by Dennis Crouch
Anecdotal whispers in my ears suggest that many companies are now looking more toward trade-secrecy as well as confidentiality and non-compete protections in reaction to both (1) shifts in patent law that have incrementally weakened the power of patent rights and also (2) to the potential creation of a national trade secret cause of action under the new Republican congress.
Disclosure vs Secrecy: A major public policy difference between patents and trade secrets is that patents require full public disclosure prior to obtaining rights while trade-secrecy requires just the opposite – affirmative steps to keep the information from the public.
Most discussions of the differences focuses on the public value of disclosure on a macro-economic scale. However, an interesting new article by a group of economists at Georgia Tech (N. Dass) and Rutgers (V. Nanda and S. Xiao) look instead to the micro-economic impact — asking whether a relative shift in legal rights toward either patents or trade secrecy impacts the innovative companies. To be clear, these economists are not experts on intellectual property law, but instead are experts on stock market liquidity and ways that information impacts that liquidity.
Information Asymmetry: Market transactions generally have some amount of information asymmetry where the seller may know more about the product than the buyer or perhaps one buyer knows more than other buyers. Major asymmetry tends to gum-up market transactions because buyers encounter more risk and may need to do more due-diligence investigation. This is a recognized problem and, as such, many of the rules associated with publicly traded companies serve as attempts to avoid the information asymmetry. Prior studies have found that information asymmetry tends to decrease stock liquidity for publicly held corporations.
Public Information and IP Rights: Patents provide investors with direct information regarding the rights held by various companies. On the other hand, companies generally cannot disclose their trade-secrets to investors (except for closely-held private companies). From these origins, the Dass makes the following hypothesis:
We expect the choice between secrecy and patenting to be affected by the degree of relative protection provided and to have distinct implications in terms of stock liquidity and equity financing. Our hypothesis is that stronger secrecy protection will encourage firms to adopt more secrecy, therefore increases information asymmetry and reduces stock liquidity. By contrast, better patent protection is hypothesized to cause firms to disclose more information by patenting their inventions, resulting in higher stock liquidity.
To test this hypothesis, the authors conducted a retrospective study that looked to historic changes in patent law (TRIPS implementation) and trade secret law (states strengthening law) and considered market reaction to those changes:
We find that exogenous, staggered passage of state-level statutes that strengthened trade-secret protection increase opaqueness, reduce stock liquidity and worsen the market’s reaction to announcement of seasoned equity offerings (SEOs). By contrast, implementation of [TRIPS], that strengthened patent protection, enhanced transparency and stock liquidity of patenting firms and reduced the stock market reaction to SEOs.*
The basic result here is that a relatively stronger patent regime provides companies with an incentive to obtain patents which, in turn, makes it easier for those companies – especially smaller companies – to raise money in the capital market. Now, although the study was primarily focused on market liquidity, the authors also found that increasing either IP-schema (patents or TS) has the impact of increasing R&D activity.
In recent history (up until the past few years), both patent and trade secret rights have only been on the rise and so the authors were unable to study if the market phenomena also work in reverse. Lucky (at least for these academics), Congress and the Supreme Court have offered a natural experiment for a follow-on investigation in a few years.
= = = = =
* Here, although not entirely clear from the study, the authors apparently use “transparancy” and “opaqueness” to actually mean that the company received respectively more or less patents following the legal change.
[…] Patenting vs Secrecy: Impact on Company Financing … link to patentlyo.com expect the choice between secrecy and patenting to be affected by the degree of relative protection provided and to have distinct implications in terms of stock liquidity and equity financing. Our hypothesis is that stronger … […]
[…] Patenting vs Secrecy: Impact on Company Financing … link to patentlyo.com expect the choice between secrecy and patenting to be affected by the degree of relative protection provided and to have distinct implications in terms of stock liquidity and equity financing. Our hypothesis is that stronger … […]
“We find that exogenous, staggered passage of state-level statutes that strengthened trade-secret protection increase opaqueness, reduce stock liquidity and worsen the market’s reaction to announcement of seasoned equity offerings (SEOs). By contrast, implementation of [TRIPS], that strengthened patent protection, enhanced transparency and stock liquidity of patenting firms and reduced the stock market reaction to SEOs.”
Why is the the first sentence written in present tense and the second sentence in the past tense?
The latter occured some years ago. But what are these alleged new “state-level statutes that strengthened trade-secret protection?” Are not almost all states still having a version of the uniform trade secrets act?
