The Biden administration recently announced its support for a proposal before the World Trade Organization that would suspend the intellectual property protections on Covid-19 vaccines as guaranteed by the landmark TRIPS Agreement, a global trade pact that took effect in 1995.
The decision has sparked furious debate, with supporters arguing that the decision will speed the vaccine rollout in developing countries. The reality, however, is that even if enacted, the IP waiver will have zero short-term impact—but could inflict serious, long-term harm on global economic growth. The myopic nature of the Biden administration’s announcement cannot be overstated.
Even if WTO officials decide to waive IP protections at their June meeting, it’ll simply kickstart months of legal negotiations over precisely which drug formulas and technical know-how are undeserving of IP protections. And it’s unthinkable that the Biden administration, or Congress for that matter, would actually force American companies to hand over their most cutting-edge—and closely guarded—secrets.
As a result, the inevitable foot-dragging will cause enormous resentment in developing countries. And that’s the real threat of the waiver—precisely because it won’t accomplish either of its short-term goals of improving vaccine access and facilitating tech transfers from rich countries to developing ones. It’ll strengthen calls for more extreme, anti-IP measures down the road.
Experts overwhelmingly agree that waiving IP protections alone won’t increase vaccine production. That’s because making a shot is far more complicated than just following a recipe, and two of the most effective vaccines are based on cutting-edge discoveries using messenger RNA.
As Moderna Chief Executive Stephane Bancel said on a recent earnings call, “This is a new technology. You cannot go hire people who know how to make the mRNA. Those people don’t exist. And then even if all those things were available, whoever wants to do mRNA vaccines will have to, you know, buy the machine, invent the manufacturing process, invent creation processes and ethical processes, and then they will have to go run a clinical trial, get the data, get the product approved and scale manufacturing. This doesn’t happen in six or 12 or 18 months.”
Anthony Fauci, the president’s chief medical adviser, has echoed that sentiment and emphasized the need for immediate solutions. “Going back and forth, consuming time and lawyers in a legal argument about waivers—that is not the endgame,” he said. “People are dying around the world and we have to get vaccines into their arms in the fastest and most efficient way possible.
Those claiming the waiver poses an immediate, rather than long-term, threat to IP rights also misunderstand what the waiver will—and won’t—do.
The waiver petition itself is more akin to a statement of principle than an actual legal document. In fact, it’s only a few pages long.
As the Office of the United States Trade Representative has said, “Text-based negotiations at the WTO will take time given the consensus-based nature of the institution and the complexity of the issues involved.” The WTO director-general predicts negotiations will last until early December.
That’s a lot of wasted time and effort. The U.S. Trade Representative would be far better off spending the next six months breaking down real trade barriers and helping export our surplus vaccine doses and vaccine ingredients to countries in need.
When this waiver inevitably fails to boost production, supporters won’t meekly back off. No, they will step up their haranguing of the United States for having failed to deliver on its supposed promise. There will be lots of yelling and recrimination, and what the Biden administration surely intended as a relatively toothless show of solidarity will instead end up being seen as just another rich country head fake.
That’s a problem for all of us who deeply care about the state of global IP policy, because the damage will be worse and longer-lasting than a diplomatic donnybrook. The United States worked for many years to ratify TRIPS, and since then has been pushing back on the populist anti-IP agenda and trying to convince the rest of the world that robust IP regimes can deliver economic development over the long run. Now much of that work will be undone in the process of this chaotic, and ultimately fruitless, waiver discussion.
When COVID-19 came ashore, glaring gaps in the government’s pandemic preparedness became painfully obvious. Everything from inadequate stockpiles of personal protective equipment to confusing and uncoordinated guidance regarding closures hampered our early response.
But while the government floundered, America’s research scientists sprang into action. Moderna actually invented its vaccine mere weeks after the virus was genetically sequenced in January — though of course, it took months of clinical trials to prove the vaccine was safe and 94% effective.
Now, tens of millions of Americans have been vaccinated, and the end of the pandemic is in sight. The credit belongs to strong intellectual property protections, as they enabled scientists to move quickly and raise ample funding for vaccine research.
As a post-pandemic world nears — and we begin to prepare for future pandemics — bolstering America’s IP infrastructure will help equip us for whatever challenges lie ahead.
Decades of expensive and risky research projects have paved the way for today’s breakthroughs. Over the last 10 years alone, drug companies invested more than $1.5 trillion on global pharmaceutical research. And some of that went toward developing the technologies underpinning the leading COVID-19 vaccines.
Notably, that includes mRNA technology. mRNA directs our bodies to produce proteins. And for nearly three decades, researchers have posited that they could use synthetic mRNA to guide the production of proteins that help treat specific diseases.
