Trade secrets and innovation: Evidence from the “inevitable disclosure” doctrine

Abstract

Research Summary: Does heightened employer‐friendly trade secrecy protection help or hinder innovation? By examining U.S. state‐level legal adoption of a doctrine allowing employers to curtail inventor mobility if the employee would “inevitably disclose” trade secrets, we investigate the impact of a shifting trade secrecy regime on individual‐level patenting outcomes. Using a difference‐in‐differences design taking unaffected U.S. inventors as the comparison group, we find strengthening employer‐friendly trade secrecy adversely affects innovation. We then investigate why. We do not find empirical support for diminished idea recombination from suppressed inventor mobility as the operative mechanism. While shifting intellectual property protection away from patenting into trade secrecy has some explanatory power, our results are consistent with reduced individual‐level incentives to signaling quality to the external labor market.Managerial Summary: While managers often list trade secrecy protection as their most important appropriation mechanism form and basis of competitive advantage (even more often than formal intellectual property protection), researchers have a hard time studying the effect of such secrets. We use a changing trade secrecy legal environment in some U.S. states (the introduction of the inevitable disclosure doctrine [IDD]) to study its effect on inventor‐level innovation. We find that a strengthened employer‐friendly trade secrecy regime adversely affects inventor‐level innovation. While part of the effect is due to substituting trade secrecy protection for patents, we also find that inventors’ diminished external labor market prospects may dampen their innovation output. Consequently, while employers may wish for strengthened trade secrecy protections, the results may paradoxically be against their innovation interests.