Employee Rights and Employment
Policy Journal, 6 Empl. Rts. & Employ. Pol'y J. 1 (2002)
Trade
Secrets and Collective Bargaining: A Solution to Resolving Tensions in the
Economics of Innovation
By Nathan Newman
Trade Secrets and Collective Bargaining:
A Solution to Resolving Tensions in the Economics of Innovation
I. Introduction- Trade Secrets and its Discontents *
A. Who Owns the Contents of your Brain? *
B. The conflict of property law and employment law regimes in trade secret disputes *
II. Historical Worker-Employer Conflict over Knowledge *
A. The Rise of the "Private Domain" of the Firm *
B. The Embodiment of Knowledge in Machinery and Union Bargaining over the "quasi-rents" of those Machines. *
C. How the rise of new technology undermined the older information regime in the workplace *
III. Why conflicts over Trade Secrets exist: Balancing Innovation versus Dissemination of Knowledge *
A. Two Conflicting views of Incentives for Innovations *
B. Why Judge-Made Rules are Not a Solution *
C. Why Individual Contracts Fail *
IV. Why Collective Bargaining is the Best Solution *
V. Conclusion: Steps to Trade Secret and Labor Law Reform *
I.
Introduction- Trade Secrets and their Discontents
A. Who Owns
the Contents of your Brain?
Who owns the contents of your brain when you quit your job?
That is the way controversies over trade secrets are usually
framed. When in late 1998, Wal-Mart, the giant store retailer, sued Amazon.com,
the online book and music store, for hiring ten former Wal-Mart employees, the
question was who owned the knowledge contained in those workers' brains about
Wal-Mart's system of tracking inventories and managing vendor deliveries. n1 The result of the lawsuit was a settlement by Amazon.com
that restricted former Wal-Mart employees to work unrelated to their previous employment.
Like so many trade secrets disputes, the negotiations between the parties were
fraught with uncertainty due to the many conflicting precedents based on trade
secret law. n2
At an accelerating pace, lawsuits seek to bar workers from
taking new employment or using information from older employment based on the
argument that trade secrets have been or might be disclosed. n3 In the last few
years, prominent [*3] companies, ranging from Intel Corp. to Cisco
Systems to Lucent Technologies, and their present or former employees have all
been enmeshed in such high-profile trade secret lawsuits. n4
Lawsuits involving trade secrets are increasingly backed by criminal sanctions,
as in the celebrated case of Petr Taborsky,
n5 thereby creating a whole new chilling edge to this question of ownership
over one's own thoughts.
On one hand, many defenders of trade secrets emphasize that
any restriction on worker freedom is not absolute but merely part of the
employment contract that can be eliminated through negotiation along with any
other benefits. This is true whether the restriction is in the form of a
so-called "covenant not to compete" against the employer, where the employer
must introduce a positive contractual restriction on the ex-employee's freedom,
or in the case of statutory trade secret law, where the employee can negotiate
to retain rights that might be lost due to the statutory default rules.
The alternative trade secret regimes of covenants not to
compete versus statutory trade secret law nicely illustrate Ian Ayres and
Robert Gertner's point that many contract laws are
merely "default rules" that penalize certain parties for failing to
bargain. n6 Since either side can bargain for rules different from the default
rule - as opposed to mandatory rules like
[*4] minimum wage laws -
statutory trade secret laws in the abstract only restrict workers' freedom when
they fail to engage in contract bargaining. In practice, however, the moving of
the default penalty from one side to the other can have more effect than who is
punished for failure to bargain. In the area of trade secret law,
Yet, the limits of this contract model have been emphasized
by courts voiding many covenants not to compete and a parallel discretion
assumed by the courts over when to apply statutory trade secret law. This assumption of court power to not only interpret the
meaning of such contracts but to overrule their clear language dates back to
common law antecedents like Mitchel v. Reynolds. n7 There, the court argued that its role was not merely to
interpret the contract but to judge "whether it be a reasonable and useful
contract" n8 to society based on the assumption that any "involuntary
restraints...are contrary to the liberty of the subject." n9
This conflict between "useful contracts" serving
society and preservation of employee liberty has remained the fixed pole of the
debate on trade secrets. If there is increased deference to employer trade
secrets, it is perceived to be due to the increasing value of intellectual
property as a "useful" element serving society. For those proposing
reforms of the trade secret law, the focus has been either on strengthening the
element of individual worker liberty in such contracts or in assuring the
production of useful intellectual property by the employer through new judicial
criteria. n10
[*5] This article argues that this continues a
false dichotomy between individual liberty and the useful production of
intellectual property by trying to find an ideal model of individual employment
contracts, or simulating a more just version of such individual contracts through
judicial intervention. Instead, because trade secrets are not typically the
product of individual effort by any employee but result from the collaboration
of many workers dependent upon one another, a better model for governing trade
secrets would be through a collective bargaining system. Such a system would
balance the collective interest of employees in their individual liberty to
change jobs when needed and in preserving their collective investments of time
and firm-specific human capital in any particular company. As well, such a
collective bargaining system would better reflect society's interest in
incentives for the production of intellectual property and its interest in the
wide dissemination of ideas and skills.