When COVID-19 started spreading, pharmaceutical company researchers were actively working on mRNA vaccines for the flu, rabies, and Zika. The pandemic necessitated a shift in priorities — and within weeks, Moderna, a small biotech in Massachusetts, and BioNTech, a small biotech in Germany that had partnered with Pfizer a few years prior, began working on mRNA vaccines that essentially instruct cells to create a harmless version of the “spike” protein found on the surface of the coronavirus.
This, in turn, triggers an immune response, which produces antibodies and teaches our body how to fight off future infection. The FDA granted emergency use authorization to the mRNA vaccines from BioNTech/Pfizer and Moderna in December.
The fight against deadly diseases won’t end with COVID-19, of course.
Fortunately for us, America remains at the forefront of the global biopharmaceutical landscape. America is home to less than 5% of the world’s population but roughly half of all international pharmaceutical R&D spending.
That’s largely because of strong IP protections. These protections, including patents, give innovators a fair opportunity to recoup their investment costs before generics firms can manufacture copycat medicines. It takes years to develop a new medicine, conduct clinical studies, and navigate regulatory review. And it costs $2.6 billion, on average, to bring a new drug to market.
Patent protections make it possible for companies to chase state-of-the-art ideas. Ultimately, if a drug maker wants to stay in business, it’s imperative they manufacture innovative products that provide considerable benefit to patients. Those are the types of products that end up changing the world for the better — just like mRNA vaccines are doing right now.
Yet, inexplicably, some have proposed weakening — or outright dismantling — these critical protections. On the home front, these attacks have come from Sen. Bernie Sanders, I-Vt., and Rep. Jan Schakowsky, D-Ill.
It’s not an accident that the overwhelming majority of drugs are developed in countries with strong IP rights. Quite simply, there would be no COVID-19 vaccines without them. America’s pharmaceutical companies delivered the greatest breakthroughs in modern history precisely because our ecosystem incentivizes firms to pursue cutting-edge research.
When the next pandemic arrives, we will have no hope of defeating it if we weaken the one industry that’s best prepared to develop innovative treatments.
The World Trade Organization will decide on Thursday whether to approve an Indian and South African proposal that would allow countries to disregard intellectual-property protections on Covid vaccines and therapeutics. Proponents claim the move would increase patients’ access to vaccines, especially in the developing world, by enabling companies to mass-manufacture generic copies of those drugs. In reality, suspending intellectual-property rights would make things much worse. The proposal is cynical—designed to benefit India’s and South Africa’s domestic drug industries at the expense of patients around the world.
India is the world’s largest manufacturer of generic drugs, and South Africa is another big producer. They lament that the U.S. and Europe have blocked intellectual-property rights suspension, even though a greater number of WTO member countries are in favor.
I’ve heard this line of attack before, and it is fraught with danger.
Among the many United Nations agencies, there is one that actually delivers practical value to U.S. businesses. The World Intellectual Property Organization in Geneva is a one-stop shop for filing patents, saving companies from having to register in multiple countries. The system takes in over 250,000 patent applications every year, including more than 50,000 from U.S. inventors, more than any other country. Critically, all applications have to be kept secret until they are published 18 months later.
So the U.S. has a strong interest in a well-run WIPO. The trouble is, the agency covers its own budget through user fees; it doesn’t need contributions from the member countries. That might sound like a good thing, but it makes oversight harder. There is no board of directors, and the director general enjoys absolute authority. This has led to scandals over the past 10 years, from secret shipments of high-end computer equipment to North Korea and Iran, to opening satellite offices in Russia and China without permission. One member of Congress, Brad Sherman of California, compared it to the corrupt leadership of world soccer, calling WIPO “the FIFA of UN agencies.”
That recent history and the need for deep reform that it reflects make next month’s election to choose a new director general even more important. Keep in mind this fact: Whoever is elected will exercise plenary authority over thousands of confidential patent applications, in effect the world’s most concentrated collection of cutting-edge technology.
I used to run the patent system at WIPO. We deployed state-of-the-art security to protect our computer systems and worked in a separate, carefully guarded facility. But one person always held the key: the director general, who exercises control over every aspect of WIPO’s operations. That includes direct command of the IT department, which can override privacy and security controls.
Now consider that the leading candidate to win the post is Binying Wang, a deputy director general who joined WIPO in 1992 from the China Trademark Service. Wang is certainly well qualified. What’s problematic is the influence that China could wield over her tenure.
