Secrecy and Patents: Theory and Evidence from the Uniform Trade Secrets Act

Abstract

How should firms use patents and secrecy as appropriability mechanisms? Consider technologies that differ in the likelihood of being invented around or reverse engineered. Here, I develop the profit-maximizing strategy: (i) on the internal margin, the marginal patent balances appropriability relative to cost of patents visa -vis secrecy, and (ii) on the external margin, commercialize products that yield non-negative profit. To test the theory, I exploit staggered enactment of the Uniform Trade Secrets Act (UTSA), using other uniform laws as instruments. The Act was associated with 38.6% fewer patents after one year, and smaller effects in later years. The Act was associated with larger effect on companies that earned higher margins, spent more on R&D, and faced weaker enforcement of covenants not to compete. The empirical findings are consistent with businesses actively choosing between patent and secrecy as appropriability mechanisms, and appropriability affecting the number of products commercialized.

Trade Secrets and Innovation: Evidence from the 'Inevitable Disclosure' Doctrine

“…We first examine whether differences in non-compete clause enforcement, as described in Garmaise (2011), overturn our main results. We employ Png's (2017a;2017b) composite index, which incorporates both Garmaise's non-compete clause enforcement data as well as other elements of the state-level trade secrecy regime (with features such as variation in qualifications for trade secrecy protection, civil procedure regarding taking legal action, and remedies in case of violations), as a control variable in the first two columns of Table 3, Panel B. The negative impact of IDD previously reported remains essentially unchanged in magnitude and statistical significance.…”

Knowledge Protection in Firms: A Conceptual Framework and Evidence from HP Labs

“…Labs in countries with weak IP rights protection tend to perform tasks whose full value emerges only when combined with other internal resources, thus mitigating the risk of knowledge spillovers. Png also finds that stronger legal protection of trade secrets is associated with greater R&D spending (Png, ) and, conditional on R&D spending, a decline in patenting especially in complex product industries (Png, ).…”

The effect of trade secrets protection on disclosure of forward‐looking financial information

“…While competitors can use the disclosing firm's forward‐looking financial information to envisage how much they should produce, developing an effective plan to enter the disclosing firm's product market space would require additional information, such as operational and marketing strategies, business plans, technical innovations, customer lists, price lists and/or cost information, that is, information about a firm's trade secrets. Trade secrets are a firm's most valuable assets (Shapiro & Hassett, ) and play a crucial role in maintaining a firm's competitive advantage (e.g., Barney, ; Flammer & Ioannou, ; Grant, ; Helfat et al., ; Kogut & Zander, ; Mahoney & Pandian, ; Png, ). Despite the importance of trade secrets for sustaining a firm's competitive advantage, there has been no study examining how trade secret information affects a firm's incentives to disclose forward‐looking financial information.…”

“…As adoption of IDD requires a delicate balance between protecting the interest of employees and that of employers (Friedman, Landes, & Posner, ), state courts in the US exhibit different attitudes in acceptance or rejection of the doctrine (Kahnke, Bundy, & Liebman, ). Recent studies show that the adoption of the IDD significantly reduces employee mobility and knowledge spillovers (Png & Samila, ), decreases the risk of a firm losing its competitive position in its product market (e.g., Klasa, Ortiz‐Molina, Serfling, & Srinivasan, ; Png, ), increases barriers to entry (Gao & Wang, ), and enhances firm value (e.g., Castellaneta, Conti, & Kacperczyk, ; Klasa et al., ; Qiu & Wang, ).…”

“…The adoption of the IDD better preserves trade secrets within the disclosing firm and therefore makes it more difficult for rival firms to initiate effective production and/or develop strategies. As a support, Png's () analytical model predicts that strengthened trade secret protection laws deter competitors from developing similar products or reverse engineering products that are similar to those protected by trade secrets.…”