An overview of the UK's Trade Secrets Impact on the Economy and Innovation

An overview of the UK's "Impact of Trade Secrets on Economics and Innovation" research report

On April 19, 2021, the UK Intellectual Property Office released the research report "The Impact of Trade Secrets on the Economy and Innovation", which summarizes and reviews the concept, types and policy background, application characteristics and impact on the economy and innovation of trade secrets, based on the review and analysis of academic literature and policy norms over the past two decades, and puts forward suggestions for further research.

Concept and types of trade secrets

As stipulated in the 1996 WTO Agreement on Trade-Related Aspects of Intellectual Property Rights, the accepted definition of a trade secret is information that satisfies three requirements: 1. it must be secret; 2. it must be reasonably protected; and 3) it must derive value from its secrecy.

The types of trade secrets are broad, including innovative methods, know-how and business information in various forms. In the European Community study, the top three assets protected by trade secrets are: commercial tenders, contracts and contractual terms; List of customers or suppliers and related data; Financial information and business planning. Trade secrets are valuable in protecting information content such as R&D data, know-how and technical solutions, recipes and recipes, marketing plans and data. A study of 200 U.S. criminal court cases showed that the most popular types of trade secrets are: trade secret information, software/source code, composite technical information, and a combination of technical and trade secret information.

In addition, there are "negative" trade secrets, that is, information about knowing what does not work. For example, a failed research pathway information can allow a company to avoid incurring more R&D costs, while its competitors may invest huge resources, which may eventually lead to failure. For another example, software vulnerabilities can also be trade secrets. The degree of confidentiality of this information reflects the company's competitive advantage.

Policy background for trade secrets

Trade secrets, which are included in Article 39 of the Agreement on Trade-Related Aspects of Intellectual Property Rights, are global rights and enjoy at least minimal protection in World Trade Organization member countries, although their legal structure varies from jurisdiction to jurisdiction.

In the UK, trade secrets are primarily protected through tort and contract law in the civil law system. However, not all jurisdictions officially recognize trade secrets under the banner of intellectual property, and in some jurisdictions the illegal use or theft of trade secrets is considered a criminal offence, although this criminalization is controversial.

Since 2016, major advanced economies have amended their trade secret laws. The EU aims to clarify and harmonize the protection of trade secrets in Member States through the Trade Secrets Directive 2016; The United States adopted an expansionist strategy, further coordinating and expanding the methods and scope of protection in the Protection of Trade Secrets Act passed in 2016, building on the criminalization of trade secret theft under the Economic Espionage Act of 1996; In 2018, Japan amended its Unfair Competition Law to provide civil and criminal remedies for trade secrets. Trade secrets are now included in multilateral trade agreement negotiations. For example, the 2018 U.S.-Mexico-Canada Agreement amendment to the North Atlantic Free Trade Agreement includes provisions to expand trade secret protections and criminalize trade secret misappropriation.

Features of trade secret applications

In the past two decades, the role of trade secrets as an intellectual property protection mechanism has been increasingly valued, and trade secrets are the preferred means of protection for innovative enterprises. Global legal and economic trends show that the use of trade secrets is growing faster than the use of patents.

For trade secret owners, the advantage of trade secrets is that they can protect some intellectual achievements that may not meet other intellectual property qualification requirements, such as innovation in marketing and organizational methods, customer lists, bidding information and other information assets, which can be included in the scope of trade secret protection, thereby supporting the operation of the company's entire innovation ecosystem. Trade secrets encompass an extremely wide range of subject matter, are applicable to all areas of economic activity, and are a very flexible IP protection mechanism, either as a supplement or replacement for patents, or in conjunction with other IP rights such as copyrights, trademarks and industrial designs, and throughout any stage of the R&D cycle. They do not require formal registration, and trade secret protection may continue indefinitely as long as they remain secret, so the cost of protection is relatively low. At the same time, by not requiring disclosure, competitors have little access to information, giving owners an advantage over competition in the relevant market segment.

