Trade secrets vs Patents
BronwynH.HallUniversityofMaastrichtand
UniversityofCaliforniaatBerkeley
Acknowledgements and DisclaimerSomematerialbasedonjointworkwithChristianHelmers,VaniaSena,andthelateMarkRogers,conductedfortheUKIntellectualPropertyOffice.See
OxfordEconomicPapers(2013)JournalofEconomicLiterature(2014,forthcoming)
ThisworkcontainsstatisticaldatafromUKONSwhichisCrowncopyrightandreproducedwiththepermissionofthecontrollerofHMSOandQueen’sPrinterforScotland.TheuseoftheONSstatisticaldatainthisworkdoesnotimplytheendorsementoftheONSinrelationtotheinterpretationoranalysisofthestatisticaldata.
ThisworkusesresearchdatasetswhichmaynotexactlyreproduceNationalStatisticsaggregates.
May2014 2OECDWorkshop
Introduction• Firmsinvestingininnovationfacetheproblemofsecuringreturnstothatinvestmentinthefaceofimitationbycompetitors– the appropriabilityproblem
• Commonlyavailableoptions:1. IntellectualProperty— registeredandunregistered
(formal)2. Rangeof“alternative”protectionstrategies(informal)
• Thesemethodsoftenusedtogether– Theyarecomplements
• Inanimportantcase,theyaresubsitutes– patentvssecrecy
May2014 3OECDWorkshop
Two contrasting views
• Tradesecretlawprovidesfarweakerprotectioninmanyrespectsthanthepatentlaw.[...]Thepossibilitythataninventorwhobelieveshisinventionmeetsthestandardsofpatentabilitywillsitback,relyontradesecretlaw,andafteroneyearofuseforfeitanyrighttopatentprotection[…]isremoteindeed.USSupremeCourt(KewaneeOilCo.v.BicronCorp.,416U.S.470,1974)
• Judgesandlawyershavesometimesthoughtthatbecausetradesecretlawprovideslessprotectiontotheinventorthanpatentlawdoes,norationalpersonwithapatentableinventionwouldfailtoseekapatent.[…]Thisreasoningisincorrect.Friedmanetal.(1991:62‐63)
May2014 OECDWorkshop 4
Valuable trade secrets• “MotorolasaidtheR&DcostsoftheinformationinMs.Jin’s[theallegedHuaweispy]possessionexceeded$600mandthecompanywouldlosesubstantialglobalrevenuesifitwasmadepublic.”FinancialTimesJuly222010
• “IBMhasagreedtopayCompuware$400moverfouryearstosettleclaimsthatitstoletradesecretsfromtheDetroit‐basedsoftwarecompany.[...]CompuwarefiledclaimsthreeyearsagothatIBMhadusedinformationobtainedimproperlyfromformeremployees[...]”FinancialTimesMarch222005
May2014 OECDWorkshop 5
The tradeoff
• PurposeofIPsystem:provideexanteincentivesforinventors
• Inexchange:explain&publishinnovationinspecific,standardizedtechnicalformat– Incentivesvs.disclosure
• Somequestions:– Howimportantaretheknowledgespilloversgeneratedbythepatentsystem?
– Whydofirmswithagiveninnovationthatcanbeprotectedbypatentschoosetorelyonsecrecytoprotectaninnovation?
