Trade secret law and information development incentives

The Law and Theory of Trade Secrecy: A Handbook of Contemporary Research

Volumn , Issue , 2011, Pages 152-182

  Risch, Michael ^a  

^a VILLANOVA UNIVERSITY   (United States)

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EID: 84874703849     PISSN: None     EISSN: None     Source Type: Book    
DOI: None     Document Type: Chapter

References (55)

1. Landes and Richard A. Posner, The Economic Structure of Intellectual Property 11, 115-23 (2003) (noting that the 'incentive' versus 'access' paradigm is important in intellectual property, but that it should not be the only analysis to consider)
2. For further discussion of trade secrecy and incentives to innovate
3. See generally Eric von Hippel and Georg von Krogh, Chapte
4. Katherine J. Strandburg, What Does the Public Get? Experimental Use and the Patent Bargain, 2004 Wis. L. Rev. 81, 106
5. Rochelle Cooper Dreyfuss Dethroning Lear: Licensee Estoppel and the Incentive to Innovate, 72 Va. L. Rev. 677, 696-7 (1986); Luigi Franzoni and Vincenzo Denicolo, Innovation, Duplication, and the Contract Theory of Patents, in The Economics of Innovation: Incentives, Cooperation, and R&D Policy (R. Cellini and L. Lambertini eds., 2008)
6. Robert M. Sherwood, Intellectual Property and Economic Development 117-19 (1990).
7. Bruce Abramson, Promoting Innovation in the Software Industry: A First Principles Approach to Intellectual Property Reform, 8 B.U. Sci. & Tech. L. 75, 94-5 (2002).
8. G.B. Ramello, Intellectual Property and the Markets of Ideas, 4 R. Network Econ. 161 (2005).
9. In theory, the price of the product would be the marginal cost of production because Intuit's development costs are sunk. However, return on development investment would be considered part of the marginal cost - an opportunity cost, but a cost nonetheless. This is obviously true in reality, because the cost of software is not zero, even in highly competitive markets (such as the tax market).
10. This is similar to copyright protection in the same code. The copyright gives the developer a private good to sell; without protection, the code could be copied, driving the price to zero. Software is often described as a potential natural monopoly due to the high ratio between development costs, which are substantial in some cases, and virtually zero reproduction costs.
11. Michele Boldrin and David K. Levine, Perfectly Competitive Innovation, 55 J. Monetary Econ. 435 (2008); Stephen N.S. Cheung, Property Rights and Trade Secrets, 20 Econ. Inquiry 40 (1982).
12. Roger D. Blair and Thomas F. Cotter, An Economic Analysis of Damages Rules in Intellectual Property Law, 39 Wm. & Mary L. Rev. 1585, 1642 (1998).
13. 431 F.2d 1012 (5th Cir. 1970).
14. Rochelle Cooper Dreyfuss, Trade Secrets: How Well Should We be Allowed to Hide Them? The Economic Espionage Act of 1996, 9 Fordham Intell. Prop. Media & Ent. L.J. 1, 37 (1998).
15. Burk and Brett H. McDonnell, The Goldilocks Hypothesis: Balancing Intellectual Property Rights at the Boundary of the Firm, 2007 U. Ill. L. Rev. 575, 601-2.
16. Dan L. Burk, Intellectual Property and the Firm, 71 U. Chi. L. Rev. 3, 8-9 (2004).
17. California Labor Code § 2860 (West 2003); Nathan Newman, Trade Secrets and Collective Bargaining: A Solution to Resolving Tensions in the Economics of Innovation, 6 Emp. Rts. & Emp. Pol'y J. 1, 43 (2002).
18. See, e.g., Petra Moser, How do Patent Laws Infl uence Innovation? Evidence from Nineteenth- Century World's Fairs, 95 Am. Econ. Rev. 1214, 1231 (2005) (in countries without patent laws, innovation shifted toward industries in which secrecy was available).
19. Alan Hyde, Working in Silicon Valley: Economic and Legal Analysis of a High- Velocity Labor Market (2003); Lawrence Lessig, The Future of Ideas: The Fate of the Commons in a Connected World 70-1 (2001); Paul Almeida and Bruce Kogut, Localization of Knowledge and the Mobility of Engineers in Regional Networks, 45(7) Mgmt. Sci. 905 (1999); John Dubiansky, The Role of Patents in Fostering Open Innovation, 11 Va. J.L. & Tech. 7 (2006), 14; 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, 600-1 (1999).
20. James Pooley, The Top Ten Issues in Trade Secret Law, 70 Temp. L. Rev. 1181, 1182 (1997).
21. Doron S. Ben- Atar, Trade Secrets 99-101 (Yale University Press, New Haven, 2004).
