Law and the boundaries of technology-intensive firms

University of Pennsylvania Law Review

Volumn 157, Issue 6, 2009, Pages 1649-1689

  Bar Gill, Oren ^a   Parchomovsky, Gideon ^b  

^a NEW YORK UNIVERSITY   (United States)

^b UNIVERSITY OF PENNSYLVANIA   (United States)

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[No Author keywords available]

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EID: 69849095476     PISSN: 00419907     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (241)

1. See generally OLIVER HART, FIRMS, CONTRACTS, AND FINANCIAL STRUCTURE (1995);
2. Sanford J. Grossman & Oliver D. Hart, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration, 94 J. POL ECON. 691 (1986);
3. Oliver Hart & John Moore, Property Rights and the Nature of the Firm, 98 J. POL. ECON. 1119 (1990).
4. Philippe Aghion & Jean Tiróle, The Management of Innovation, 109 Q.J. ECON. 1185 (1994).
5. The property rights theory is not the only possible framework for studying the boundaries of technology-intensive firms. Early contributions in the tradition of Transaction Cost Economics (TCE) include OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES 127-28 (1975),
6. which pioneered and developed TCE theory that focuses on the ex post bureaucracy costs of integration; David J. Teece, Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, 15 RES. POL'Y 285, 288-96 (1986)
7. [hereinafter Teece, Profiting from Technological Innovation], who argued that when innovation is easy, a firm's ability to profit from innovation may depend on its ability to control assets complementary to innovations, such as manufacturing or distribution;
8. and David J. Teece, Technological Change and the Nature of the Firm, in TECHNICAL CHANGE AND ECONOMIC THEORY 256, 256-81 (Giovanni Dosi et al. eds., 1988)
9. [hereinafter Teece, Technological Change].
10. The importance of appropriability and its relationship with intellectual property rights was first emphasized in Teece, Profiting from Technological Innovation, supra, at 287. Arora et al. highlight the difficulty in contracting over tacit knowledge and know-how, noting "the role of patents in facilitating transactions in technology."
11. ASHISH ARORA ET AL., MARKETS FOR TECHNOLOGY: THE ECONOMICS OF INNOVATION AND CORPORATE STRATEGY 262 (2001).
12. Scott Masten provides a detailed account of the distinct features of the legal rules governing the employment relationship of firms. See Scott E. Masten, A Legal Basis for the Firm, 4J.L. ECON. Sc ORG. 181, 185-89 (1988) (noting the duties, obligations, sanctions, and procedures under such legal rules).
13. Aighon & Tirole, supra note 2, at 1186.
14. Id. at 1189. 5
15. See infra Part II.
16. While Aghion & Tirole, supra note 2, and the literature that builds on their analysis assume that the innovation is protected by property rights, another strand in the literature adopts the opposite assumption. These audiors and others recognize that property rights in information are often imperfect or even nonexistent, and proceed to study how the innovator can extract value from a downstream customer in the absence of property rights.
17. See James J. Anton & Dennis A. Yao, Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights, 84 AM. ECON. REV. 190, 191-92 (1994)
18. [hereinafter Anton & Yao, Expropriation and Inventions] (arguing that despite the risk of expropriation, a financially weak independent inventor selling an invention for which no property rights exist can nonetheless appropriate a sizable share of the market value of the invention by revealing the invention to an informed buyer);
19. James J. Anton & Dennis A. Yao, Start-Ups, Spin-Offs, and Internal Projects, 11 J.L. ECON. & ORG. 362, 363 (1995)
20. [hereinafter Anton & Yao, Start-Ups] (examining the "incentive conflict" facing an employee who discovers a private innovation for which no property rights exist and must choose between keeping the innovation private or disclosing the innovation to the employer);
21. Joshua S. Gans & Scott Stern, The Product Market and the Market for "Ideas": Commercialization Strategies for Technology Entrepreneurs, 32 RES. POL'Y 333, 348 (2003) (finding that "when weak intellectual property for innovation exists alongside low barriers to entry, competitive commercialization strategies are more likely");
22. Mariagiovanna Baccara & Ronny Razin, Curb Your Innovation: Corporate Conservatism in the Presence of Imperfect Intellectual Property Rights 11-20 (Ctr. for Econ. Policy Research, Discussion Paper No. 4466, 2004), available at http://www.cepr.org/pubs/ dps/DP4466.asp
23. (considering the same spin-off-or-disclose dilemma facing employees creating innovations with imperfect property rights examined in Anton & Yao, StartUps, supra, and examining the effects of various employer attributes on the efficiency of spinning-off or disclosing). These papers, however, do not ask the "boundaries of the firm" question (at least not within the framework of the property rights theory of the firm).
24. But see Raghuram G. Rajan & Luigi Zingales, The Firm as a Dedicated Hierarchy: A Theory of the Origins and Growth of Firms, 116 Q.J. ECON. 805, 841 (2001)
25. [hereinafter Rajan & Zingales, The Firm as a Dedicated Hierarchy] (defining control as "the right to determine current access," as compared to ownership, "which gives the owner the right to determine access now and in the future"). Rajan and Zingales observe that the Grossman-Hart-Moore Property Rights Theory "does not deem current access necessary in any way (ownership is important only in that it helps control future access)." Id. We are not the first to study the role of access in a theory of the firm that is founded on notions of contractual incompleteness and control. Rajan and Zingales emphasize the role of access in organizational design.