As FBI Director Christopher Wray recently noted, China has “pioneered an expansive approach to stealing innovation through a wide range of actors.” In fact, right now the FBI is running about 1,000 investigations involving China’s attempted theft of U.S.-based technology. Whether through outright pilfering or forced technology transfer, China is the world’s most avaricious aggregator of commercial secrets – a conclusion shared by the European Union, which ranks it as the only tier one country in its recent report on the protection and enforcement of intellectual property rights. Given that pattern of behavior, and China’s goal of exerting greater influence by winning leadership of more multilateral institutions, allowing Wang to take charge would amount to a huge strategic mistake.
The U.S. has focused on China’s strategic plan to grab leadership in the most important fields of innovation, including artificial intelligence, 5G telecommunications, robotics, and quantum computing. But even the Justice Department’s recent sweeping indictment of Huawei Technologies Co. looks like a convenience store holdup compared to what could happen to the world’s storehouse of secret patent applications in Geneva.
The commercial value of the unpublished patent applications held by WIPO is staggering. They come in through the Patent Cooperation Treaty, or PCT, a unique system that allows inventors to file one application and then wait 30 months before choosing the countries where they need a patent, giving them time to raise money or do market research, and then requiring each country to honor the original filing date. This is why virtually every U.S. company serving international markets uses the PCT system.
Because of WIPO’s importance to American industry, and concerns over the integrity of the agency’s management, the U.S. has pressed for reforms to its governance structures. These include establishing an independent body to review and approve important decisions of the executive; substantially reducing fees charged to inventors, which would make WIPO more dependent on contributions and less likely to obfuscate its operations; and guaranteeing that whistleblower complaints will be arbitrated externally. The concerns raised by China’s candidacy also point to the need for tools that would alert interested member states of any suspicious access to the PCT computer system.
So far there has been little progress, and in the tradition of UN diplomacy we complain about the most annoying failures but seem content just to tell the director general to do a better job next time. That can’t continue. The U.S. needs to support a candidate willing to pursue systemic change. Daren Tang, the head of Singapore’s IP office, is reportedly backed by the U.S., and he would be an excellent choice. There are also two other strong alternative candidates from countries that don’t thirst for technological dominance: Marco Aleman from Colombia and Edward Kwakwa of Ghana.
China, on the other hand, can be expected to use its candidate as an instrument of control over WIPO in its own national interest. Consider what has happened at the International Civil Aviation Organization, another UN agency now run by China’s former head of civil aviation. She reacted to a 2016 cyberattack on its systems likely to have originated in China by ultimately firing a whistleblower who documented the agency’s failings in investigating the breach. More recently, in the wake of the coronavirus outbreak, ICAO has not only excluded Taiwan from global efforts to coordinate a response to the virus, but also blocked mentions of Taiwan on the ICAO Twitter account, drawing widespread condemnation.
China’s WIPO candidate enjoys a political advantage from the infrastructure investments it has made in developing countries as part of its “Belt and Road” initiative. But the U.S. has a strong card to play. The State Department must make clear that the U.S. will not accept the Chinese nominee, and that if she is elected the U.S. will prepare to leave the PCT. The U.S. has long contemplated “PCT 2.0,” in which participating countries’ patent offices would share information about qualifying applications, while maintaining strict controls over unpublished inventions. Although the transition would be disruptive, WIPO would no longer have possession of U.S. inventors’ secrets.
Whether WIPO can reach its full potential in the current strategic environment is an open question. The U.S. is engaged in a new cold war with China, and this one is about innovation. If history is any guide, expect China to continue to encourage its nationals to infiltrate our companies and universities in the search for technology to help it get ahead, while the U.S. continues to push back with vigilance and aggressive prosecution of trade secret theft. Reforms that make WIPO more secure and more trusted might enable it to weather that storm. But in the current climate, allowing China to run the organization that holds our most curated and valuable inventions represents an unacceptable risk.
This past week the US Congress passed the Defend Trade Secrets Act (DTSA), less than two weeks after the European Parliament voted through the EU Trade Secrets Directive. What might at first seem like an extraordinary coincidence in fact has a lot to do with pressure applied by industry on both sides of the Atlantic to improve the remedies that are available for theft of trade secrets.
Businesses are relying increasingly on secrecy as the preferred way to protect their innovations, as well as the massive amount of analytics, financial and customer data that drive competitive advantage. But this valuable information is also vulnerable, not just to hacking and other kinds of espionage, but also to careless behaviour by employees and business partners. Having access to robust and predictable legal remedies is important.
Those aren’t available in Europe, the Commission found in a 2013 report. That concern led to its proposal for the EU Trade Secrets Directive, an attempt at minimum harmonisation.
