Spill your (trade) secrets: knowledge networks as innovation drivers.

• Author: Pedraza-Farina, Laura G.
• Position: Negotiating IP's Boundaries in an Evolving World

ABSTRACT

Theories of intellectual property take the individual inventor or the firm as the unit of innovation. Hut studies in economic sociology show that in complex fields where knowledge is rapidly advancing and widely dispersed among different firms, the locus of innovation is neither an individual nor a single firm. Rather, innovative ideas originate in the informal networks of learning and collaboration that cut across firms.

Understanding innovation in this subset of industries as emerging out of networks of informal information-sharing across films challenges traditional utilitarian theories of trade secret law--which assume trade secret protection is needed to prevent excessive private, self-help efforts to preserve secrecy. Doctrinally, knowledge network research suggests that the scope of trade secret protection in these industries should be narrow. In these industries, strong trade secret rights that grant managers tight control over employee-inventors' informal information-sharing practices are bad innovation policy. Rather, optimizing trade secret law requires tailoring the strength of protection to match industry characteristics, narrowing trade secret scope in those industries where informal information-sharing networks are predicted to enhance innovative output. In turn, because industry types tend to cluster around geographic centers, the importance of tailoring cautions against current trends towards uniformity by federalizing trade secret law and favors state experimentalism in designing trade secret law and policy.

INTRODUCTION

Where does innovation take place? Under traditional theories of intellectual property, the answer to this question seems rather obvious. Innovation takes place inside individual firms, where inventors and, increasingly, teams of inventors lead research and development efforts. (1) But economic sociology studies show that in complex fields where knowledge is both rapidly advancing and widely dispersed across firms, the locus of innovation is no longer a specific firm. (2) Rather, innovative ideas often originate in informal networks of learning and collaboration that cut across firms. (3) Shifting the unit of innovation from the firm (or the individual) to the network of relationships in which these actors are embedded has important consequences for intellectual property theory and practice. This Article focuses on one such consequence: the implications of informal, cross-firm networks of innovation for trade secret theory and doctrine, and for the overlap between state and federal trade secret protection. This Article shows how, in a subset of science-based industries, where innovation is fast paced and needed knowledge is widely distributed among firms, innovation is likely to proceed more efficiently when networks of informal know-how sharing are encouraged. In these industries, strong trade secret rights that grant managers tight control over employee-inventors' informal information-sharing practices would be bad innovation policy. Rather, optimizing trade secret law requires tailoring the strength of protection to match industry characteristics, narrowing trade secret scope in those industries where informal information-sharing networks are predicted to enhance innovative output. In turn, because industry types tend to cluster around geographic centers, the importance of tailoring cautions against current trends towards uniformity by federalizing trade secret law and favors state experimentalism in designing trade secret law and policy.

Contrary to traditional assumptions in intellectual property theories, a large and growing body of historical and empirical work reveals that informal information-exchange networks across firm boundaries can be crucial to spur innovation. As historical studies document, in the Industrial Revolution--an era of technological explosion that many attribute to the increased availability of intellectual property protection (4)--a subset of industries made breakthrough advances precisely by eschewing trade secret protection. (5) Instead, in these industries, including fundamental steam engine technology, engineers who worked for competing firms but belonged to the same epistemic community (6) freely and reciprocally shared know-how across firm boundaries. (7) More recently, empirical studies in the biotechnology, semiconductors, and information technology industries reveal a similar trend: important modern discoveries were enabled by informal networks of information-sharing across competing firms. (8)

The prevalence of these informal information exchanges challenges three long-standing assumptions in traditional utilitarian theories of trade secret law. First, utilitarian theories predict that, absent trade secret protection, firms will overinvest in self-help measures to preserve secrecy. (9) Second, lack of trade secret protection is predicted to fragment scientific and technological research by incentivizing firms to only selectively disclose information to employees, thus hampering internal collaboration. (10) Third, absent protections against misappropriation provided by trade secret law, firms are predicted to underinvest in employee training. (11)

Why does traditional utilitarian theory get firm behavior wrong? Because it fails to realize that there is a second possible response to low trade secret protection. Knowledge network research tells us that, when it is hard to keep information secret, some industries will build reciprocal information-sharing innovation networks--rather than higher walls to protect their secrets. (12) When innovation networks form, the precise opposite of knowledge fragmentation takes place: informal interactions within and across firms incentivize knowledge recombination and synthesis, often leading to breakthrough innovation. (13) Employee learning also grows exponentially at networks through exposure to ideas from multiple institutional cultures. (14)

What are the implications of knowledge network studies for trade secret doctrine? (15) Applying knowledge network studies to trade secret law suggests two conditions where low trade secret protection is more likely to lead to local, open information sharing than to excessive efforts at secrecy: (1) complex innovation (where technological progress is rapid and knowledge is widely dispersed among firms); (16) and (2) a background, local epistemic community with social norms of open-sharing (often affiliated with a university that anchors a technology cluster). (17) When these two conditions are fulfilled, this Article argues, courts should interpret trade secret law narrowly by (1) expanding the scope of what constitutes general technical knowledge that is ineligible for trade secret protection (for example, by excluding technical negative know-how (18) from the scope of trade secret protection); (2) defining an employee's implied duty of loyalty narrowly, absent an express contract provision; and (3) refusing to apply the "inevitable disclosure doctrine" absent a showing of bad faith on the part of the employee. (19)

Further, the geographic clustering of complex innovation industries by state, (20) and the importance of fostering local information exchange to form successful clusters, argues for a robust role for states in designing specific trade secret laws to fit the needs of their particular local state industries. In turn, the local and contextual impact of trade secret law on innovation highlights the importance of policing the overlap between the newly created federal cause of action for trade secret misappropriation (the Defend Trade Secrets Act) (21) and state trade secret law--lest the ability of states to tailor trade secret doctrine get swept away by the drive for uniformity.

The idea that innovation can take place in networks is, of course, not new. Studies on the role of networks in innovation (and related studies on innovation clusters) stretch back to the 1980s in management, sociological, and economics literature. (22) In law, scholars such as Yochai Benkler and Julie Cohen have focused on the importance of networks for the social, non-market production of knowledge. (23) Additionally, both business and legal scholars have written extensively about the rise of "open innovation" and "user innovation" models--two ideas that are related to the concept of networks. (24) A growing literature in contract law also focuses on formal and informal arrangements among firms that enable collaborative research. (25) This literature pays close attention to informal norms that facilitate dealings between firms, but the emphasis in this line of scholarship is on the creation of informal bonds of trust through formal contractual mechanisms and on the informal enforcement of these formal contractual promises. The literature on informal exchanges of know-how through epistemic community networks remains thin. (26) Finally, employment and intellectual property scholars have focused on the importance of employee migration for innovation in highvelocity industries in the context of intellectual property and contractual policies that can curtail such migration. (27)

This Article adds to this vast, yet incomplete, literature a focus on the importance of informal information-sharing networks for innovative output in a subset of industries. This Article also updates current understandings of the role of informal networks in the legal literature by incorporating research from sociology and economics that seeks to identify which types of industries are likely to benefit from informal information-sharing through networks. Finally, this Article emphasizes a little-discussed phenomenon with important consequences for the design of trade secret law: the conflict between managers' and inventors' practices and background norms towards know-how sharing.

The remainder of this Article proceeds as follows. Part I demonstrates the prevalence and the primacy of...