26. See id. at 813, 841 (focusing on access as a mechanism for allocating power within a firm);
27. Raghuram G. Rajan & Luigi Zingales, Power in a Theory of the Firm, 113 Q.J. ECON. 387, 388 (1998);
28. see also Krishnamurthy Subramanian, A Theory of Financing of Ideas 3-5 (July 2007) (unpublished manuscript, on file with audiors) (focusing specifically on modeling access to ideas). The notion of access adopted in this paper also relates to the notion of real authority developed by Aghion and Tirole.
29. See Philippe Aghion & Jean Tirole, Formal and Real Authority in Organizations, 105 J. POL. ECON. 1, 2 (1997) (describing real authority as "an effective control over decisions"). Hvide relates organizational structure to the employer's knowledge about "the progress and content of the projects the workers are engaged in," arguing that in smaller firms the employer is better informed; the employer's knowledge depends on access as determined by the organizational structure or firm size.
30. Hans K. Hvide, The Quality of Entrepreneurs, 119 ECON. J. (forthcoming 2009) (manuscript at 3), available at http://ssrn.com/abstract=545144. Gans and Stern refer to secrecy as an informal appropriability mechanism, as compared to formal intellectual property rights.
31. See Gans Sc Stern, supra note 6, at 335.
32. Following Aghion & Tirole, supra note 2, at 1186, we call the upstream creator of the information (or the inventor) the "research unit" and the downstream user of the information (who may proceed to develop it further) the "customer."
33. Kenneth J. Arrow, Economie Welfare and the Allocation of Resources for Invention, in THE RATE AND DIRECTION OF INVENTIVE ACTIVITY 609, 615 (Nat'l Bureau of Econ. Research ed., 1962) ("In the absence of special legal protection, the owner cannot... simply sell information on the open market. Any one purchaser can destroy the monopoly, since he can reproduce the information at little or no cost");
34. see also Anton & Yao, Expropriation and Inventions, supra note 6, at 191 ("[I]f the inventor first reveals information regarding the invention, a lack of property rights makes it possible for the newly informed party to 'steal' or 'expropriate' the invention.").
35. Anton & Yao, Expropriation and Inventions, supra note 6, at 192 (arguing that a contract between RUand C may be negotiated at this point to garner benefits);
36. see also Baccara & Razin, supra note 6, at 1-4 (discussing possible choices and outcomes for RU).
37. See Anton & Yao, Expropriation and Inventions, supra note 6, at 191 (noting that an inventor could negotiate without disclosing the innovation, but buyers are understandably "hesitant to buy... an unknown commodity").
38. See Anton & Yao, Start-Ups, supra note 6, at 363 (noting that an employee who develops a reproducible innovation can leave the firm and start a new company);
39. see also Gans & Stern, supra note 6, at 336 (observing that an innovator's profitability depends, in part, on her ability to establish market presence).
40. See James J. Anton & Dennis A. Yao, The Sale of Ideas: Strategic Disclosure, Property Rights, and Contracting, 69 REV. ECON. STUD. 513, 514-515 (2002) (describing how, in competitive markets, partial disclosure can drive up an innovator's profits).
41. HART, supra note 1, at 57.
42. Id. at 29.
43. Joint ownership is also possible. Joint ownership may seem to allow for a continuous allocation of control, similar to the type that we attributed to CNCs. See infra text accompanying notes 54-56. The ownership shares can be continuous: A can own X% and B can own (100 - X) %. But these continuous-ownership shares do not translate into a continuous allocation of control: either one party has decision rights or each party has veto power.
44. At the other extreme, a very weak noncompete clause brings us back to the outcome described in the case where the innovation is not legally protected. The employee's incentives to invest in this scenario can be very weak (depending on the effect of the employee's threat to leave and go work for a competitor). In particular, while we associate weak noncompete clauses with nonintegration, the incentives that such nonintegration provides for employees can be much weaker than the incentives provided to employees when the innovation is protected by property rights and these rights are allocated to the employee (as in the nonintegration case).
45. Cf. Eric A Posner et al., Investing in Human Capital The Efficiency of Covenants Not to Compete 3 (Univ. of Va. Law Sch., John M. Olin Program in Law and Econ. Working Paper Series, Working Paper No. 11, 2004), available at http://law.bepress.com/ uvalwps/olin/artl 1 (arguing that the scope of the CNC is set to induce privately, but not socially, optimal incentives to invest in human capital).
46. As described infra Part II, successful innovation can occur in the absence of enforceable CNCs. The prime example is the success of Silicon Valley despite the refusal of California law to enforce CNCs. In certain cases (or places) there may be other forces outside of our model that enable efficient innovation absent CNCs. This observation, however, does not undermine our analysis. In many other cases (or places), CNCs are important and the law's restrictions on CNCs affect the organization of innovation.
47. Ashish Arora & Robert P. Merges, Specialized Supply Firms, Property Rights and Firm Boundaries, 13 INDUS. & CORP. CHANGE 451, 451 (2004);
48. see also Ashish Arora & Alfonso Gambardella, The Changing Technology of Technological Change: General and Abstract Knowledge and the Division of Innovative Labour, 23 RES. POLY523, 529 n.13 (1994) (noting that strong intellectual property rights have encouraged specialization in fields such as biotechnology);
49. Robert P. Merges, Intellectual Property Rights, Input Markets, and the Value of Intangible Assets 3-4 (Feb. 9, 1999) (unpublished manuscript), available at http://www.law.berkeley.edu/institutes/bclt/pubs/merges/iprights. pdf (calling IPRs the "crown jewels" of small firms).