Meanwhile, in the US, where thanks to broad discovery rights and a (mostly) uniform set of state laws, trade secret protection has been viewed as relatively powerful, business called for amendment of the federal Economic Espionage Act – which provides only criminal remedies – to include an option for companies to bring their private trade secret disputes to federal court as well. (Up to now, they have been able to do that only in cases where there is “complete diversity” of citizenship among the parties, an unusual occurrence in trade secret cases, or where there is another federal claim – such as patent infringement – pending based on closely related facts.)
Introduced only nine months ago, the DTSA enjoyed unusually bipartisan political support, buoyed by enthusiastic intervention from industry groups. In fact, the only organised opposition came from a group of law professors who were worried that provisions for seizure of infringing property could lead to a new class of “trade secret trolls” terrorising unsuspecting companies. After a Senate hearing last December, at which I was called to rebut the professors’ arguments, work began on a set of amendments that were all accepted by the end of January. On 4 April, the Senate voted unanimously to accept the legislation, and the House followed suit on 27 April. President Obama is expected to sign it soon.
The DTSA adds a private right of action to the existing federal criminal law, using the same standards expressed in the Uniform Trade Secrets Act, which is the basis for almost all US state laws, and was also the pattern for Article 39 of TRIPS. As a result, it can now be said that the US has fully complied with its TRIPS obligations, since it has a single national law covering the subject. However, the new federal law will not displace existing state statutes. Instead, it will be used optionally for trade secret disputes where the federal courts provide a distinct advantage: cases with
interstate or foreign actors, where attorneys can initiate discovery anywhere in the country, and where judicial experience is needed to handle complex jurisdictional issues.
State courts in the US, even though having similar substantive laws on trade secret protection, apply local procedural rules that can vary enormously, impacting multi-state cases where speed matters. This is why industry was so supportive of the legislation: instead of having to go to various county courts with unpredictable local customs, they can take advantage of a single nationwide system and set of rules.
The DTSA also provides an ex parte seizure when the trade secret holder has advance warning that someone is about to destroy a stolen secret or leave the jurisdiction. This provision has been quite controversial; however, applications have to be so well supported, and the penalties for a mistaken application are so severe, that most believe the remedy will not be invoked often and will be allowed only in obviously deserving cases.
Two other aspects of the DTSA deserve special comment. First, although US law has always allowed courts to issue orders against a “threatened” misappropriation, concern was raised whether this standard language might allow a federal court to stop a departing employee from taking a similar job with a competitor. This so-called “inevitable disclosure doctrine” has provoked fear – not always rational – that courts might be able to bar competitive employment merely based on how much sensitive data the employee knows. The DTSA’s solution to this mobility issue was to prohibit any order that is based only on what the person knows, requiring instead that it be based substantially on the employee’s behaviour that indicates untrustworthiness.
A second significant feature of the DTSA is its grant of immunity to employee whistleblowers reporting suspected wrongdoing. Existing law in the US is sparse and unreliable, based on a highly contextual backward look at the facts to determine whether the employee’s action may have been justified. Unsurprisingly, under these circumstances, the risks of coming forward are too great, and studies show that many who might otherwise have reported significant wrongdoing have remained silent. Of course, the employer has legitimate interests at stake as well, since the claim may turn out to be wrong, or the employee’s disclosure may be broader than necessary. The DTSA resolves this tension by providing clear immunity, but only for disclosures made in confidence to law enforcement, or as part of a court filing under seal. In this way, the information can be provided without fear of retributive litigation, while the relevant authorities can maintain the integrity of the secrets while they determine whether there is a basis to proceed.
The DTSA will improve the efficiency of, but will not revolutionise, trade secret disputes in the US. As already noted, there will be a certain class of cases brought in federal court because they involve foreign actors or witnesses spread across the country. Strictly local cases – where the chef leaves a restaurant with the secret recipes and moves down the street – will still be handled in state courts. That’s in part because the DTSA requires that the information in controversy be related to a product or service in “interstate commerce”, the minimal jurisdictional requirement for federal courts to act. And it’s in part because local cases will be brought by local lawyers who are familiar with their local courts.
Although some lawyers will want to use federal courts for trade secret cases just because they handle patent matters and are more comfortable there, that may not be the smartest tactical move. Federal judges take their cases on “single assignment”, meaning that they are in charge of all issues from beginning to end. They are therefore more likely to view the case skeptically than state court judges, who typically have a “departmental” system and are sometimes seen as waving through weak cases so that they can be taken care of by a different judge at trial. In addition, federal judges are usually more demanding of a plaintiff’s identification of its trade secrets. So we may not see a general rush toward filing in federal court.
