Why Do Startups Use Trade Secrets?

By Levine, David S.; Sichelman, Ted | Notre Dame Law Review, December 2018 | Go to article overview

Why Do Startups Use Trade Secrets?


Levine, David S., Sichelman, Ted, Notre Dame Law Review


INTRODUCTION                                                       753   I. EXISTING THEORIES OF WHY STARTUPS USE (AND DON'T              755      USE) TRADE SECRETS      A. Reasons Why Startups Use Trade Secrecy                     756         1. To Maintain Lead-Time Advantage and Prevent             757            Competition         2. Patent Protection Is Unavailable                        758         3. Patent Protection Is Too Costly, Weak, or Difficult     761            to Enforce         4. To Provide Protection Prior to and                      763            Complementary with Patenting         5. To Assist in Financing and Financial Exit               766         6. To Prevent Employees from Working at                    767            Competitors         7. To Generate Licensing Revenues                          768         8. To Provide Strategic Bargaining Leverage                770      B. Reasons for Startups Not to Use Trade Secrecy              770         1. Ease of Reverse Engineering and Advantages to           770            Patenting         2. Fear of Others Independently Patenting the              771            Invention         3. Inability to Market or Even Explain to Investors        773         4. Tension with Open Source, Open Innovation, and          774            Other "Sharing" Models         5. Reliance on Contracts Like Covenants Not to             775            Compete and Nondisclosure Agreements  II. THE PAUCITY OF EMPIRICAL STUDIES ON TRADE SECRECY             776      A. Previous Empirical Studies of SMEs and Trade Secrecy       779      B. Speculating on the Results of More General Studies         781         1. The Benefits of "Informal" vs. "Formal" IP              781         2. Products vs. Processes                                  782         3. Lead-Time and First-Mover Advantage                     783         4. Industry Analysis: Software and Biotechnology           784         5. Collaboration                                           785         6. Knowledge Spillovers                                    786         7. Research and Development (R&D)                          787         8. Hybrid Strategies                                       788         9. Open Questions Remaining from Previous Studies          789 III. AN EMPIRICAL ASSESSMENT OF STARTUPS AND TRADE SECRECY         789      A. The Data: The Berkeley Patent Survey                       790      B. Response Rates and Respondent Characteristics              792         1. Survey Response Rates                                   792         2. Characteristics of Respondents                          793      C. The Results: The Use of Trade Secrets by Startups Highly   794         1. Descriptive Results                                     795            a. Importance of Trade Secrecy Relative to Other        795               Appropnabihty Mechanisms            b. Trade Secrets and Patents as Substitutes or          797               Complements?            c. "New" vs. "Old" Startups                             800            d. Important of Secrecy by Business Model               801         2. Regression Models                                       803            a. Explanatory Variables                                803         3. Regression Results                                      805            a. General Trends                                       805            b. Secrecy vs. Patenting                                807  IV. IMPLICATIONS OF OUR RESULTS: THE VARIED USES OF TRADE         808      SECRETS      A. The Role of Trade Secrecy in Promoting First-Mover         809         Advantage      B. Trade Secrets and Patents as Substitutes and Complements   810      C. Trade Secrets as Strategic IP Assets                       811 CONCLUSION                                                         812 APPENDIX                                                           813 

INTRODUCTION

Magic Leap is a startup company that is active in the exploding field of augmented reality, head-mounted displays that "superimpose[ ] 3D computer-generated imagery over real world objects. …

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Why Do Startups Use Trade Secrets?
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