50. Arora & Merges, supra note 20, at 456.
51. Also, much of the analysis in Arora Sc Merges, supra note 20, can be interpreted as proposing one way to minimize the costs associated with the disclosure paradox- through intellectual property rights in complementary assets.
52. See also ARORA ET AL., supra note 2, at 116-117 (noting that an innovator can protect herself by withholding the "know-how" of complementary technology). Our focus, on the other hand, is on intellectual property rights in core informational assets.
53. Dan L. Burk & Brett H. McDonnell, The Goldilocks Hypothesis: Balancing Intellectual Property Rights at the Boundary of the Firm, 2007 U. ILL. L. REV. 575.
54. Id. at 577.
55. Id. at 597-600.
56. Aghion Sc Tirole, supra note 2, at 1186-1187 (noting the focus on the legal features of research and development).
57. In some cases assets complementary to the unprotected innovation are legally protected. These assets can be used both conceptually-to define the boundaries of the firm-and substantively as a means for RU to extract surplus from C. See, e.g., Arora & Merges, supra note 20, at 453 (calling complementary assets a "safeguard");
58. Teece, Profiting from Technological Innovation, supra note 2, at 288-91 (describing complementary assets and calling them a "critical" bargaining chip).
59. Following Aghion and Tirole, supra note 2, we focus on cases where there are no significant complementary assets.
60. Aghion & Tirole, supra note 2, at 1186-87. We present a bare-bones version of the Aghion and Tirole model, abstracting from many important features of their model. We generalize the Aghion and Tirole model in one dimension in particular: while Aghion and Tirole assume that the value of the innovation V is exogenous, we allow Vto depend on the parties' investments. This generalization helps demonstrate the effect of organizational structure in the absence of property rights in the innovation.
61. See infra subsection II A.5.
62. That is the only relevant factor in the contract The contract can also specify a sharing rule on the verifiable revenue (license fee) obtained by the research unit, but Aghion and Tirole demonstrate that the sharing rule is irrelevant. See Aghion & Tirole, supra note 2, at 1193;
63. see also HART, supra note 1, at 79 (observing that revenue- or cost-sharing contracts do not force either party to trade under the contract). 30 These are ex post payoffs; to get the ex ante payoffs subtract E for Cand e for RU.
64. Aghion and Tiróle, supra note 2, at 1189.
65. See, e.g., HART, supra note 1, ch. 2 (introducing and explaining the property rights approach to the firm).
66. Cf. id. at 79 (arguing that while "the presence of a third party can help" contractibility problems, "there is a great incentive for" the third party to collude with another party);
67. Aghion & Tirole, supra note 2, at 1193 (making an argument similar to ours about the irrelevance of the initial sharing rule).
68. See HART, supra note 1, at 29-30 (defining residual-control rights as "the right to decide all usages of the asset in any way not inconsistent with a prior contract, custom, or law").
69. A clarification of terminology is in order. Our purpose is to expound the role of law in drawing the boundaries of the firm. We thus distinguish between legally recognized property rights and other sources of control. We recognize, however, that economists may define "property right" more broadly to coincide with "control." But even under this definition it would be interesting to identify and compare different legal and extralegal sources of control.
70. The alternative case, where an employee who made a discovery can try to negotiate a wage increase while keeping the discovery secret, is in fact a nonintegration case under our access-based definition of integration and nonintegration.
71. Alternatively, RU can leave the firm and use the innovation herself or start working for one of Cs competitors. See infra subsection I.D.2.
72. See Anton & Yao, Expropriation and Inventions, supra note 6, at 192-195
73. Models applying the property rights theory, such as the A-T model, generally focus on ex ante efficiency and thus assume frictionless ex post bargaining under conthtions of symmetric information. See HART, supra note 1, at 34, 38. The secrecy forced by the absence of property rights renders this assumption inapplicable. Bargaining under asymmetric information suffers from well-known inefficiencies. At the extreme, the market can completely unravel. Anton and Yao formally show how adverse selection leads to a "vanishingly small" payoff to the inventor when the inventor's wealth is limited.
74. See Anton & Yao, Expropriation and Inventions, supra note 6, at 203.
75. (We follow Aghion and Tirole, supra note 2, at 1188, in assuming that RU has no initial cash endowment) But even if the extreme no-trade-and even no-negotiations- outcome can be avoided, the parties will still expect a reduced ex post surplus and will accordingly be more reluctant to invest ex ante.
76. See Anton & Yao, Expropriation and Inventions, supra note 6, at 195 (noting that "an inventor who has made a difficult but valuable discovery can expect a significant payoff... by freely revealing the invention").
77. Id. at 195-196
78. RU's threat to disclose in the integration case is identical to RU"s threat to disclose in the nonintegration case. The resulting ex post wage adjustment affects the expected payoffs and investment incentives in the same way. See generally Anton & Yao, Start-Ups, supra note 6 (examining the incentives faced by an employer and an employee after the employee privately discovers a significant innovation).