What of the EU Trade Secrets Directive? Also driven by industry concerns over the need for harmonisation, the EU effort starts from a much lower base of harmony than has existed in US states. Indeed, the Commission’s report found a disturbing level of inconsistency among the 28 national regimes. So by establishing common definitions, some common remedies and an approach for protecting secrets during litigation, the directive represents a major step forward.
But measured by the expectations and needs of customers, there is quite a distance left to travel. For cultural and political reasons, the directive does not deal with criminal remedies and so there remains an uneven regime for enforcement in the most egregious cases of information theft. More importantly perhaps for business, there has been no progress on addressing the fundamental problem of pursuing trade secret cases in civil law systems: the lack of discovery. Say what you will about the excesses of US civil discovery in general; the trade secret plaintiff, facing losses from behaviours that only the defendants can know, is always disadvantaged at the outset of a dispute by asymmetric access to information about what happened. Without discovery to set the balance right, there will always be a significant number of legitimate cases that cannot be pursued.
Worse still may be the exceptions provided in the Directive. Unlike the DTSA, whistleblowers are free to disclose confidential information not just to government but also to media, so long as it is in the public interest. And the catchall exception for “protecting a legitimate interest” under national or EU law seems a yawning loophole that even the CJEU may not be able to constrain adequately.
The EU Trade Secrets Directive is a very good start on harmonising standards in this critical area. But for the time being, if your clients need extremely reliable civil remedies they are probably well advised to find ways to bring their cases in the US.
Civil claims for trade secret misappropriation have always been grounded on state law, with only limited access to federal courts. That would change with the Defend Trade Secrets Act (S.1890) now pending in Congress as an amendment to the Economic Espionage Act. The proposed law enjoys broad industry and bipartisan political support, and was favorably reported out of the Senate Judiciary Committee on January 28. Most of the focus to this point has been on the need for a federal option when misappropriation occurs across state or national borders. But at the recent hearing a new amendment was proposed and accepted that would have an impact well beyond the original legislation. Suggested by Senators Patrick Leahy and Chuck Grassley, this part of the law would provide immunity under federal and state law to whistleblowers who confidentially report suspected illegal activity to the authorities.
The idea for this proposal originated with a draft article, Tailoring a Public Policy Exception to Trade Secret Protection, recently posted by Professor Peter Menell of the UC Berkeley School of Law. Professor Menell was confronting what should be a rather obvious issue: how do we support and encourage the private disclosure to government of needed information about possible wrongdoing, while recognizing the legitimate secrecy interests of business owners? It turns out that current law does not provide a clear answer, and this has negative consequences for whistleblowers and law enforcement.
Although an exception of sorts exists for personal disclosure of trade secrets in the public interest, it is expressed in vague terms that require a balancing of interests in the context of case-specific facts. For example, the Restatement (Third) of Unfair Competition § 40, comment c, states that “a privilege to disclose another’s trade secret depends upon the circumstances of the particular case, including the nature of the information, the purpose of the disclosure, and the means by which the actor acquired the information.” You might imagine that an employee, discovering evidence of corporate wrongdoing, should be comfortably protected by this principle when taking that evidence in confidence to the government. But you would be wrong.
In cases where the whistleblower has reported illegal activity through a qui tam action under the False Claims Act, 31 USC § 3729, some companies have reacted by asserting claims against the former employee for having misappropriated the very secrets that made the action possible. Claims have even been filed against the whistleblower’s attorneys for their part in their client’s alleged violation of a standard nondisclosure agreement. Arguments against applying a public interest exception include that the former employee took too much information, or should have reported their concerns in some other way. In any event, the limited case law and ambiguous formulation of the exception expose potential whistleblowers not only to the expense of litigation but also to its inherent personal stress.
And the risk of litigation is only one of many negative consequences that can result from reporting internal evidence of wrongdoing. As Professor Menell explains, studies show that whistleblowers frequently suffer job loss or demotion, personal shunning or blacklisting. This affects their finances, their families and their health. As one researcher put it, “the surprising part is not that most employees do not talk; it is that some talk at all.”
When employees know of illegal activity but are too scared to come forward, the public suffers. The insider typically is in a unique position to provide the evidence, which then remains walled up within the organization. On the other hand, businesses have a compelling need, particularly in the modern information economy, to protect their legitimate trade secrets from exposure, and sometimes whistleblowers are wrong, driven by self-interest. But at the moment there is no reliable way to balance and protect all these interests by ensuring that the relevant information can get to the officials who can consider it in confidence and make a decision on whether to proceed.
