Inevitable Disclosure Doctrine Research Articles

Strategy Typology and Cost Structure: A Textual Analysis Approach

This study investigates the impact of firms’ strategic positioning on cost structure. Using textual analysis based on 10-K filings, we capture business strategy along three dimensions: product leadership, customer intimacy, and operational excellence. Firms pursuing the product leadership strategy emphasize innovation and confront high congestion risk caused by rapid growth. We find that these firms display a more rigid cost structure by incurring higher strategic fixed investments in R&D and choosing higher committed capacity to reduce congestion risk. We also document that firms following the other two strategies on average exhibit a less rigid cost structure. This is possibly because customer-intimate firms tend to invest in specialized resources in small chunks and take on-demand inputs to tailor offerings, while operational-excellence firms may adopt real options and flexible models to achieve production efficiency and mitigate default risk. Our results are robust to using a difference-in-difference approach based on a quasinatural shock caused by the Inevitable Disclosure Doctrine adoption and a change analysis based on firms’ internal strategic shifts. Our findings suggest that organizational strategy has a significant impact on firms’ resource commitments and capacity choices.

Safeguarding proprietary information in the supply chain and relationship‐specific investments

AbstractWe examine whether the risk of losing proprietary information through the supply chain affects relationship‐specific investment (RSI) decisions by supply chain partners. Using state courts' staggered adoption of the Inevitable Disclosure Doctrine (IDD) as a shock to the firm's ability to protect proprietary information, we find that customers increase RSI when their supplier is headquartered in a state that adopts IDD. The effect is more substantial for customers who face a higher risk of losing proprietary information and with suppliers that are difficult to substitute. IDD also plays a more prominent role in the absence of alternate mechanisms that reduce contracting frictions, such as shared directors, common ownership, or joint ventures. Our results are robust to using cross‐citation measures of RSI and alternative estimations that mitigate potential biases arising from the staggered difference‐in‐difference approach. Our findings suggest that proprietary information protection enables firms to reduce contracting frictions arising in supply chain relations.

Trade secret laws and initial public offering underpricing

This paper examines the impact of trade secret laws on the underpricing of initial public offerings (IPOs) in the United States, where we focus on the Uniform Trade Secret Act and/or the inevitable disclosure doctrine. Given that trade secret laws help firms protect their know-how in the form of trade secrets, we propose that trade secrets protected by these laws may result in increased corporate opacity, leading to greater IPO underpricing. Empirically, the average first-day returns of IPOs in states with trade secret laws are 12.7% higher than those in states without such laws. Using the information disclosed in the 10-K report on whether the firm owns trade secrets, we suggest that the existence of trade secret laws enhances the protection effect of firm maintenance of trade secrets, which leads to greater IPO underpricing. Further analyses show that the effect of trade secret laws is reinforced for IPO firms operating in complex industries, IPO firms with R&D investments, and large IPO firms, suggesting that trade secret laws increase the difficulties investors face in assessing the intrinsic value of such firms.

Employee mobility constraints and debt choice

Using Inevitable Disclosure Doctrine adoptions as the exogeneous shocks, we find that firms gravitate towards bank debt financing following an increase in employee mobility constraints. Information asymmetry is the channel driving this effect.

Proprietary information and the choice between public and private debt

AbstractThe high costs of disclosing confidential information lead firms with proprietary information to prefer private debt (bank loan) to public debt (corporate bond). We provide empirical evidence supporting this proposition using the staggered adoption of the inevitable disclosure doctrine (IDD) by US state courts that exogenously increased the value of proprietary information. The focal firms are significantly less likely to issue bonds after the IDD adoption. Financing through public debt decreases more for firms in which the protection of proprietary information is relatively more important.