79. Other ways in which RU may be able to extract some value from C., even absent property rights in the innovation, have been discussed in the literature but are not discussed in this paper. See ARORA ETAL., supra note 2, at 116 ("[E]fficient contracts ... can be written by exploiting the complementarity between know-how and any other technology input that the licensor can use as a 'hostage.'");
80. Teece, Profiting from Technological Innovation, supra note 2, at 304 (discussing the importance of owning complementary assets for extracting value from the innovation);
81. Lynne G. Zucker et al., Commercializing Knowledge: University Science, Knowledge Capture, and Firm Performance in Biotechnology, in SCIENCE AND CENTS: EXPLORING THE ECONOMICS OF BIOTECHNOLOGY 149, 151 (John V. Duca & Mine K. Yücel eds., 2002), available at http://www.dallasfed.org/research/pubs/ science/darby-zucker.pdf (detailing "the strong effects of academic science [in the form of academic-to-industry technology transfers] on the success of firms");
82. Bruno Biais & Enrico Perotti, Entrepreneurs and New Ideas 5 (Jan. 2006) (unpublished manuscript), available at http://ssm.com/abstract=424601 (discussing how an "entrepreneur can take advantage of the complementarity between the different dimensions of her innovative idea, to mitigate the risk of idea stealing").
83. Also, in certain contexts innovators are driven by nonpecuniary motives and are thus more willing to share ideas across firm boundaries. See LAWRENCE LESSIG, THE FUTURE OF IDEAS 14 (2001) (arguing for the essential importance of free resources) ;
84. Yochai Benkler, Coase's Penguin, or, Linux and The Nature of the Firm, 112 YALE L.J. 369, 374 (2002) (suggesting "characteristics that make large-scale collaborations ... sustainable and productive in the digitally networked environment without reliance either on markets or managerial hierarchy"). Finally, and perhaps most importantly, reputation-either of the research unit or of the customer-can overcome the disclosure paradox.
85. See Anton & Yao, Expropriation and Inventions, supra note 6, at 191 (arguing that an inventor is willing to negotiate when she has "large financial resources").
86. See Anton Sc Yao, Start-Ups, supra note 6, at 362 (discussing an employee's option, upon making a discovery, to leave his firm and form a start-up);
87. Gans Sc Stern, supra note 6, at 336 (discussing how "a start-up innovator... launch [es] its product independendy").
88. Gans and Stern refer to this option as "[profiting from innovation through the market for ideas" and discuss "negotiations... in the shadow of potential product market competition."
89. Gans Sc Stern, supra note 6, at 336-337 Seventy-one percent of the firms included in the Inc. 500 (a list of young, fast-growing firms) were founded by people who "replicated or modified an idea encountered through [their] previous employment"
90. AMAR V. BHIDÉ, THE ORIGIN AND EVOLUTION OF NEW BUSINESSES 54 (2000).
91. See Anton & Yao, supra note 13, at 514 (discussing the phenomenon of partial disclosure).
92. A legally enforceable NDA can be viewed as a substitute for property right protection-i.e., as an alternative mode of legal protection afforded to the innovation. See infra subsection I.D.2. In essence, the viability of an NDA implies that the innovation is contractible. Achieving contractibility is costly, perhaps prohibitively so. RU would have to invest in detailed documentation of the innovation and C would have to invest in detailed documentation of its stock of knowledge in a way that would enable the execution of a nondisclosure agreement.
93. Alternatively, if we allow for stochastic property rights, as does, for example, HART, supra note 1, at 86, then property rights again can only increase efficiency. But stochastic property rights may also be legally unenforceable.
94. Id. at 57. Aghion and Tiróle discuss trailer clauses, which are closely related to CNCs, yet they retain the assumption that property rights in the innovation are legally recognized.
95. Aghion & Tirole, supra note 2, at 1199-1200.
96. HART, supra note 1, at 29.
97. Cf. Sudipto Bhattacharya & Sergei Guriev, Knowledge Disclosure, Patents, and Optimal Organization of Research and Development 4 (London Sch. of Econ., Sun tory & Toyota Int'l Ctrs. for Econ. & Related Disciplines, Research Paper No. TE/2004/478, 2004), available at http://sticerd.lse.ac.uk/ dps/te/te478.pdf (describing a situation in which a developing unit's control over a research unit derives from an ex ante contract providing the developing unit with a right to veto the research unit's outside financing choices).
98. A CNC is not a property right according to Hart's basic definition. He defines property rights as residual-control rights-"the right to decide all usages of the asset." HART, supra note 1, at 30. Hart correcdy notes that this definition is "consistent with the standard view of ownership [and property rights] adopted by lawyers." Id. at 30 n.4. Nevertheless, Hart notes that a CNC may be the defining asset of R&D firms.
99. Imperfect enforcement transforms the allocation of property rights from a discrete to a continuous decision. See, e.g., Arora Sc Merges, supra note 20, at 452-53 (discussing the effects of information spillovers on firms based on different levels of rights protection);
100. Rajan & Zingales, The Firm as a Dedicated Hierarchy, supra note 7, at 826-828 (discussing the effects of better or worse enforcement on the nature of a firm). But unlike with CNCs, the continuous variable is not in the parties' control (at least not entirely; the parties can affect the probability of enforcement to some degree).
101. See, e.g., HART, supra note 1, ch. 2 (presenting the property rights model and discussing how the theory influences organizational arrangements).
102. Imperfect enforcement of property rights can similarly transform a discrete allocation of property rights into a continuous allocation.
103. The parties cannot improve the outcome obtained under property-based organization by adding CNCs. CNCs are meaningless when the innovation is protected by property rights. First consider the integration case, where the property right is allocated to C CNCs are meaningless in this case, since the allocation of property rights already provides C with maximal control. Next, consider the nonintegration case, where the property right is allocated to the employee. Without a CNC, C's expected payoff is 1/2 x V(e, E)-E and the employee's expected payoff is 1/2 x V(e, E) - e. The same payoffs are obtained with a CNC. When C makes the take-it-or-leave-it offer, the CNC is irrelevant And when the employee makes the take-it-or-leave-it offer she will wield the superior power of the property right, again rendering the CNC meaningless.
