The Law of Trade Secrets: Toward a More Efficient Approach

By Chally, Jonathan | Vanderbilt Law Review, May 2004 | Go to article overview

The Law of Trade Secrets: Toward a More Efficient Approach


Chally, Jonathan, Vanderbilt Law Review


I. INTRODUCTION

Trade secret law must efficiently protect that which can be considered a trade secret.1 Were the law to provide too little protection, information protected as a trade secret would not be created. Were the law to provide too much protection, competition would be unnecessarily stifled. Only efficient protection, meaning neither too little nor too much, appropriately addresses the unique nature of trade secrets as intellectual property. Such a conclusion becomes increasingly necessary given the rising import of trade secret law in the spectrum of intellectual property.2

"It is the policy of the law, for the advantage of the public, to encourage and protect invention and commercial enterprise."3 With this, the first sentence in Peabody v. Norfolk, states began to recognize that the law must protect commercial secrets to insure that those secrets will be developed.4 Despite the threats of preemption by the federal patent scheme,5 state trade secret law remains essential to providing incentives for innovation.6 In addition, courts have noted that trade secret law exists to institute a form of commercial morality, to impose certain ethical standards on business relationships.7 Absorbed by this potential of mandating morality, courts have molded trade secret law in ways that frustrate the notion that trade secret law should provide efficient incentives to create.8

The ultimate focus of this Note is to identify the truly efficient nature of the protection afforded by state trade secret law.9 Further, this Note seeks to identify the importance of efficient intellectual property protection.10 This Note contends that courts should abandon those aspects of trade secret law more recently grafted onto its efficiency underpinnings with hopes of mandating commercial morality.

Part II first identifies the need for promoting efficient outcomes through intellectual property laws. Part II continues by discussing the extent to which the two most relevant forms of protection granted to commercially valuable ideas, trade secret law and patent law, create efficient outcomes. Part III identifies the current state of trade secret law. Finally, Part IV presents a form of trade secret law that appropriately promotes the law's efficient outcomes.

II. INTELLECTUAL PROPERTY AND EFFICIENCY

Trade secret law, unlike any other form of intellectual property, grants a property right that is limited by competitive forces.11 As such, trade secret law, so long as it is untainted by the potential of mandating commercial morality, is uniquely efficient.

Legal protection of intellectual property is absolutely necessary.12 This result becomes clear when we consider the choice facing innovators if the law did not provide protection for intellectual property.13 Without possible legal protection, benefits accruing to innovators from information developed after extensive expenditures would continue only as long as innovators could keep this information secret.14 Once the information became public, competitors would begin to sell products, which use or embody the innovation, that would compete with those developed by the original innovator.15 Because the competitors would not have incurred the substantial costs associated with developing the innovation, those competitors would charge lower prices than would the original innovator.16 Thus, the original innovator would be quickly priced out of the market.17 Faced with such a legal regime, innovators would expect fewer benefits from new innovations than they expect under the existing regime because of the additional suppliers infused into the market. Also, innovators would expect to incur higher costs attempting to maintain secrecy than they currently expect.18 Rational actors would be deterred from developing information at the rate it is currently developed.19 Thus, the problem necessitating the law's provision of additional protection is a lack of natural exclusivity.

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