The Leahy-Grassley amendment appears to do this well, adopting what Professor Menell calls a “sealed disclosure/trusted intermediary” approach. Specifically, the amendment would rephrase 18 USC § 1833(2) (defining exceptions to the EEA) to provide that a person may not be held criminally or civilly liable for disclosure of a trade secret, if the disclosure is made (a) in confidence to a government official or to an attorney and (b) for the sole purpose of “reporting or investigating a suspected violation of law.” Immunity would also apply for disclosures made in a complaint or other filing, but only if done under seal. Nondisclosure agreements presented to employees or contractors must contain a notice of the immunity, at least by reference to the company’s relevant policy document. (Failure to provide the notice will forfeit the right to recover attorneys fees or enhanced damages against the employee under the DTSA.)
Significantly – and this point was emphasized by Senator Dianne Feinstein at the January 28 hearing – the amendment would not protect any otherwise wrongful behavior of the employee, such as hacking a computer system in violation of the Computer Fraud and Abuse Act.
If the amendment survives and becomes law, it is not likely to create substantial new burdens or risks for employers. Statutory notice provisions have been required in employee NDAs for decades, as a result of state laws protecting the rights of individual inventors. Recent action by federal agencies like the NLRB and SEC have signaled that employee contracts must expressly confirm the individual’s right to share and report certain kinds of information. And although there is always some incremental risk when secret data is provided to the government, experience has shown it to be manageable.
The benefit to the public of this new approach could be profound. Government plays a central role in the modern economy, and can only enforce rules affecting safety, public health and financial integrity when it has access to information about what might be going wrong. Whistleblowers are usually the best source of this information, but they will almost never come forward if they face the risk of being sued for violating obligations of confidentiality. The DTSA whistleblower amendment provides a sensible answer: a safe harbor for disclosures in confidence to the government.
A review of Talent Wants to Be Free: Why We Should Learn to Love Leaks, Raids, and Free Riding, by Prof. Orly Lobel
When I first learned about this book, I was intrigued mostly by the subtitle: not only does talent want to be free (surprise!), but companies that pay the talent should let them go without worrying about protecting their secrets. Now that was a bold and counterintuitive proposal that justified a closer look.
As I’ll explain below, this work fails spectacularly to prove its hypothesis. But so do a lot of books that comment on social issues. Why should the IP community care about this one? In part that’s because of its focus on where creativity most often begins: in the relationship between a company and its employees. But it’s also because the book is beginning to be approvingly cited not just by the popular press, but also by some IP scholars, who may not have read through it with sufficient skepticism.
A very troublesome flaw in Talent Wants to be Free is that the author frequently conflates non-compete agreements with two other very common forms of employee restraints: confidentiality (or nondisclosure) agreements and invention assignments. As most practitioners can readily appreciate, there is a world of difference between the first one and the other two, and they typically are not joined in a single document. Non-competes stop someone from taking a job with a competitor, and their use is restricted in many places and illegal in a few, like California.
Nondisclosure contracts (NDAs), however, are universally seen as appropriate to define the scope of a confidential relationship, and normally cause no problems with later employment. Similarly, assignment agreements provide clarity of expectation for employers and their inventive employees. Both NDAs and assignment agreements generally leave employees free to leave and work wherever they want. But Prof. Lobel regularly mashes together all three types of agreements as “human capital controls” when arguing that they don’t work and that businesses should stop using them.
In this sense, the book misses an opportunity to focus on the distinctive and serious problems of non-compete agreements, which truly can “restrict careers and connections that are born between people.” But it’s not right to put NDAs and assignments in the same box with non-competes. The heavy, somewhat clumsy prohibition against future employment of a non-compete is different not only in its effect on the employee but also in the greater challenge of justifying it.
Confidentiality agreements, in contrast, merely restrain use of special information that the employee gets access to by virtue of a trusted relationship. By enforcing such agreements, the law promotes a basic principle of commercial ethics, and the burden on the employee is relatively light. (It is surprising, by the way, that Prof. Lobel never mentions this ethical mooring of trade secret law, or the U.S. Supreme Court case, Kewanee v. Bicron, 416 U.S. 470 (1974), that explains it.) The same is true for the normal invention assignment, which simply clarifies by contract the idea that creative people who are paid for what they do should leave their specific creations with their employer when they go, while remaining free to keep creating for themselves or others.
The principles involved here are not just academic abstractions. Trade secrets are today the most widely used form of intellectual property, and are critically important to many industries. Consider, for example, a 2009 survey conducted by the National Science Foundation and Census Bureau, which showed that, among companies that engage in substantial research and development activity, secrecy is the leading method of protecting competitive advantage, and for those classified as “R&D intensive” – who account for 67% of U.S. R&D expenditure – secrecy is viewed as the most important form of intellectual property, more than twice the level for invention patents. (The paper is available at nsf.gov/statistics/infbrief/nsf12307/.)