104. Alternatively, if we allow for stochastic property rights, then property rights again can only increase efficiency; stochastic property rights, however, may also be legally unenforceable. See supra note 49.
105. 35 U.S.C. §154(a)(2) (2006).
106. See Arthur R. Miller, Common Law Protection for Products of the Mind: An "Idea" Whose Time Has Come, 119 HARV. L. REV. 705, 716-717 (2006) (describing how ideas cannot per se receive protection since "[p]atents protect inventions, and inventions are a discrete subset of ideas that have satisfied direshold ... requirements").
107. See generally 35 U.S.C. §§ 101-376.
108. See id. §§ 101-103 (setting forth these general requirements).
109. See, e.g. Funk Bros. Seed Co. v. Kalo Inoculant Co., 333 U.S. 127, 132 (1948) (holding that the patent sought was for a natural phenomenon and thus that the invention was not patentable);
110. see also Michael Meehan, The Handiwork of Nature: Patentable Subject Matter and Laboratory Corporation v. Metabolite Labs, 16 ALB. L.J. SCI. & TECH. 311, 312 (2006) ("Aldiough the wording of the statute is broad, it is nonetheless well established that mathematical algoridims, laws of nature, natural phenomena, and abstract ideas cannot be patented.").
111. See, e.g., Roberto Mazzoleni & Richard R. Nelson, The Benefits and Costs of Strong Patent Protection: A Contribution to the Current Debate, 27 RES. POL'Y 273, 281 (1998) (arguing that stronger patent protection may hinder rather than stimulate technological and economic process). Mazzoleni and Nelson also provide additional references supporting this academic trend opposing the expansion of patent protection.
112. See id. at 282-284
113. See, e.g., State St Bank & Trust v. Signature Fin. Group, Inc., 149 F.3d 1368, 1372 (Fed. Cir. 1998) (emphasizing the broad statutory language of 35 U.S.C. § 101 to find a business method patentable), abrogated on other grounds by In re Bilski, 545 F.3d 943 (Fed. Qr. 2000).
114. See Mark A Lemley, Are Universities Patent Trolls?, 18 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 611, 614-615 (2008) (noting and discussing the rise of university patenting).
115. This tendency is mainly due to the establishment of the United States Court of Appeals for the Federal Circuit in 1982. See Mazzoleni & Nelson, supra note 64, at 274 ("From 1982 through 1987, 89% of the district court decisions of patent validity have been upheld by the [Federal Circuit], up from 30% prior to [its] creation-").
116. See John F. Duffy, Rethinking the Prospect Theory of Patents, 71 U. CHI. L. REV. 439, 445 (2004) ("Policies that permit patenting of embryonic research results-that is, that allow patenting prior to the bulk of the investment needed to bring the innovation to market-increase the efficiency of the competition ....").
117. 668 F.2d 1229, 1232 (CCPA. 1982) ("We recognize that working examples are desirable in complex technologies ... [but] examples are not required....").
118. See Robert P. Merges, A Transactional View of Property Rights 20 BERKELEY TECH. L.J. 1477, 1511-1513 (2005) (comparing the potential remedies available under patent law with those available under contract law).
119. 127 S. Ct 764, 777 (2007).
120. See Gen-Probe Inc. v. Vysis, Inc., 359 F.3d 1376, 1382 (Fed. Cir. 2004).
121. MedImmune, 127 S. Ct at 774 n.11 ("The [Federal Circuit's] reasonableapprehension-of-suit test... conflicts with our decisions ....").
122. See 127 S. Ct. 1727, 1739 (2007) (finding the Federal Circuit's test too narrow and inconsistent with precedent).
123. Id.
124. 500 F.3d 1346, 1357 (Fed. Cir. 2007), cert, denied, 172 L. Ed. 2d 1 (2008).
125. 545 F.3d 943, 954 (Fed. Cir. 2008), cert, granted sub nom. Bilski v. Doll, No.08-0964, 2009 WL 221232 (June 1, 2009).
126. 558 F.3d 1359 (Fed. Cir. 2009).
127. Id. at 1363
128. (quoting In re Bilski, 545 F.3d 943, 954 (Fed. Cir. 2008) (en banc)).
129. Id.
130. See Dan L. Burk, Intellectual Property and the Firm, 71 U. CHI. L. REV. 3, 9 (2004) (describing the "complex pedigree" of trade secrecy).
131. Compare E.I. DuPont de Nemours Powder Co. v. Masland, 244 U.S. 100, 102 (1917) ("[T]he starting point for the present matter is not property... [but the defendant's] confidential relations with the plaintiffs"),
132. and RESTATEMENT OF TORTS § 757 cmt a (1939) ("[T] he protection is afforded only by a general duty of good faith"),
133. with Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1002 (1984) ("Trade secrets have many of the characteristics of more tangible forms of property."),
134. and Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 481-85 (1974) ("[T]he encouragement of invention [is] the broadly stated polic[y] behind trade secret law.").
135. See ROBERT P. MERGES ET AL., INTELLECTUAL PROPERTY IN THE NEW TECHNOLOGICAL AGE 38 (4th ed. 2006) ("Treatment of trade secrets as property rights ... is consistent with a view of trade secrets law as providing an additional incentive to innovate ....");
136. see also Pamela Samuelson, Information as Property: Do Ruckelshaus and Carpenter Signal a Changing Direction in Intellectual Property Law?, 38 CATH. U. L. REV. 365, 366 (1989) (discussing how "two recent... decisions classified information as private property").