Managerial Labor Market Mobility and Corporate Social Responsibility

ABSTRACT The staggered rejection of the inevitable disclosure doctrine (IDD) by state courts increases the mobility of both managerial and rank-and-file employee labor markets. Flammer and Kacperczyk (2019) report a positive impact of the IDD rejection on firms’ corporate social responsibility (CSR) and interpret the finding as managers using CSR to retain employees. We propose and test managerial incentives to grow their external employment potential as another explanation. We find that the IDD rejection impact is stronger when industry firms are more likely to hire external CEOs and when external tournament prizes are greater, and weaker when CEOs are held up by unvested equity grants and when governance control is stronger. We fail to find that the IDD rejection effect varies with employee incentives. We further find that CSR investment does help CEOs obtain sought-after personal benefits by increasing their total pay and the likelihood of landing a new executive position. JEL Classifications: J44; J62; M14.

Labor Mobility and Loan Origination

Abstract We find that mortgage loans originated after the adoption of the inevitable disclosure doctrine (IDD; a mechanism discouraging loan officers’ labor mobility) have a lower default probability, a higher loan modification rate, and a lower foreclosure rate. These effects are unaccompanied by any reduction in loan supply and contribute to more stable housing prices. Using the adoption of the Uniform Trade Secrets Act as an alternative identification generates consistent results. Overall, our findings suggest that restricting loan officers’ labor mobility leads to better ex ante screening and ex post monitoring, improving the origination efficiency for U.S. residential mortgage loans.

Do labor mobility restrictions affect debt maturity?

Prior literature finds that staggered state-level adoption of the Inevitable Disclosure Doctrine (IDD) significantly constrains labor mobility. Using the IDD as an exogenous shock to labor mobility, we find that firms headquartered in states that adopt the IDD gravitate towards issuing short-term debt for external debt financing. We examine three mechanisms—default risk, information asymmetry, and agency cost mitigation—through which labor mobility restrictions affect debt maturity. Our results provide support for the information asymmetry mechanism, which suggests that firms are more inclined to use short-term debt when their information environment deteriorates. We find that in the wake of IDD adoption, firms tend to utilize short-term debt only in corporate bond markets and their debt maturity profiles become more concentrated.

Stay safe? Restrictions on managers’ outside employment opportunities and firm risk

ABSTRACT We provide empirical evidence showing that for managers with more potential outside employment opportunities, adoption of the Inevitable Disclosure Doctrine (IDD) causes them to just ‘stay safe’ by taking on less risk because of reduced labour mobility. Moreover, managers lower firm risk through reduced R&D intensity, capital expenditure, and more diversifying acquisitions. Consequently, these firms have a lower value after the adoption of the IDD. Overall, we document a novel unintended consequence of the recognition of the IDD, specifically, its effect on firm risk and investment policies for managers with more potential outside employment opportunities.

Managerial labor mobility and banks’ financial reporting quality

This paper explores the relationship between managers’ labor mobility and the financial reporting quality of banks. Using the state-level adoption of the Inevitable Disclosure Doctrine (IDD) as an exogenous shock discouraging labor mobility, we show that adoption of the IDD is associated with a decline in financial reporting quality, as measured by discretionary loan loss provisions. The effect is larger for banks with managers who have limited outside job opportunities and smaller for banks with tight regulatory oversight. Our results support the view from the career concern hypothesis that bank managers facing restrictions on mobility have greater incentives to engage in discretionary accounting.

Do Stock Prices Affect Real Decisions? Evidence from the Effects of the Inevitable Disclosure Doctrine on Investment-q Sensitivity

Do Stock Prices Affect Real Decisions? Evidence from the Effects of the Inevitable Disclosure Doctrine on Investment-q Sensitivity

CEO mobility and corporate payouts

AbstractWe examine how chief executive officer (CEO) mobility affects corporate payouts. We exploit US state courts’ staggered adoption of the inevitable disclosure doctrine (IDD) to obtain exogenous variation in mobility. We report several findings. First, we find that firms in IDD‐adopting states increase dividend payouts, whereas the effect of IDD on share repurchases is insignificant relative to firms not in IDD‐adopting states. Second, the increase in dividends is concentrated on firms run by CEOs having high ability. Third, CEOs increasing dividends are less likely to be forced to leave their jobs. Fourth, the increase in dividends is concentrated on firms run by early‐career CEOs rather than retiring CEOs. Last, CEOs increasing dividends receive more favorable shareholders’ say on pay votes for higher pay. Our evidence supports the notion that restricted mobility induces CEOs to choose a dividend policy that enhances their positions with their shareholders.