At the same time, a healthy information economy requires easy mobility of knowledge-workers. So in setting policy and enacting laws, a lot rides on whether we get that balance right. And that also means we have to be cautious and discriminating when we examine these competing interests and propose new approaches.
Prof. Lobel supports her case in part by attacking the so-called “inevitable disclosure” doctrine applied by some courts to bar competitive employment by someone who “knows too much” to be trusted to keep secrets. And indeed some of the cases seem to have produced bad outcomes. But by using anecdotes, and describing the facts almost exclusively from the employee’s point of view, she sacrifices objectivity and nuance. When the team captain, with the playbook in his head, wants to join the rival team, there may be a legitimate need for courts to intervene. In the vast majority of these “inevitable disclosure” cases, however, the court denies an injunction, or imposes a limitation like working in another department of the new company for a couple of months. Orders that flatly prevent competitive employment are rare, and even then are usually temporary and require compensation to the employee.
(For a detailed review of all the relevant inevitable disclosure cases, sorting them by their varied facts and outcomes, see my treatise Trade Secrets at §7.02[b][ii].)
A similarly one-sided analysis of non-compete agreements detracts from the force of the author’s argument. That’s a shame, because while non-competes deserve healthy criticism, they aren’t completely without justification. Although employers can rely exclusively on NDAs and trade secret law to protect their interests, litigation is messy and unpredictable, and the former employer typically has very little evidence to go on, since the employee planned his departure in secret.
So from the employer’s point of view, the alternative of simply prohibiting competitive employment for a period of time looks pretty attractive. Yes, non-competes are a blunt instrument to provide protection for secrets, and that is why courts are skeptical and why some places like California don’t allow them at all. But this represents a policy choice between competing, rational interests, not a realization of some transcendent truth about the evil of non-competes (which by the way are not, as Prof. Lobel claims they are, a “near universal feature of employment contracts”).
The book also disappoints by relying on anecdotes and examples that turn out to be, well, unreliable. For example, the author cites IBM as a company that “defaults to control,” supporting this claim with a single employee’s description of the company’s “internal communications mail system” that requires “millions” of specially marked envelopes, demonstrating “waste in oversecrecy.” But the quote comes from a Wall Street Journal article published back in 1995. What does IBM do now? I checked, and learned that the envelopes were only used for the most top-secret “restricted” documents – in the hundreds, not millions – and that this practice stopped shortly after Lou Gerstner became president, in 1993. So the 1995 statement turns out to have been both hyperbole and old news when it was first quoted. Over the last 20 years IBM has simplified its confidentiality controls, using electronic systems instead of paper, but without relaxing its focus on information security. And during that same period IBM distinguished itself as one of the nimblest, most successful technology companies in the world. This doesn’t seem to fit with the author’s hypothesis that “control” breeds underperformance.
Her treatment of Apple is similarly problematic. Apple is well known as one of the world’s most secretive enterprises, but (despite certain problems with its Asian suppliers, which have nothing to do with Apple’s secrecy) it also boasts a very satisfied and engaged work force, not to mention the world’s largest market capitalization. Rather than confronting this apparent contradiction with her basic thesis, Prof. Lobel resorts to trivializing Apple’s product release secrecy as a marketing gimmick.
Similarly, Procter & Gamble is singled out as a dinosaur that was obsessively paranoid about security. Here, Prof. Lobel relies on information provided by a journalist who in the 1990s had been in litigation with P&G over her investigative techniques. She is quoted for the assertion that P&G’s “intimidation practices resulted in many talented P&G employees leaving the company to seek work elsewhere.” But where’s the proof that “excessive security” was the cause of P&G’s stock decline in that period? In addition, the author simply assumes that all of this opened the eyes of management, who (we are led to believe) must have relaxed its information security program.
To support this assumption, she points to the well-known success of P&G’s embrace of “open innovation” in sourcing more than half its products from outside the company. This analysis is wrong in at least two ways. First, the kind of “open” innovation employed by P&G (represented by its “Connect+Develop” program) is not free, and in fact can only exist thanks to secrecy laws and internal controls that support collaboration. Second, the introduction of Connect+Develop didn’t happen because P&G’s attention to secrecy was diminished. To assume that it did is just an implausible hypothesis in dire need of evidence.