137. See, e.g., Burk & McDonnell, supra note 23, at 603 ("[T]rade secrets ... lacking the right to exclude, cannot properly be considered property rights at all.");
138. Burk, supra note 81, at 11 ("[T]rade secrecy does not confer a property right, or at best it confers an incomplete property right.").
139. It has been adopted by forty states, while the rest continue to apply the common law or separate state statutes. See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 39 statutory note at 437-438 (1995).
140. UNIF. TRADE SECRETS ACT §1(4) (amended 1985), 14 U.LA. 537-538 (2005).
141. RESTATEMENT (THIRD) OF UNFAIR COMPETITION §39 (1995). The Restatement also expands the remedies provided in the course of trade secrets protection.
142. See id. §§ 44-45 (providing for injunctive and monetary relief).
143. Burk Sc McDonnell, supra note 23, at 600
144. (citing UNIF. TRADE SECRETS ACT § 1 cmt, 14 U.LA 538).
145. See Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not To Compete, 74 N.Y.U. L. REV. 575, 600 (1999) (" [I] t remains the case that [trade secret] protection is limited ....").
146. See Anton & Yao, Start-Ups, supra note 6, at 363 ("In practice, detection is problematic and court challenges ... are difficult to win.");
147. Gilson, supra note 89, at 598-600 (discussing barriers to legal victories in trade secret litigation).
148. See, e.g, Celeritas Techs. Ltd. v. Rockwell Int'l Corp., 150 F.3d 1354 (Fed. Cir. 1998) (arising from a manufacturer's alleged breach of an NDA between it and an inventor);
149. Medtronic, Inc. v. Mine Safety Appliances Co., 468 F. Supp. 1132 (D. Minn. 1979) (arising from a failed business relationship).
150. See generally MERGES ET AL., supra note 83, at 80-82 (discussing issues relating to departing employees and their former employers).
151. Merges, supra note 70, at 28-29 (illustrating the difficulty of proving misappropriation under On-Line Techs., Inc. v. Bodenseewerk Perkin-Elmer GMBH, 386 F.3d 1133 (Fed. Cir. 2004)).
152. See, e.g., Alan Hyde, Silicon Valley High Velocity Labor Market, 11 J. APPLIED CORP. FIN., Summer 1998, at 27, 31-32 (describing an investigation of suspected corporate theft by a former employee of Intel).
153. See Gilson, supra note 89, at 601 (discussing how firms "riskf] the imposition of labor market-imposed reputation penalties");
154. Hyde, supra note 94, at 32 (noting that "Intel acquired a reputation for being a bully towards its own employees, and may have paid for it" as potential employees "constantly asked ... if they too would be sued if... they would someday leave the company").
155. Arora & Merges, supra note 20, at 461.
156. See supra text accompanying note 88.
157. See Merges, supra note 70, at 7-9 (discussing costs associated with contractual protections).
158. 17 U.S.C. § 102(b) (2006);
159. see also Harper Sc Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 547 ( 1985) ("[N]o author may copyright facts or ideas.").
160. 17 U.S.C. § 102(a).
161. See id. §§ 106, 302 (enumerating rights of copyright holders and their duration). In fact, however, commentators point towards an expansion of the copyright regime, stretching to an all-purpose, general-use right with no effective time limitation.
162. See, e.g., Jessica Litman, Creative Reading LAW Sc CONTEMP. PROBS., Spring 2007, at 175, 183 ("[W] e need to remember that copyright was never intended to be a general-use right Rather, Congress designed the statutory copyright as a collection of enumerated, individually bounded, exclusive rights.").
163. See 17 U.S.C. §106 (enumerating the "exclusive rights" of the copyright owner).
164. See id. § 502(a) (audiorizing injunctive remedies).
165. Compulsory licenses are area specific. See, e.g-., id. §114(d)(2) (providing compulsory licenses for digital transmissions of sound recordings);
166. id. §115 (providing compulsory licenses for "cover" music).
167. See Dan L. Burk, Patenting Speech, 79 TEX. L. REV. 99,158-160 (2000) (discussing how fair use may be considered a compulsory-licensing scheme).
168. See, e.g, Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d 49, 54 (2d Cir. 1936) ("[B]ut if by some magic a man who had never known it were to compose anew Keats's Ode on a Grecian Urn, he would be an 'author'....").
169. Reverse engineering constitutes infringement in other areas of copyright law when it involves so-called "intermediate copying." See, e.g., Sega Enters. Ltd. v. Accolade, Inc., 977 F.2d 1510, 1518-28 (9th Cir. 1993) (holding that intermediate copying of computer code is infringement but finding it protected fair use in this case);
170. Walker v. Univ. Books, Inc., 602 F.2d 859, 864 (9th Cir. 1979) (finding intermediate copying of blueprints to be infringement);
171. Walt Disney Prods, v. Filmation Assoes., 628 F. Supp. 871, 876 (CD. Cal. 1986) (holding that intermediate copying of story boards and scripts was infringement).