22. Adam B. Jaffe and Manuel Trajtenberg, Patents, Citations and Innovations 174-5 (2002).
23. Lee Fleming, Charles King III and Adam I. Juda, Small Worlds and Regional Innovation, 18 Org. Sci. 938 (2007).
24. Yuval Feldman, Experimental Approach to the Study of Normative Failures: Divulging of Secrets by Silicon Valley Employees, 2003 U. Ill. J.L. Tech. & Pol'y 105, 119.
25. Bruce Fallick, Charles A. Fleischman and James B. Rebitzer, Job- hopping in Silicon Valley: Some Evidence Concerining the Microfoundations of a High-Technology Cluster, 88 R Econ. & Stat. 472 (2006). The reduction in investment may be outweighed by benefi ts of high mobility, especially in the computer industry.
26. Bruce Fallick, Charles A. Fleischman and James B. Rebitzer, Job- hopping in Silicon Valley: Some Evidence Concerining the Microfoundations of a High-Technology Cluster, 88 R Econ. & Stat. 472 (2006). The reduction in investment may be outweighed by benefi ts of high mobility, especially in the computer industry.
27. Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 349 (1991); ABBA Rubber Co. v. Seaquist, 286 Cal. Rptr. 518 (Cal. Ct. App. 1991).
28. Two parties can own the same trademark, so long as the mark protects different goods and services, or if they exclusively serve diff erent geographic regions. Such overlap is not really 'identical' information as that term is used here because they actually designate diff erent origination sources for diff erent types of goods.
29. California Civil Code § 3426.1(a) (West 1997) ('Reverse engineering or independent derivation alone shall not be considered improper means'). The Uniform Trade Secrets Act (UTSA) does not include this sentence, though reverse engineering is commonly accepted as an exception to improper means. Uniform Trade Secrets Act § 1 (amended 1985), 14 U.L.A. 437 (West Supp. 2006).
30. 17 U.S.C. § 107 (2006).
31. 35 U.S.C. § 101 (2006).
32. 15 U.S.C. § 1051(a) (2006).
33. Alex Foods, Inc. v. Metcalfe, 290 P.2d 646, 654 (Cal. Ct. App. 1955) (fi nding that peculiar 'likes and fancies' of customers are protectable).
34. But see 15 U.S.C. § 1051(b) (2006) (registration for intent to use).
35. 17 U.S.C. § 411 (2006).
36. 35 U.S.C. § 111 (2006); but see California Code of Civil Procedure § 2019.210 (West 2005) (requiring a plaintiff to identify the trade secrets at issue prior to discovery). Section 2019.210 is formerly and better known as § 2019(d).
37. DVD Copy Control Ass'n v. Bunner, 10 Cal. Rptr. 3d 185, 192-3 (Cal. Ct. App. 2004) ('Publication on the Internet does not necessarily destroy the secret if the publication is suffi ciently obscure or transient or otherwise limited so that it does not become generally known to the relevant people, i.e., potential competitors or other persons to whom the information would have some economic value').
38. Nisvan Erkal, The Decision to Patent, Cumulative Innovation, and Optimal Policy, 23 Int'l J. Indus. Org. 535 (2005); Sharon K. Sandeen, Kewanee Revisited: Returning to First Principles of Intellectual Property Law to Determine the Issue of Federal Preemption, 12 Marq. Intell. Prop. L. Rev. 301, 344 (2008).
39. 22 F.3d 290 (Fed. Cir. 1994). toward industries that provided eff ective secrecy).
40. (arguing that market experimentation need not be (and often is not) secret in order to provide an incentive to experiment).
41. Katherine J. Strandburg, Users as Innovators: Implications for Patent Doctrine, 79 U. Colo. L. Rev. 467, 476-7 (2008).
42. Robert M. Hunt, Nonobviousness and the Incentive to Innovate: An Economic Analysis of Intellectual Property Reform, Federal Reserve Bank of Philadelphia, Working Paper No. 99- 3 (April 1999), available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=160674. 81, at 11; Suzanne Scotchmer and Jerry Green, Novelty and Disclosure in Patent Law, 21 Rand J. Econ. 131 (1990).
43. See Rebecca S. Eisenberg, Chapter 18 for a further discussion of data exclusivity.
44. Applications can cost from U.S.$2,500 to U.S.$250,000 or more depending on the nature of the application and any challenges to it on appeal or during patent interferences. Even U.S.$2,500 will be cost prohibitive for many individual or small company inventors.
45. Josh Lerner, Patenting in the Shadow of Competitors, 38 J.L. & Econ. 463 (1995).