Finally, Prof. Lobel holds up Syntex Laboratories in Palo Alto as a company that succeeds while allowing free rein to its employees and interns. The most striking aspect of this example is that she uses the present tense to refer to Syntex. A quick check on the Internet shows that the company was acquired in 1994 by Roche, and ceased operations long ago. But the suggestion that a pharmaceutical company may have been relaxed in its attitude about protecting secrets was too tantalizing for me to resist doing some fact checking. It happens that I know the person who was General Counsel and in charge of these issues for Syntex in the 1980s and 1990s. So I got in touch with him, and he confirmed that the company in fact required NDAs and invention assignments from all employees, and took industry-standard steps to keep its research secret. So there’s no story there either.
Beyond her shaky examples, the author also makes serious errors in describing the current state of the law on trade secrets. She attacks the concept of “negative know-how” – that is, the knowledge of what doesn’t work – by claiming that it is “one of the strangest developments in trade secret law.” She supports this with a footnote to an article that says nothing at all about negative know-how. But worse, despite quoting Edison’s famous statement (“I haven’t failed; I’ve just found 10,000 ways that don’t work.”), she fails to acknowledge that this kind of secret is exactly what protects all research and development. And she suggests that there is still a “battle” going on about whether the law should recognize it as protectable. That’s just wrong; the battle, such as it was, over the protection of negative know-how was resolved more than 30 years ago, with the adoption of the Uniform Trade Secrets Act, recognizing “actual or potential” value.
Other references are merely misleading, as where she cites to cases invalidating NDAs under the same scope restrictions as non-competes. But these are exceedingly rare, and the one she refers to, AMP v. Fleishhacker, 823 F.2d 1199 (7th Cir 1987), was decided almost 30 years ago.
But in my view the author’s strangest claim comes when she tries to argue that California’s prohibition against non-competes has paid off by causing fewer trade secret lawsuits to be filed in that state. Specifically, she says, “In practice, the number of trade secret disputes in the [Silicon] Valley has been relatively low in comparison to other competitive regions.” That was a shock to see; from my own experience, I would confidently assume that the opposite is true.
But rather than rely on impressions, I turned to the only published articles that address trade secret litigation statistics: Ameling, et al, A Statistical Analysis of Trade Secret Litigation in Federal Courts, 45 Gonzaga Law Review 291 (2009) and A Statistical Analysis of Trade Secret Litigation in State Courts, 46 Gonzaga Law Review 57 (2010). There, we find that during the years 1995-2009 California ranked number one, with 16% of the country’s state court trade secret filings (Texas came in second with 11%). Although there are no statistics reported separately for Silicon Valley as such, a very close proxy in the federal system is the Northern District of California. That district ranked second in the country for federal court trade secret filings in 2008, the most recent year reported. So California, while refusing to enforce non-competes, actually handles a lot more trade secret litigation than other places that allow them.
It’s no surprise that “talent wants to be free.” Of course it does. The promise of something new comes in the book’s subtitle: “why we should learn to love leaks, raids and free riding.” But unless the “we” refers to the rest of society cheering on the departing employees for contributing to knowledge spillovers (hardly a new idea), Prof. Lobel fails to make her case that the former employer should be happy about this. She tries to get there based on research showing that left-behind firms tend to cite the patents of those who left, and vice versa. But so what? It’s a huge leap from that to conclude that the “sending employers” are better off as a result of the leaving.
Even more speculation is involved in her assertion that “[s]ending companies gain access and possible advantages in future dealings. [Thus,] both sides benefit greatly from the movement.” That can be true in individual cases, but it’s hardly a universal, or even common, condition. And pointing to “alumni embrace” by law firms demonstrates the weakness of her generalization, because these are relationship-based businesses, incomparable to most product-based industries that rely heavily on secrecy. Mostly, the author relies on colorful metaphors like one about jungle vines growing back after being cut, asserting that “[i]n industry, new connections and communications grow to replace the lost employee.” Fine, but what about the lost competitive advantage from stolen secrets? There is just no evidence provided to support the idea that employers should re-think their attachment to proprietary information and “learn to love” leaks and free riding.
The employee-supportive perspective is important to consider, and there are certainly cases where our clients choose to “let it go” rather than fight. But it would be better to provide analysis of those exceptional cases, instead of pointing to them as the option of choice for modern, enlightened enterprises. Things are indeed different these days. But trade secrets are more important now, not less. Talent matters, but sometimes information matters more.
Prof. Lobel’s writing style is captivating, and some of her analysis can be insightful. While in my opinion this book failed to deliver what it promised, I hope that she decides to take on more directly the issues related to non-compete agreements, providing specific advice to employers on how to protect their information assets while intelligently motivating their knowledge-workers. After all, in an age when the term of employment is shrinking and mutual loyalty fading, the connection between the company and its “talent” is becoming more like that between the company and its vendors, customers, and competitors: everything is a collaboration, and all relationships have to be managed carefully for mutual benefit.