172. See, e.g., Sony Computer Entm't Inc. v. Connectix Corp., 203 F.3d 596, 602-03 (9th Cir. 2000) (concluding that where copying is necessary to access functional elements, it constitutes fair use);
173. Atari Games Corp. v. Nintendo of Am. Inc., 975 F.2d 832, 844 (Fed. Cir. 1992) (holding Atari's noncommercial reverse engineering to be fair use);
174. see also Dennis S. Karjala, Copyright Protection of Computer Documents, Reverse Engineering and Professor Miller, 19 U. DAYTON L. REV. 975, 993 (1994) (suggesting that the object-code exception to copyright exists to limit copyright's strength and breadth);
175. J.H. Reichman, Design Protection and the New Technologies: The United States Experience in a Transnational Perspective, 19 U. BALT. L. REV. 6, 143-44 (1989) ("[B]y encouraging third parties to make free and abundant use of nonprotectable matter underlying the protected expression, copyright laws foster a built-in process of 'reverse engineering' that enables many copyrightable works to cluster around common themes or ideas.").
176. See, e.g., ABKCO Music, Inc. v. Harrisongs Music, Ltd., 722 F.2d 988, 998 (2d Cir. 1983) (noting that the widespread dissemination of the allegedly copied work could support a finding of access to it);
177. Douglas Lichtman, Copyright as a Rule of Evidence, 52 DUKE L.J. 683 (2003).
178. See 17 U.S.C § 101 (2006) (defining, among other tilings, "work made for hire").
179. See Barak Y. Orbach, The Law and Economics of Hired Creativity: Who Should Own the Rights? 46-47 (Oct 27, 2003) (unpublished manuscript), available at http://www.law.umich.edu/centersandprograms/olin/workshops/Documents/Fall20 03/orbach.pdf ("[M] uch of the discussion ... under copyright law... is focused on the evasive ... distinction between employees and independent contractors.").
180. See 17 U.S.C. §§ 502-505, 509.
181. See Burk, supra note 81, at 9 ("Resolving trade secrecy disputes is especially problematic in the case of employee departure, as courts are reluctant to curtail the mobility of labor.");
182. see also Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CAL L. REV. 1293, 1302-1307 (1996) (discussing intellectual property regimes from both liability-rule and property-rule perspectives).
183. See generally Desny v. Wilder, 299 P.2d 257, 270 (Cal. 1956) (en banc) (using implied contracts to protect ideas from disclosure and misappropriation);
184. Bristol v. Equitable Life Assurance Soc'y, 30 N.E. 506, 507 (N.Y. 1892) (applying New York law of ideas);
185. Peabody v. Norfolk, 98 Mass. 452, 459-460 (1868) ("In this court, it is settled that a secret art is a legal subject of property....").
186. See, e.g., Miller, supra note 60, at 731 (noting that these common law doctrines resemble federal patent and copyright requirements but concluding that "their application in idea law is misguided").
187. See id. (noting judicial reluctance to allow compensation for misappropriation of ideas);
188. see also Larissa Katz, A Powers-Based Approach to the Protection of Ideas, 23 CARDOZO ARTS Sc ENT. L.J. 687, 706 (2006) ("We cannot look to property theory to uncover the source of the duty not to use or disclose another's idea shared in confidence for the simple reason that idea-submission law concerns a more limited or in personam rights-duty relationship than the in rem rights-duty relationship that property law describes.").
189. See Katz, supra note 116, at 706-15 (detailing the various approaches);
190. Miller, supra note 60, at 764-773 (same).
191. See Miller, supra note 60, at 731.
192. See id. at 720 (discussing these "two core concerns underlying the courts' reluctance to recognize a protectable interest in ideas").
193. But see Katz, supra note 116, at 692 (noting four prerequisites: novelty, originality, confidentiality, and concreteness). This different classification is largely semantic, but it does demonstrate the courts' inconsistency.
194. See, e.g. Stone v. Liggett & Myers Tobacco Co., 23 N.Y.S.2d 210, 212 (App. Div. 1940) ("[O] wing to the difficulties of enforcing such rights, the courts have uniformly refused to assume to protect property in ideas that have not been reduced to a concrete form.");
195. Williamson v. N.Y. Cent. R.R. Co., 16 N.Y.S.2d 217, 217-18 (App. Div. 1939) (per curiam) ("Plaintiffs idea never took on concrete form at the time of disclosure so as to give rise to a property right....");
196. Alberts v. Remington Rand, Inc., 23 N.Y.S.2d 892, 894 (Sup. Ct 1940) ("Only where the idea has been reduced to concrete form prior to its disclosure to and appropriation by the defendant may recovery be had upon an implied contract").
197. Miller, supra note 60, at 726.
198. For a view that criticizes these standards and offers an alternative framework, see id. at 731-732
199. See, e.g, Smith v. Recrion Corp., 541 P.2d 663, 665 (Nev. 1975) ("An idea in order to meet the test of concreteness must be ready for immediate use without any additional embellishment").
200. See, e.g., Flemming v. Ronson Corp., 258 A2d 153, 156 (N.J. Super. Ct Law Div. 1969) ("The concept submitted by [plaintiff] is not an abstract one in the sense that it is incapable of physical form. Rudimentary as it is, the idea can be transformed into a product. It is, to that extent, concrete and usable."), aff'd, 275 A.2d 759 (N.J. Super. Ct. App. Div. 1971). Professor Miller criticizes requiring tangibility as anachronistic, especially in light of the development of intangible injuries, assets, and concepts in other fields of the law.
201. See Miller, supra note 60, at 724.
202. See Katz, supra note 116, at 693 (noting that across jurisdictions, there is a lack of clarity on how to assess and distinguish novelty criteria);
203. Mary LaFrance, Something Borrowed, Something New: The Changing Role of Novelty in Idea Protection Law, 34 SETON HALL L. REV. 485, 485-486 (2004) (noting that "[i]dea protection doctrine... differs primarily in the role played by the concept of 'novelty" and noting that "[t]here is no one audioritadve definition of novelty in this context").