The premise of this research seems to be that you can never have too much “market liquidity” and that patents have an impact on said market liquidity. Does this mean that if Google shifts to trade secrets over patents that it will get harder to buy and sell shares of its stock on any of the major exchanges? Given the extreme velocity with which shares are traded now, can the quantum of information provided by issued patents (or published applications) really have much impact?
Also, and in light of what one Edward Snowden managed to do to our national “trade secrets” using little more than a flash drive, I don’t expect to see a huge movement towards favoring trade secrets over patents any time soon. Rather, I think what we will see is that the amount of money that the some of the big filers are willing to spend on getting U.S. patents will decline as companies become more selective in what they patent, with little impact on R&D expenditures.
What it will mean is that Google won’t be talking about what they are doing. Their employees will be terminated if they talk about what they are doing. Their employees will be locked into working for Google forever or switch to a new technology area all together. It will probably mean that standards will go by the way side as companies like Google try to lock-up their markets with proprietary standards. Expect lots of web services that are dark. You will get functionality, but zero knowledge how that functionality is achieved.
Just look at how Microsoft was in 1985. Super, super, secret rooms. Large projects on how to deliver code that can’t be decompiled.
Encryption is going to become huge. Probably chips will start having large portions devoted to decrypting code.
It is going to get ugly.
History repeats.
In a somewhat ‘charming’ tie-in to the “Top Patently-O Subscribers” thread, the only “controlling” terms I could locate to the Feedburner mechanism were Google’s.
I wonder if this is the right ‘Cahoots’:
link to clubplanet.com
Google doesn’t talk about what they are doing now, so how is that going to be a change?
Microsoft hasn’t change a bit. They never released code from their “Super, super, secret rooms.”
And since you didn’t notice, encryption is ALREADY huge.
The problem with chips to do encryption (it has been tried before you know) is that such chips, once compromised, can’t be replaced easily. And that makes the equipment containing those chips much more expensive.
Night, if I recall correctly, one of the points of the government’s antitrust settlement was that Microsoft had to make public how to interface with its operating system. So long as they could keep that a secret, they had a built-in advantage over any competitor trying to build products that work with its OSs.
Given Microsoft’s success in building and extending a monopoly based upon trade secrets, trade secret protection is extremely important for software – far more important than copyright, and far more important than patent protection in particular situations.
That said, one of the problems any small business had a may still have in trying to get off the ground in software was Microsoft. If they invented a product that was highly popular and useful, Microsoft would soon put that product’s functionality into its own products. i4i is a good example. Without a patent, i4i would have been completely sunk and without value.
On Google, I would think that it would, like Microsoft, depend heavily on trade secrets until and unless the government sues them like they did Microsoft. Apple’s patent wars with its rivals has shown that software patents have very little value in the end.
i4i still lost. The award amount barely covered the legal expenses – and didn’t cover the loss of business over 10 years.
That’s a different issue jesse.
Try not to be confused.
It may be a different legal issue.
But for all practical purposes, i4i still lost more than they gained by the patent.
They were luckier than Stacker though.
i4i is still in at least some business.
You do realize that your phrase “for all practical purposes” is quite meaningless in the context of the discussion here, right?
You are doing that ignoring the context of the discussion thing again. See Sun Tzu.
yet they still lost.
jesse, you may be right there about the legal expenses. MS put on more than an full court defense. It was fanatical, even going to the Supreme Court. I think MS was trying to make a point — something about might makes right.
Didn’t i4i win $300MM? That’s a whole lot more than legal fees cost in a patent case.
The best I can find is “more than 10 million” was spent. But did the 290 million cover the lost development time and the lost business?
i4i was lucky.
I4i chose to spend the development time on litigation. They could have tried to build something for their customers instead. Microsoft certainly didn’t make them.
And i4i didn’t lose any business because Microsoft never copied anything from them.
“Microsoft had to make public how to interface with its operating system”
Microsoft actually always did that. The DDK and SDK were always available to the public. There were some unfair allegations of secret APIs but thorough investigation revealed that there was nothing available to Microsoft apps that was not available to the public.
“So long as they could keep that a secret, they had a built-in advantage over any competitor trying to build products that work with its OSs.”
That is not factually accurate and never was. There was some advantage to Microsoft in that internally they knew what new features they would be marketing in the upcoming versions, but there was never a technical advantage. And beta versions of new features were widely available far enough ahead to dissolve even the small advantage that secrecy about future plans could have created.