May2014 6OECDWorkshop
Patents vs secrecy – the differences
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Patents SecrecyDisclosure(codifiableknowledge) Yes NoDisclosure(tacitknowledge) No NoEaseofdelimitinginvention Yes Not clearReverseengineeringallowed No YesSubjectmatter Statutory BroaderTiming After invention Work‐in‐progressProcessvs.product Both Easier for processLength 20 years Longer (potentially)Costtoobtain Higher NonzeroEnforcementcost Expensive Expensive
Partial answer to the spillover question
• Harhoff(2011):InnoS&TFP7projectwithBocconi,LMU,KULeuven,IESE (incooperationwithMITandRIETI)
• CoversEU,US,Japan• Askedinventorsaboutcost‐savingfromreadingpatents
– Highlyheterogeneousacrossandwithinsectors– Medianwas1.2hoursintelecommunications,alsolowinIT,audiovisual,electrotechnical
– 27.6hoursinorganicchemicals,alsohighinpharma,polymers,materialschemistry
May2014 OECDWorkshop 8
Importance of patent literature
• SharesofinventorsansweringaLikertscalequestiononimportancefortheirinvention,classifiedbymainpatentclass(Harhoffetal.2011)
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Maintechnologyarea Impt orveryimpt Not usedChemistry 61.4 9.1Processengineering 48.0 15.6Instruments 47.8 14.7Consumption&construction 45.8 16.7Mechanicalengineering 44.9 15.9Electricalengineering 34.1 21.7
Innovation and IP use
UK1998‐2006 Allfirms InnovatorsPatents 10 26Secrecy 21 45FromCIS3,4,5–sharesoffirms,populationweighted(38,760obs)
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US2008 Allfirms R&D‐doingfirmsPatents 5 41Secrecy 14 67FromNSFBRDIS,sharesoffirms,populationweighted
Shareoffirmsratingprotectionmechanismofhighormediumimportance
Theory: costs and benefits of patenting
• Costs– Directandindirectfinancialexpendituresforapplicationandmaintenance
– Disclosureofinformation(published18monthsafterpriority)– Grantuncertain– Enforcementuncertain
• Benefits– Excludecompetitorsfromusingtechnology– Licensingincome– Blockcompetitorsbyrestrictingtheirfreedom‐to‐operate– Signallingofqualityofinventiontopublicorpotentialresearchcollaborators
– Deterinfringementsuits– Increaseinbargainingpowerin(cross)‐licensingnegotiations
May2014 OECDWorkshop 11
Theory: costs and benefits of secrecy
• Costs– Directandindirectfinancialexpenditures– Activeknowledgemanagement(internalsecrecypolicy)
– Needtosignconfidentialityagreements– Enforcementuncertain&difficult
• Benefits– Protecttheinventionindefinitely– Notlimitedtocertaintechnologies– Broaderscope(example‐ customerlists)– Applicableto‘workinprogress’
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Theoretical literature• Horstmannetal.(1985):“[...]propensitytopatentwillbelowerthe
moreprofitable(exante)acompetingproductisexpectedtobe.”• AntonandYao(2004):ifpatentprotectionweak,onlysmall&medium
valueinventionsarepatented;highvalueinnovationskeptsecret.• Kulttietal.(2006):However,whenthereisastronglikelihoodof
simultaneousinvention,patentingtakesonadefensiverole:thechoiceisnownotbetweenpatentingandsecrecy,butbetweenpatentingorallowingacompetitortopatent.
• ScotchmerandGreen(1990):sequentialinnovation‐ loweringnoveltythresholdwillnotleadtomorepatentsiffirmsprefersecrecy
• Ponce(2007):sequentialinnovators– loweringthenoveltythresholdmayincreasetheuseofsecrecyifinnovationisverycumulative(addedassumptionthatpriorartmakespatentingmoredifficult)
• Schneider(2008);Zaby(2010):importanceofleadtime– iflarge,prefersecrecy
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Theoretical literature
• Resultsareverymixed– Dependonthenatureofcompetition– Whethertheleadinnovatorisfarahead– Informationassumptions– Largelybasedontheoneproduct‐onepatentmodel
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Empirical literature
• Surveyevidenceonpatent/secrecyuse• Crosscountrycomparisons• Impactonperformanceanddiffusion• Naturalhistoricalexperiments
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Empirical evidence: surveys
• Fundamentalproblemis‘observability’‐ needforsurveydata
• Levinetal.1987 (YaleIsurvey)andCohenetal.2000(CarnegieMellonsurvey)– Firmsindifferentindustriesfavorsecrecyandleadtimeoverpatentstoprotectinnovation