204. See LaFrance, supra note 126, at 486 (discussing New York's novelty requirements).
205. See Apfel v. Prudential-Bache Sec. Inc., 616 N.E.2d 1095, 1098 (N.Y. 1993) ("The law of contracts would have to be substantially rewritten were we to allow buyers of fully disclosed ideas to disregard their obligation to pay simply because an idea could have been obtained from some other source or in some other way.");
206. see also LaFrance, supra note 126, at 486 ("New York requires some form of novelty as a prerequisite to all forms of idea protection other than post-disclosure contracts.").
207. See Nadel v. Play-By-Play Toys & Novelties, Inc., 208 F.3d 368, 380 (2d Cir. 2000) ("[Misappropriation claims require that the idea at issue be original and novel in absolute terms. This is so because unoriginal, known ideas have no value as property and the law does not protect against the use of that which is free and available to all.");
208. see also LaFrance, supra note 126, at 492-495 (summarizing the Nazdel decision and its implications).
209. Compare LaFrance, supra note 126, at 486 ("For an idea to be protected under unjust enrichment/quasi-contract however, the idea must be novel in the general or absolute sense-in other words, unknown not only to the buyer but also to the public in general."),
210. with Katz, supra note 116, at 695-696 ("For unjust'enrichment claims in New York and California, a plaintiff need only establish that the idea was novel to the defendant, rather than generally or objectively novel.").
211. See Donahue v. Ziv Television Programs, Inc., 54 Cal. Rptr. 130, 134 (Cal. Dist Ct App. 1966) ("An idea which can be the subject matter of a contract need not be novel");
212. LaFrance, supra note 126, at 486 (noting that novelty is not required for ideas disclosed pursuant to an express or implied-in-fact contract in California);
213. Ronald Caswell, Comment, A Comparison and Critique of Idea Protection in California, New York, and Great Britain, 14 LOY. LA. INT'L & COMP. L.J. 717, 723 (1992) ("Under California's [quasi-contract] analysis, it is irrelevant whether an idea contains the element of novelty.").
214. Wrench LLC v. Taco Bell Corp., 256 F.3d 446, 461-63 (6th Or. 2001) (predicting that Michigan courts would follow the California approach);
215. Reeves v. Alyeska Pipeline Serv. Co., 926 P.2d 1130,1141 (Alaska 1996) (adopting the California approach).
216. The leading novelty case in New Jersey, Hemming v. Ronson Corp., 258 A2d 153, 156-57 (N.J. Super. Ct. Law Div. 1969), aff'd, 275 A2d 759 (N.J. Super. Ct App. Div. 1971),
217. favors no novelty prerequisite in the contractual framework. The recent case of Johnson v. Benjamin Moore & Co., 788 A2d 906, 914-18 (N.J. Super. Ct. App. Div. 2002), cert, granted and summarily remanded, 796 A2d 893 (N.J. 2002), deviated from Hemming and demonstrated a willingness to adopt such a novelty standard. Johnson, however, has since been remanded (in light of the plaintiff's receipt of a patent) and thus no longer represents controlling law. Hence, the New Jersey courts have an opportunity to reconsider the issue.
218. See LaFrance, supra note 126, at 486-487 (suggesting that New Jersey courts take this opportunity to "carve out a more thoughtful approach" to idea law).
219. Miller, supra note 60, at 730-732
220. See id. (summarizing the overarching problems with the current state of idealaw doctrine). Professor Miller believes that because of the modern significance of ideas for a wide range of businesses and industries, the law should grant greater protection to ideas, especially in light of the need to stay competitive in a global market that creates alternative markets for ideas for American and foreign idea vendors.
221. See id. at 705-706
222. See supra subsection HA. 1.
223. See supra subsection II A.2.
224. See supra subsection II A.3.
225. See supra subsection II A.4.
226. See supra Section IIA.
227. See Hyde, supra note 94, at 30.
228. See Katherine V.W. Stone, Knowledge at Work: Disputes over the Ownership of Human Capital in the Changing Workplace, 34 CONN. L. REV. 721, 738-739 (2002) ("Covenants not to compete and covenants not to disclose information have become commonplace in employment contracts over the past ten years. In addition to their increased presence in negotiated, fixed-term employment contracts, such covenants have also been inserted into at-will employment relationships.") .
229. See id. at 739 (tracking the increase of litigation involving covenants not to compete in decisions available on Wesdaw).
230. See id. at 740.
231. See id. at 742 (explaining that one test is whether the CNC is "ancillary to an otherwise valid transaction").
232. See id. at 743-744 (discussing the various courts' responses to CNCs in cases of unjustified dismissal).
233. See id. at 744 ("The current approach of a majority of courts is either to rewrite an invalid covenant and enforce it as rewritten or to delete the invalid portions and enforce the remainder.").
234. See id. at 747 (noting this expansion and the elimination of the trade secret requirement).
235. See id. at 749.
236. See id. at 751
237. (discussing the courts' recent focus on "who pays" for the training as a justification for enforcing CNCs in such circumstances). 151 CAL. Bus. & PROF. CODE §16,600 (West 2008).
238. See Hyde, supra note 94, at 29-30 (observing that CNCs have been unenforceable in California for over a century because of this statute).
239. Gilson, supra note 89, at 578.
240. Id at 578-579
241. Burk & McDonnell, supra note 23, at 602. 156 We thank Phil Weiser for pointing out this example to us.