Proprietary Knowledge Protection and Product Market Performance

AbstractDoes proprietary knowledge protection (PKP) spur or hinder the product-market performance of new firms? Exploiting the staggered adoptions of the inevitable disclosure doctrine by U.S. State Courts, which enhance PKP, we show that treated firms increase industry-adjusted sales growth by 2% compared to control firms. The effect is concentrated among small and young firms and increases with the scope of proprietary knowledge and rivals’ access to external finance. PKP encourages firms to develop new products and stimulates initial public offering activity. Our results suggest that PKP alleviates predation risk associated with “deep-pocket” rivals by allowing firms to maintain competitive advantages.

The Benefits of Trade Secret Legal Protection: Evidence from Firms’ Cost Structure Decisions

Abstract We investigate whether better trade secret legal protection permits a firm to shift resources from protecting trade secrets to expanding its fixed operation capacity, thus reducing cost elasticity. We employ the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by US state courts as a plausibly exogenous shock that improves trade secret legal protection. We find a reduction, on average, in cost elasticity in firms headquartered in the IDD recognition states relative to those in non-affected states. This change in cost structure is concentrated in firms with trade secrets. These results highlight that the optimal choice of fixed resources is affected by the extent of trade secret protection. Further, we find that firm value is higher for trade secret firms after the IDD adoption. Overall, our empirical evidence suggests that trade secret legal protection is beneficial for firms with trade secrets.

Employee Mobility Constraints and Strategic Alliances

Employee mobility facilitates alliance formation due to critical information transmission. At the same time, employee mobility and alliances can be substitute means by which firms source external capabilities. We emphasize the interaction between these two relationships and ask how employee mobility constraints in labor markets affect firms' alliances. More specifically, we propose dynamic changes in alliance formation following legislative changes that constrain employee mobility (i.e., the inevitable disclosure doctrine (IDD)). In the immediate aftermath of these changes that constrain employee mobility, the substitution effect dominates, and firms form more alliances to access cabilities. In the long run, this effect is dampened due to a lack of supply of new hires that would otherwise foster technology partnerships. We further investigate factors that change the demand and supply conditions. Knowledge-intensive firms have more alliances in the aftermath and fewer alliances in the long run. Stronger noncompete enforceability shifts the timeframe so that firms do not have higher alliances even in the aftermath of IDD adoption. Our hypotheses are supported by empirical results from a sample of venture-backed startups in the biopharmaceutical industry.

Mobility Constraints, Interfirm Collaboration, and the Dual Role of Knowledge Centrality

This paper investigates how constraints on employee mobility affect the joint development of technologies by firms. In addition, we explore how a firm’s geographic embeddedness and its centrality in the knowledge network of firms moderate this relationship. To obtain exogenous variation in the likelihood of employee mobility, we exploit a natural experiment provided by the legal adoption/rejection of the inevitable disclosure doctrine (IDD) by different U.S. states. Our results indicate that mobility constraints lead to a decrease in the rate at which firms identify and pursue collaborative opportunities that lead to shared IP rights. We also find that this negative effect is weaker for firms that are embedded in dense technology clusters. Finally, in line with our expectations, we found that a firm’s centrality in the knowledge network possesses a dual and to some extent paradoxical role in our results. On the one hand, in the presence of mobility constraints, firms central in the knowledge network experience a sharper decrease in the number of jointly owned patents. On the other, our results show that the attenuating effect of the local concentration of firms on the negative relationship between mobility constraints and shared IP rights is stronger for firms that are central within the knowledge network.

