The justification for trade secrets.

• Jurisdiction: United States
• Date: 01 January 2007
• Author: Risch, Michael

This Part addresses--from strongest to weakest--three alternative normative justifications for the bundle of rights associated with trade secret law: economic justifications, philosophical justifications, and populist justifications.

1. Economic Justification of Trade Secrets

   Perhaps the best justification for the existence of trade secrets is a purely economic one, (130) for two primary reasons. First, trade secrets relate to the economic value of information; it stands to reason that economic analysis is the appropriate way to justify the law. (131) Second, economic analysis shows that the particular bundle of rights associated with trade secrets adds to societal wealth in a defensible, potentially measurable and provable way.

   In summary, the bundle of rights associated with trade secret law is justified because it enhances the marginal benefits of society more than the marginal costs. Ironically, the best justification also requires the most explanation. Thus, the Article includes a complete analysis in Part IV, which analyzes the marginal societal benefits (and costs) associated with the bundle of rights granted by trade secret law. As will be discussed below, the primary benefit of trade secret law is the decrease in both the amount spent on protecting secrets and the amount spent by those who seek to learn them.

   However, creating incentives to innovate is a very minor justification of trade secret law. (132) To be sure, additional protection of secret information does provide some incentives, discussed below with respect to the labor value theory, as well as with respect to forced disclosure of information.

   Because forced disclosure is not the status quo, however, the marginal incentive to innovate provided by trade secret law is small (133) because companies would still protect secret information by--obviously enough--keeping such information secret. (134) Such information need not be an innovation--even the earliest trade secret law protected customer information. (135)

   Patents and copyrights foster an incentive to create by allowing for a period of exclusive use. The exclusivity is required because of the "public good" nature of innovations and original works. If others could freely use innovations and original works, then the creator might not be able to recover the cost of creation. By allowing the creator exclusive use, the creator can more readily recoup costs of creation.

   In industries where there is no self-help, patent and copyright may be the only source of protection to encourage innovation. Trade secrets do not fall into this category because the inability to protect information by self-help does not change with trade secret law. If a company cannot keep its secrets confidential, trade secret protection will not add new abilities to keep the information secret. Thus, information that owners would otherwise keep secret shares little of this "public use" property; if information can be kept secret through self-help, then owners will spend more money to keep the information secret even in the absence of the law. This is discussed in more detail below.

   As a result, trade secret law (or even secrecy without the law) does not necessarily confer an opportunity for the owner to charge more than would be available on the open market. (136) In fact, to the extent that trade secrets reduce production costs, they would lead to lower pricing in the market. A trade secret must have competitive value, but every company has information that has competitive value. Take customer lists, for example. Knowing who to contact will reduce costs of sales vis a vis a company's competitors. This fact does not mean that a company can extract monopoly pricing; while the company may have a "leg up," product quality and pricing will still affect competition.

   The same is true for a secret process for making goods. Assume there is a secret process for making food taste better or making a widget more cheaply. Producers compete with other food and widget makers, and they still have price competition. Their competitors will have their own methods for taste enhancement and cost reduction.

   One concrete example is the tax program market: TurboTax and TaxCut. Each product costs approximately the same amount and the two are in stiff competition. Each has source code that is a trade secret; having that source code gives each an advantage over the other to the extent that the code includes special routines, and both have an advantage over those who do not have a product. Now, if an Intuit employee wants to compete, he or she might take the source code and call the new product "SuperTax." That employee will save development time and can undercut the price the other two companies charge because of lower costs. That lower price does not mean that the original pricing was monopolistic--the prices charged would reflect the marginal costs of producing the program with some rate of return on the investment in development. Thus, even if there were no trade secret law, Intuit would likely create a tax program if it saw market demand, and it would want to protect the TurboTax source code, even though it has no monopoly rents from its trade secrets.

2. Philosophical Justification of Trade Secrets

   There are two primary philosophical branches that justify trade secrets: labor value and veil of ignorance.

   1. Labor Value Theory

      The most cited philosophical theory, as reflected in the Peabody (137) case, is one where those who create value through their labor ought to "own" the end product of their labor. (138) This theory is often called a "Lockean" theory after John Locke and his theory of property. Locke posited that one who improves the land with his or her labor should be entitled to ownership of that land. (139) Under this theory, even information that is not secret could still be property. (140) This theory is the implicit basis for any business owner's consideration of trade secrets as valuable property.

      An initial criticism of this theory is that Locke was dealing with real property and not intellectual property, which can be "possessed" by two people at the same time. For example, the Supreme Court ruled in Feist Publications, Inc. v. Rural Telephone Services Co. (141) that pure facts, like names and addresses in a telephone book, cannot be protected by copyright simply because they were obtained by the "sweat of the brow." (142) This criticism does not necessarily apply to trade secrets, however. The value of the trade secret is not its novelty (like a patent) or its originality (like a copyright) but rather its secrecy. It follows that the labor used to discover or assemble such information may...