There are also disadvantages to the application of trade secrets. Trade secret protection can be relatively weak for trade secret owners. Because trade secrets are easily stolen, and the law does not prohibit independent discovery or reverse engineering to obtain secret information, once the information is disclosed, it is no longer a trade secret. With the increase in business dealings between businesses and the increasing use of digital means to store trade secrets, trade secrets are becoming a hot target for cybercrime, and trade secret owners need to invest in strengthening cybersecurity defenses. In addition, the protection of rights is also challenged, as judicial proceedings may lead to further loss of trade secrets and the standard of remedies and damages is not clear.

The impact of trade secrets on economics and innovation

From an economic point of view, the core rationale for protecting intellectual property rights is that they provide incentives for innovation. Innovation incentives, also known as the social contract theory of intellectual property, where society grants innovators exclusive rights to their innovations, which enables innovators to reap rewards from their innovation efforts, recoup their innovation investment and continue to innovate. Society benefits from continuous innovation and knowledge disclosure, which in turn stimulates further innovation.

In order to avoid long-term monopolies and encourage more innovation, these rights have an expiration date when knowledge protected by intellectual property rights can be freely used. IP introduces a static inefficiency (monopoly of IP) in exchange for a dynamic efficiency (continuous innovation). Intellectual property rights such as copyright and patents fit well into this model. Trade secrets also fit this incentive model to a large extent, and trade secret policies reduce the need for companies to overinvest in physical protection, freeing up funds for other purposes such as R&D.

However, trade secrets require special attention to two points: first, the lack of disclosure; The second is the lack of a predetermined term of protection. By definition, trade secrets are non-public and can theoretically exist forever, leading to criticism that trade secrets impede communication and limit R&D spillovers (the exchange of ideas outside the R&D project), which in turn leads to reduced innovation and reduced productivity.

Indeed, within the framework of an intellectual property system that stimulates innovation and a social contract, disclosure is the basis for the flow of knowledge, and trade secrets inhibit this flow, both within and between firms. Trade secrets and the cost of protecting them can be barriers to market entry. For example, some respondents believe that trade secret owners use secrecy to raise the barrier to entry for competitors through aggressive litigation and other actions.

Strong trade secret laws limit employee mobility. While such restrictions increase the utilization of trade secrets, restrictions on employee mobility are detrimental to innovation; In contrast, weaker trade secret laws can promote liquidity. In the United States, a ruling against the "principle of inevitable disclosure" would have contributed to a 10 percent higher turnover for college-educated workers; Conversely, rulings endorsing the "principle of unavoidable disclosure" reduce the corresponding competitive threat, from which companies can often benefit. This may benefit trade secret holders, but reduce the flow of knowledge, which in turn hinders innovation.

In general, trade secrets enjoy weaker protection than patents and copyrights because they do not provide protection against reverse engineering and independent discovery, thereby mitigating their negative effects; It should also be emphasized that there is a very important non-economic reason for trade secret protection, namely the right not to disclose implied by disclosure requirements in the IP system. Thus, the economic reasons why patents, copyrights and other intellectual property rights must be disclosed in turn provide a theoretical basis for the protection of trade secrets.

Recommendations for further study

Trade secrets support innovation, but also limit knowledge diffusion and labor mobility. Strong trade secret policies benefit existing trade secret holders and encourage investment in R&D, but they can also hinder future innovation and create barriers for competitors to enter relevant markets. Therefore, a delicate balance needs to be struck between trade secrets that encourage R&D investment and trade secrets that limit knowledge spillover (leakage).

As an important and flexible innovation tool, there is a lack of understanding of the economic and innovative impact of trade secrets in practice. At present, many important questions remain, for example, what is the economic impact of the patentability of existing trade secrets? How is the choice to use trade secrets influenced by factors such as novelty, cost, and barriers to competition? How can companies identify and protect trade secrets? How do R&D, business, legal and IT personnel interact in protecting trade secrets? Trade secrets are inherently confidential, resulting in a lack of data related to trade secrets, and the theoretical model of trade secrets is quite limited compared to developed patent literature. Therefore, it is necessary to expand empirical and empirical data on trade secrets through a broader survey, and explore key issues such as the interaction between trade secrets and patentability, so as to better provide information support for policy formulation.

(Tang Zhen, author's unit: Shanghai Songjiang District People's Court)

Source: People's Court Daily