Protection of trade secrets and value of cash holdings: Evidence from a natural experiment

We examine whether the protection of trade secrets by restricting the mobility of knowledgeable employees through the adoption of the legal Inevitable Disclosure Doctrine (IDD), an exogenous event, increases the marginal value of corporate cash holdings by reducing the uncertainty of future cash flows, and how that value differs across firms in IDD recognizing and non- recognizing states. We find that the marginal value of cash holdings increases (decreases) significantly in states in which the IDD has (not) been recognized through increases (decreases) in firm value and performance. A battery of robustness tests reveals that the effect of the IDD is more pronounced in firms with high R&D activities. Overall, the evidence shows that the IDD acts as a mechanism that inhibits the mobility of key employees and, thus, reduces the probability of the misappropriation of knowledge-based human capital assets. That is, the IDD creates an opportunity for firms to efficiently use cash to increase firm value - rather than using cash to protect trade secrets from rivals.

Catch me if you can? Staggered inevitable disclosure doctrine (IDD) rejection and entrepreneurial activity in the US

AbstractResearch SummaryInevitable disclosure doctrine (IDD) refers to a legal doctrine where an employer can claim, without the need for proof or evidence, misappropriation of trade secrets to seek an injunction against an employee. Based on entrepreneurial spawning literature, for employees seeking to start their ventures, IDD rejection by state courts could therefore be a potential catalyst to entrepreneurial activity. In a sample of neighbor‐counties across state borders with and without IDD rejection, the two‐way fixed‐effects difference‐in‐differences estimates show positive effects for county‐level entrepreneurial outcomes. However, when applying more recently developed methods for testing staggered implementation, we find no support for county‐level entrepreneurial outcomes across multiple specifications and heterogeneities. The findings have implications for the limited efficacy of IDD rejection on regional entrepreneurial activity.Managerial SummaryThe value of protecting trade secrets is important for employers, and the role of laws in preventing employees from potentially disclosing their trade secrets is widely studied. One such legal doctrine is the inevitable disclosure doctrine (IDD) where an employer can claim, without the need for proof or evidence, misappropriation of trade secrets to seek an injunction against an employee. We find that IDD rejections by courts have a limited effect on the formation of startups in a county. The findings imply that investors are less encumbered by IDD rejections by courts and that policymakers may not find IDD rejections as a useful mechanism to prime local entrepreneurship.

Say on mobility:Do CEO outside opportunities affect shareholder say on pay?

We investigate whether shareholders take into account CEO outside opportunities when casting their say on pay (SoP) votes. By employing the staggered rejection of the inevitable disclosure doctrine (IDD) by US states as an exogenous shock that increases key talent outflow risk, we find that IDD rejection moderates the well-documented positive relation between CEO pay and dissenting SoP votes. The effect is concentrated in firms with more able managers, higher firm efficiency, better operating performance, and greater uncertainty of a new manager's ability. Our results are the first to highlight talent retention as an important motive for affirmative SoP votes.