– Firmspatentforstrategicreasons(blockcompetitors,improvereputation,gainbargainingpower)
• Largenumberofsimilarsurveys:CISinEurope,similarsurveysaroundtheworld...– Mostfindfirmssystematicallyregardlead‐timeandsecrecyasmoreimportanttoprotectinnovationthanpatents
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CIS literature on IP protection
• BrouwerandKleinknecht(1999):DutchCIS1• Arundel(2001):CIS1datafor7Europeancountries
• Pajak(2009):FrenchCIS4• HegerandZaby(2010):GermanCIS2005• Hussinger(2006):GermanCIS3• Halletal(2013):UKCIS3,4,5• Mainlimitations:
– Cross‐sectionaldata– Firm‐level;actualusegenerallynotobserved
May2014 17OECDWorkshop
CIS Literature – Main Findings• Patentingpropensity
+Size+Salesofinnovativeproducts+R&Dcollaborationagreements+High‐tech+Inventionscharacterizedbyasmallerinventivestep+Technologicalleadwherereverseengineeringeasy
• Propensitytousesecrecyrelativetopatents– Firmsizeforproductinnovations+– CooperationinR&D/innovation+Processinnovation– High‐tech– PartofMNCs
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Cross country evidence
• Moser(2005):innovationspresentedattwo19Cworldfairsinthe19thcentury,fromcountrieswithandwithoutpatentsystems– Patentprotectionnotcriticaltoinnovation– Doesaffecttheindustrialdistributionofinnovativeactivity‐ countrieswithoutpatentprotectionconcentrateinindustrieswheresecrecyeffectivesuchastextiles,foodprocessingandwatchmaking
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Empirical evidence: performance
• Impactofprotectionmethodonfirmperformanceandknowledgediffusion– Hanel(2002)– increasedprofitsfromallformsofIP
– Hussinger(2006) – patentsassocwithinnovsales,butsecrecyisnot
– Halletal.(2013)– bothpatentsandsecrecyassociatedwithhigherinnovativesalesshare
• Verylittleworkonthistopicduetothedatachallenges(useofsecrecynotobserved)
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Evidence on value to the firm
• Litigationdata– highlyselectivesodifficulttodrawstrongconclusions– Lerner(2006)– mostcasesinsectorswherepatentsarelessimportant;damagesrelativelylowcomparedtopatents
– Almelingetal.(2010a,b)– federalandstateappealscourtcases.Mostareagainstformeremployees
– Bothstudiesfindwinrateslessthan50%
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Natural experiments• Png(2011):impactofsecrecyonR&Dandpatenting
– UniformTradeSecretsAct(UTSA)inUS‐ exploitvariationovertimeandacrossstatesinenactment(strengthening)
– Associatedwithaveragedropof2.4%inR&DinUSmanufacturing(1976‐2006)
– Differentialimpactacrosssectors:dropof4.2%inmedicinalchemicals&4.7%incomputerterminals,butnoimpactinpharmaceuticalsandcomputercommunicationsequipment
– negativeimpactonpatentinginsectorsinwhichpatentingofprocessinnovationsrelativelymoreimportant/effective
• CarrandGorman(2001):EconomicEspionageAct(1996)– Criminalizedtheftoftradesecrets– Impactonstockmarketvalueoffirmsaffectedbytheft– Rangedfrom$0.04to$20million,withanaverageof$5million.– Muchlargerthanactualvalueoftradesecrets(fromcourtrecords)
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Natural experiments• YoungeandMarx(2013)– lookatchangetoMichiganlaw– Madenon‐competesenforceable(strengtheningoftradesecrecy)
– Immediatepositiveimpactonmarketvalueofaffectedfirms,especiallythoseinsectorsknowntorelymoreonsecrecy(fromYale/CMsurvey)
• ContrastwiththesectoraldevelopmentargumentofSaxenian,Gilsonetal.:– SiliconValleygrewrelativetoroute128becausenon‐competeswerenotasenforceableinCaliforniaasinMassachusetts
– Allowedmigrationofknowledgetonewstartups,i.e.,morespillovers
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Some key findings• Theoreticalliteratureisinconclusive• Empiricalliteraturesuffersfromfocusatfirmlevel,ratherthaninventionlevel(verycoarse)
• Sectorswherepatentsareimportantarealsothosewherereadingpatentssavestime,suggestingspilloversareenhanced
• Tradesecretenforcementlargelydirectedatformeremployees
• Strengtheningtradesecretprotectionisgenerallypositiveforincumbentfirms,butmaynotenhanceinnovationanddevelopmentintheaggregate
• Weakeningpatentprotectionpushesfirmstowardssecrecy
May2014 OECDWorkshop 24
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