Neither included HOW. Just tools that would – and those tools were not portable. They only worked on Windows.
Even when the EU REQUIRED MS to produce the documents, they couldn’t.
They had to get help from the Samba team to write it.
“Given Microsoft’s success in building and extending a monopoly based upon trade secrets”
Microsoft’s monopoly was not based on trade secrets; it was based on network effects. Almost nothing Microsoft was doing in its monopoly era was a secret. Competitors provided all the same functionality Microsoft did.
“i4i is a good example. Without a patent, i4i would have been completely sunk and without value.”
That is just hilariously wrong. I4i’s business was viable with or without a patent. Microsoft never copied anything from i4i, neither ideas, nor software, nor technology. And i4i’s patent was one of the worst examples of abusive nonsense software patents that should never have been allowed by a sane PTO.
There are plenty of businesses that have been swallowed by Microsoft’s predatory abuse of its monopoly. I4i was never one of those that Microsoft predated or treated unfairly; it is just a successful abuser of the failures of the patent system in an area where patents do not belong.
If Microsoft’s monopoly was not based on trade secrets then why is the source code secret?
Keeping the source code secret makes it harder to interoperate with Microsoft systems and promotes the network effect.
None of the functionality was protected by keeping the source code secret since the competitors already knew how to write operating systems that did everything Windows did. Apple IIGS, MacOS, Linux, PC-DOS, IBM OS/2, BeOS, GeoWorks, 386BSD, and more did everything Microsoft’s systems did. They just didn’t have the network.
Microsoft’s interfaces had a set of bugs and inconsistencies that were and are difficult to emulate. For independent software vendors, it was always a matter of rewriting software to run it on another system that didn’t require the same bug fixes and workarounds. The result was mass Microsoft lock in and antitrust issues. But it wasn’t based on trade secrets.
Preventing bug-for-bug compatibility and solving the network effect problem was the purpose of source secrecy.
The Samba project had lots of problems with MS interaction.
It wasn’t “a set of bugs and inconsistencies that were and are difficult to emulate”, it was a total lack of documentation. Even MS didn’t know how it worked.
Preventing bug-for-bug compatibility and solving the network effect problem was the purpose of source secrecy.
I thought that is called a “trade secret”.
Secret / not secret
Win / lose
Lucky / unlucky
Did you both enjoy your stay at the Holiday Inn last night? How was the screening of the new Jim Carrey movie (based in part on your antics)?
secret:
1.
done, made, or conducted without the knowledge of others:
secret negotiations.
2.
kept from the knowledge of any but the initiated or privileged:
a secret password.
Trade secret:
A trade secret is a formula, practice, process, design, instrument, pattern, commercial method, or compilation of information which is not generally known or reasonably ascertainable by others, and by which a business can obtain an economic advantage over competitors or customers.
Yup. I think that covers why MS doesn’t publish, and explains why MS doesn’t want what it does public.
Owen, all have to put your comments down as your personal opinion because I believe a jury found that Microsoft willfully infringed. Your post makes it seemed as if Microsoft did not infringe at all.
Sorry if I gave you that impression. In fact, Microsoft and all the inventors of modern markup had been infringing i4i’s patent for years, probably more than a decade, before i4i filed for the patent and still infringe today.
Not that I give any credit to the technical conclusions of a randomly selected jury, but they did see that much.
What I mean to say is that no one who understands the technology in question and its history could conclude that i4i’s patent constituted an invention, anything new in the field, any kind of contribution to the art, or any kind of inspiration or aid to Microsoft’s products.
Actually, the only difference is that the “patent”, described a dynamic modification of the underlying data. (Which is the same thing every query to a database does…)
Certainly it is junk.
Yet it was also issued by the PTO.
What made MS guilty was doing it AFTER holding rather extensive interaction with i4i and learning what they were doing.
They didn’t present the same results before that.
You don’t understand hind sight. You sound like a typical software engineer that has not taken a step back and thought about these issues. So, you just get on here and pour out your ignorance and make us all suffer through it.
And all you do pour your ignorance of software engineering.
jesse,
You continue to admonish others on points that you need to apply to yourself.
Note that the field you work in is NOT called “Maths Philosophy”
Why do you think the term “engineering” is included?
Plain fact that you still need to come to grips with: software is a machine component, a manufacture built by the hand of man for a (typically, and admittedly not always utility that falls within the Useful Arts).
