Typically, an NDA in the sport would encompass information relating to technical designs, race strategies, development processes, and software. The confidentiality obligations obviously extend throughout the employment period but in the case of high-level engineers, it may even extend beyond their tenure with the team.

However, there is one main drawback that arises in the case of trade secrets – the human element. Confidentiality of information may get compromised when team personnel or engineers involved in research and development activities move from one team/organisation to another. Despite the mandatory non-disclosure and non-compete agreements the racing knowledge and philosophies known to these employees cannot be deleted from their minds. It has also been observed that teams are eager to poach engineers and technicians from rival teams in order to take advantage of the skills and knowledge possessed by them.

Conclusion

Formula 1 is able to strike a balance between ensuring a competitiveness in the championship while still promoting innovation. Though patents do not provide long-term protection, the existence of trade secrets is sufficient incentive for Formula 1 teams to innovate and maintain even a short-term competitive advantage. Hence, the lack of patent protection does not seem to stifle creativity and innovation.

Hence, it is worth considering whether a similar patent-free model can be adopted in other industries of vital importance to humans, such as pharmaceuticals. For instance, it can be argued that one of the reasons for the slow development of life-saving drugs and treatments for diseases like cancer, is due to the culture of competitive patent-filing by pharma companies motivated by profits only. Companies like Apple have been known to file pre-emptive patents for technologies that have not yet been fully developed. Such activities deter innovation by others who may even possess better resources for their research and development. Predatory patent-filing kills competition and retards the rate of progress and development in any industry.

Formula 1 provides an interesting case study into how a patent-free environment can actually boost innovation rather than discourage it. An analysis of the IP-regime in the Formula 1 industry is crucial in the debate to overhaul and adopt a system that is better-suited to the challenges of the modern world.

Written by Varshika, Legal Intern at Intepat IP