Intellectual Property in the New Technological Age: 2022 - Chapters 1 and 2

Rapid advances in digital and life sciences technology continue to spur the evolution of intellectual property law. As professors and practitioners in this field know all too well, Congress and the courts continue to develop intellectual property law and jurisprudence at a rapid pace. For that reason, we have significantly augmented and revised Intellectual Property in the New Technological Age. The 2019 Edition reflects the following principal developments: Trade Secrets: Congress passed the Defend Trade Secrets Act of 2016, one of the most momentous changes in the history of trade secret protection. The new law opens up the federal courts to trade secret cases, provides for ex parte seizures of misappropriated trade secrets in “extraordinary circumstances,” and establishes immunity for whistleblowers. Other recent developments address nonsolicitation agreements, the inevitable disclosure doctrine, and the enforceability of noncompetition agreements Patents: The past several years have witnessed some of the most significant developments in U.S. patent history—from the establishment of the new administrative review proceedings at the Patent Office to important shifts in patent-eligibility, claim indefiniteness, enhanced damages, and equitable remedies at the Supreme Court and means-plus-function claim interpretation and infringement doctrine at the Federal Circuit. IPNTA significantly expands coverage of design patents in response to the growing importance of this form of protection. ● Updated Section 102 discussion with time line illustrations explaining first-to-invent (1952 Act) and first-to-file (AIA) regimes; added note on corroboration of invention dates; update on Helsinn Healthcare v. Teva Pharmaceuticals USA, Inc., 139 S.Ct. 698 (2019) ● Updated Section 101 notes to reflect substantial new developments (Berkheimer, Aatrix, Vanda) and legislative reform efforts ● New section on Reassessing Patent Eligibility featuring Judge Lourie's concurrence in denial of rehearing en banc in Berkheimer ● Administrative Patent Review: Updated statistics on IPRs ● Note on Amgen Inc. v. Sandoz Inc., 923 F.3d 1023, 1029 (Fed. Cir. 2019) (doctrine of equivalents) ● Administrative Patent Review: Updated statistics on IPRs ● Design Patent: Updated note on apportioning damages to reflect remand of Samsung Electronics Co. v. Apple Inc. Copyrights:The Supreme Court issued important decisions addressing the useful article doctrine, public performance right and the first sale doctrine. The past few years also witnessed important developments in the Online Service Provider safe harbor, fair use, and state protection for pre-1972 sound recordings. We have also integrated the digital copyright materials into a unified treatment of copyright law and substantially revamped the fair use section to reflect the broadening landscape of this important doctrine. IPNTA2019 integrates the complex provisions of the Music Modernization Act of 2018. ● Originality: New problem on copyrightability of jokes based on lawsuit by comedy writer Alex Kaseberg against Conan O’Brien ● Update on copyright duration (1923 works now in the public domain) ● Note on cord cutting and Locast, a nonprofit local broadcasting service ● Update on DMCA exemptions ● New fair use problem based on Dr. Seuss Enterprises v. ComicMix ● Integration of new cases: Fourth Estate Public Benefit Corp. v. Wall-Street.com, LLC, 139 S. Ct. 881 (2019) (registration must be made prior to filing suit); Revision Comm’n for General Assembly of Georgia v. Public.Resource.Org, Inc., 906 F.3d 1229 (11th Cir. 2018) (holding that “the People are the constructive authors of . . . official legal promulgations of government,” meaning that the works are intrinsically public domain material and, therefore, uncopyrightable), cert. granted, Georgia, et al. v. Public.Resource.Org, Inc. (2019)); Disney Enterprises, Inc. v. VidAngel, Inc., 869 F.3d 848 (9th Cir. 2017) (Family Entertainment and Copyright Act of 2005 is not a defense to anticirumvention provisions); Capitol Records, LLC v. ReDigi, Inc., 910 F.3d 649 (2d Cir. 2018) (rejecting digital exhaustion); BWP Media USA Inc. v. Polyvore, Inc., 922 F.3d 42 (2d Cir. 2019) (exploring the volition requirement); Rimini Street, Inc. v. Oracle USA, Inc., 139 S.Ct. 873 (2019) (scope of costs recoverable under Section 505) Trademarks: IPNTA2019 integrates important cases on federal registrability of disparaging marks, merchandising rights, likelihood of confusion on the Internet, and remedies. ● False Advertising: added MillerCoors, LLC v. Anheuser-Busch Companies, LLC, United States District Court, Western District of Wisconsin, 2019 WL 2250644 (2019) ● New problem based on Dr. Seuss Enterprises v. ComicMix (protectability) ● Integration of new cases: Iancu v. Brunetti, S. Ct. (June 24, 2019) (holding that FUCT, while vulgar, is registrable); Moldex-Metric, Inc. v. McKeon Prods., 891 F.3d 878 (9th Cir. 2018) (holding that aesthetic functionality must consider the availability of alternative designs); Beyonce Knowles-Carter v. Feyonce, Inc., 347 F. Supp. 3d 217 (S.D.N.Y. 2018) (denied summary judgment that “Feyonce” merchandise marketed to fiances would confuse consumers into thinking it was sponsored by the musician Beyonce); Gordon v. Drape Creative, Inc., 909 F.3d 257 (9th Cir. 2018) (application of the Rogers test).