You ignore this bedrock at your continued peril of ignorance.
Because “engineering” is the term given.
Remember, when it was first applied the engineers objected as it didn’t call for an engineering degree, training, and didn’t (and still doesn’t) provide the reliability of what a real engineer provides.
I agree that “software engineering” isn’t really engineering. It was used because programmers were combining pre-defined solutions to provide new solutions. In that limited context, “engineering” does apply.
jesse,
You continue to exhibit such shallow thinking.
Why do you think the term “engineering” was the term given?
Why does it apply – even if the context is limited?
You seem unable (or unwilling) to grasp the meanin under discussion.
The provision of solutions IS engineering and IS the type of utility-driven human behavior meant to fall under patent law.
Once again – this was NOT called “Maths Philospohy” for a reason.
Please stop ignoring the bedrock of what software is.
Sorry – the term “engineering” also contains liability for failure.
Software has none other than what some contract includes – thus “at your own risk”. and why MS isn’t held liable for all its software failures.
If engineers produced so many failures they would have been sued out of existence.
And the bedrock of software is math.
The bedrock of ALL engineering is math.
This proves the point against you.
Come my 2 Dimensional friend, you do not have to be trapped in that circle, you can step over that line.
How wrong can you be…
The bedrock of ALL engineering is PHYSICS.
The math is just a tool that can describe reality, but even there, there are limits where the physicists have not figured out how.
Not all math can be used in physics.
The bedrock of physics is Maths.
I am not wrong at all – you are merely at the limits of your intelligence, my 2 Dimensional friend.
And by the way, tools are patent eligible.
Owen, if i4i’s invention were all that obvious to one of ordinary skill in the in the art, one wonders at Microsoft’s defense.
The bedrock of Physics is the universe.
Math can make all kinds of things predictable…. but that doesn’t make those predictions real.
The universe has a way of proving that…
So you are now saying that your version of ‘math’ is a man made tool and not the same as the underlying universe…?
It is a manufacture then, made by man for some utility….
You do know that you have just shown that your version of ‘math’ is exactly the type of thing that is meant to be protected by patents, right?
You have proven the case against your own professed views.
Congratulations.
It is a tool of the mind.
And you are being short sighted.
Can you copyright something ‘of the mind?’
You are the one being “short sighted” confusing the thought of software with software (and yes, you are also forgetting the defined nexus of software as a machine component – and machines do not think [anthropomorphication])
(you are doing that monologuing thing again)
So now we are talking abut copyright.
Pretty much anything written can be and is copyrighted. The current presumption is it is copyrighted as soon as it is written.
Actually, machines can do the same thinking of math that people can. Things like adding two numbers together, comparing numbers, and selecting the next step.
Of course, that is exactly how you do it – thus the machine “thinks” in math. It can’t do anything else though.
Human cognition is required for thinking.
You keep on attempting to use words outside of their recognized meanings, thus your ramblings are simply meaningless.
Human cognition is required for thinking.
No it isn’t.
As many studies of various species show.
Ned as usual you come up with your nonsense to try to cloud the issues around information processing.
Face it: trade secrets are powerful and can lead to monopolistic behavior. You are essentially agreeing with me. Patents break that down and encourage disclosure and openness.
Microsoft is much more open then they were and a good measure of that is patents.
Silicon Valley companies have already been caught colluding on salary caps for employees. Patents are one of the great reasons why Silicon Valley can’t capture employees. The disclosure of a patent kills the trade secret and makes it so the employee can easily slide over to another job.
All of this is basic. Those that deny these basic facts are operating for Google and their ilk. That is reality.
Those Silicon Valley tech employees are in for quite a surprise when they see new contracts that turn them into slave laborers. And Lemley has never disclosed the contracts he makes his employees sign. Let’s see them Lemley. Disclose. Interesting how Lemley is supposed to be for the future of openness and how things are magically funded and yet—Lemley is secretive about all his activities and the reality of what his employees have to sign.
Night, the problem of so many big companies existing side-by-side in one area is that it is easy to pirate the employees of another as a form of competition. This is what the companies were complaining about recently. Major companies would target key employees of another simply to do them damage or to retaliate.
When I first moved to California to join the aerospace industry in Southern California, it was booming. There were multiple companies all doing aerospace R&D in Southern California. Engineers could move around quite freely, thereby driving up their salaries. At the time, the average stay of an employee on the job was one and a half years. I don’t know if it’s changed very much since.