46. There is no requirement that a registration be fi led at all in order to secure a copyright, though in the United States one must fi le a registration in order to pursue an infringement claim.
47. Pseudo- code is a non- functional representation of computer code written in plain English rather than in a computer language. For example, the computer code c := a+b might be expressed in pseudo- code as 'add the values of variables a and b and assign the result to c'.
48. The discussion above explains how trade secrets might provide an independent incentive to create source code where the law provides protection from disclosure by a regulatory agency (here, the Copyright Offi ce). Diane Zimmerman in Chapter 13 further discusses issues associated with copyright registration of trade secrets.
49. Of course, the Copyright Offi ce might allow 'secret' registrations without trade secret law, but in a world where trade secrets are not recognized by law, there is no reason to expect governmental agencies to protect information just because a company wants to keep it secret. In that sense, the existence of the law shifts the mindset toward protection.
50. Pseudo- code is a non- functional representation of computer code written in plain English rather than in a computer language. For example, the computer code c := a+b might be expressed in pseudo- code as 'add the values of variables a and b and assign the result to c'.
51. The discussion above explains how trade secrets might provide an independent incentive to create source code where the law provides protection from disclosure by a regulatory agency (here, the Copyright Offi ce). Diane Zimmerman in Chapter 13 further discusses issues associated with copyright registration of trade secrets.
52. Of course, the Copyright Offi ce might allow 'secret' registrations without trade secret law, but in a world where trade secrets are not recognized by law, there is no reason to expect governmental agencies to protect information just because a company wants to keep it secret. In that sense, the existence of the law shifts the mindset toward protection.
53. Software becomes less copyable if it is distributed with a 'dongle', a physical device that must be connected to the computer before the software will operate.
54. Robert A. Kreiss, Accessibility and Commercialization in Copyright Theory,
55. UCLA L. Rev. 1, 54-6 (1995). The DMCA is similar to trade secret law with respect to spending on protection; without the DMCA, more money would be spent on technology, such as better encryption or more fragmented data, which would better limit access to copyrighted work in the absence of a remedy for bypassing the control. The DMCA creates an incentive for information producers to limit overspending on access control technology. 101 Despite its fame, the 'special sauce' mark is not a registered trademark. The only registered mark associated with the 'special sauce' is Twoallbeefpattiesspecialsaucelettucecheesepicklesonionsonasesameseedbun® to McDonald's Corp. Even unregistered, however, the 'special sauce' mark has trademark value, as a diff erent company attempted to obtain 'special sauce' as a trademark covering a sandwich dressing and had the mark cancelled. 102 Quite often the secret sauce claimed by trade secrets plaintiff s ends up looking a lot like Thousand Island dressing. Indeed, the trade secret status of the 'special sauce' is dubious since it can be reverse engineered. One such attempt is available at www.topsecretrecipes.com/recipedetail.asp?id=65. Even so, the actual recipe is so closely guarded that McDonald's itself lost the recipe for a time. Wallet Pop, Closely- Guarded Trade Secrets, www.walletpop.com/specials/ closely- guarded- trade- secrets?photo=2. 103 Samuel D. Warren and Louis D. Brandeis, The Right to Privacy, 4 Harv. L. Rev. 193, 199-200 (1890) (emphasis in original). 109 Uniform Trade Secrets Act §7 ('except as provided in subsection (b), this [Act] displaces confl icting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret'). Of course, private information may be excluded from the pre- emption if the information does not fall under the defi nition of trade secret. Charles Tait Graves in Chapter 4 further discusses pre- emption. to the right of privacy).