I used to talk to engineers on a regular basis inside my company. They were constantly complaining that loyalty was punished because new hires, of less seniority or position, had to be hired in at higher salaries than they were making. In order to keep people happy, there was a constant need to keep salaries of loyal engineers competitive. The wage spiral was significant, and it was one of the reasons why companies wanted to restrict as best as possible the movement of employees because without some restraint, it became almost impossible to place an R&D facility in California.
Ned,
You are conflating many factors together and have lost any “point” that you were trying to make.
Are you trying to say that Big Corp should be allowed to engage in overt wage control?
Are you saying that the government should step in and stop wage escalation as an R&D policy matter?
Are you saying that escalating wages are a good thing with a natural self-limiting ceiling (Big Corp says ‘no mas’ and moves elsewhere?
I cannot figure out what you are trying to say, much less how it fits into the patent law discussion here.
anon,
1. companies know they cannot restrict movement of employees.
2. employees take advantage.
3. there is an investable wage spiral due to proximity of so many companies hiring skilled engineers.
4. companies are wont to move out of California because of this alone.
5. companies seek to limit the damage by not mutually agreeing not to target employees of each other.
6. the recent scandal exclusively involved reciprocal non targeting deals.
Great Ned – but what is your point?
Are you merely listing these items, but not saying anything meaningful about them? I am well aware of the items already.
What are you adding? How does what you are attempting to add impact patent law?
Read again my post at 9.1.4.4.1.1 and note that the questions put to you remain.
Well for one thing, anon, targeting is a method of obtaining technology from one’s competitor. To the extent that has been made legal in California, it only made matters worse.
I’d also point out too that I was the one that said that new trade secret law would be coming to cancel out CA law. And it did. I said that two years ago.
“And it did”
Sorry NWPA, but that is not true (yet).
As discussed on the previous thread concerning the national law, that national law was NOT pre-emptive and merely added another layer of law on trade secrets.
The California (and other states’) law survives.
Night, actually I think the whole point of nationalizing trade secret law is to undo California’s statutory restriction.
Ned, as I indicated, if the aim was to undo California law, then the current national law under discussion is an absolute FAIL on that goal.
anon, I agree that Congress cannot constitutional legislate to control California intrastate commerce.
But this is not the same Supreme Court as we had in the 1800s when the Trade Mark Cases were decided.
Sorry Ned, but I only see your comment as muddling the situation (and the Federal Government could if it wanted to enter this field and preempt State law – this is easily within the reaches of Wickard v Filburn).
Didn’t work either, did it.
And speak for yourself. As liars go, you are pretty consistent.
On walking away to a competitor with a thumb drives full of the crown jewels, there can be problems in that:
Seagate Technology recoups $630M trade-secrets award
link to blogs.law.unh.edu
This crossed my desk this morning – worth a read:
link to law.com
(might be behind a paywall)
Threats to use more trade secrecy protection instead of patents are too often made by people who do not realize its serious limitations versus patents. It will not protect a sold product that can be reverse-engineered. It does not protect against independent re-inventions by others. It will not survive public disclosures or unrestricted access. It requires proof of access to and unauthorized using of that trade secret, not just proof of doing essentially the same thing.
BTW, the whole concept of rating companies technological prowess by the number of patents they obtain is a highly dubious proposition. One good patent providing protection from competition for a major product is worth more than hundreds of patents of no economic significance cranked out by another company.
Very true Paul – it is difficult to make a one to one numbers comparison.
Such things as a ring of patents to keep the competition away and make them attempt costly research is not adequately reflected in those “no economic significance” ones you may have misjudged.
The game is far more intricate than a shear numbers game.
“The game is far more intricate than a shear numbers game.”
You got that right!
Paul,
You may be overlooking the tandem of one entity having a patent while the holder of a trade secret has the shiny new right known as the Prior Uset Right – all the benefits and none of the costs.
The AIA expansion of the prior commercial user right does not give any patent-like protection. Nor does it overcome any of the trade secrecy law disadvantages noted in these comments. It provides an additional defense for a prior commercial user from later-filed patents of others IF special proof obligations are satisfied. Neither this statute or its predecessor have ever yet been successfully used.
Not true Paul – take another read: the protection afforded let’s you operate under the umbrella of the patent holder – your customers cannot be purposes as your sale counts as an exhaustion event (even though the patent holder does not benefit).
Purposes = prosecuted
(autocorrect)