The rest of Part I will outline the historical conflict
between legal regimes of intellectual property and at-will employment. Much as
collective bargaining came to be seen as a solution to worker justice and
broader economic problems during the 1930s, this section will suggest why
collective bargaining is a possible solution to present conflicts over the
production of innovative ideas and skills in the new workplace.
Part II will illustrate how conflict over control of
innovation between firms and employees is nothing new, and how those earlier
conflicts shaped both the intellectual property and industrial organization
regimes of the mass production era. It is precisely in response to changes in
the industrial regime that we are seeing demands for change in the intellectual
property regime, and the understanding of that dynamic is needed to inform any
new policy.
Following that historical view, Part III will outline the
economic tension between incentives to innovation and the benefits of
dissemination. In contrasting the arguments for strong trade secret protection
and those for free information [*6] dissemination, this article will highlight
why both judge-made rules and individual bargaining fail to resolve these
tensions in the economics of innovation.
Part IV will outline why the best solution to the
innovation dilemma is through collective bargaining. Through addressing those
collective interests of workers and restraining the opportunistic power of both employees or employers in individual contracts, the
tension between incentives for production and dissemination would be best
resolved. Through collective bargaining, the interests of workers in realizing
the fruit of their collective effort would be balanced with their individual
interests in job mobility.
Finally, in Part
V, the article will trace the specific advantages of a union approach to trade
secret law and conclude with how to tie such an argument into political debates
over production "teams" in the workplace. The main reform proposed
will be to amend state trade secret statutes to allow workers to switch jobs
without restriction, unless a collective bargaining agreement has been
negotiated to assure fair compensation for the workers' contribution to any
trade secret innovations. It will also outline some steps to modify national
labor law policy to integrate concerns over employee contributions in trade
secret innovation.
B. The
conflict of property law and employment law regimes in trade secret disputes
Even starting at the question, as
trade secret law does, of who owns the ideas in a worker's head assumes that
the paradigm of ownership and property law is the best starting place to
address employment controversies. Yet, since the time English jurist Henry
Maine declared, "The movement of the progressive societies has hitherto
been a movement from Status to Contract," n11 the assumption of modern
thought had been that analyzing employment in terms of property was essentially
a throwback to a medieval frame of thought. If anything defined the birth of
the modern era, it was the
[*7] freeing
of workers from the confines of status and property, whether as serf tied to
the land or journeyman licensed only for trade under the dictates of a guild.
n12
Property regimes were considered the wrong approach to
analyzing the employment relationship because labor happens at the time of
production, at that Lockean point before labor has
been mixed with the world and before property has been created in the liberal
common law tradition. n13 The firm comes to own
property only through its position as a "nexus of contracts" n14
where workers transfer ownership of the fruits of their labor to the firm in
contractual exchanges for wages and other benefits. Worker and employer might
struggle over the price for that transfer, the so-called "wages-profit"
split, but until that division is resolved through a fully resolved contract,
the legalisms of property law would have no application.
A corollary to this pre-property nature of employment was
the doctrine of at-will employment, which meant starting in the nineteenth
century that workers could leave their employer at any time, just as the
employer could layoff the worker at-will as well, with freedom to take any job.
n15 This ideal of freely formed and freely dissolved employment contracts was
further reinforced by the "free labor" ideology triumphant in the
Civil War and enshrined in the Thirteenth Amendment's ban not only on slavery
but on "involuntary
[*8]
servitude." n16 Courts treated with suspicion even voluntary
contractual restraints on the right to compete against a former employer and
usually struck them down as violations of "restraint of trade." Where
such agreements were upheld (and we will detail more about the evolving doctrine
on this), the remedies for breach were generally confined to compensa-tion based on civil suit, n17 with specific
performance enforced by injunction a rarity and criminal sanction almost
unheard of. n18 This would reinforce the sense that
employment was a realm of civil freedom subject to compensation to make good a
contract, but not status regulation of property governed by sanctions imposed
by the state.
Of course, employers paid wages not only in exchange for
ownership of the widgets produced by employee labor, but ended up with
ownership of the tools necessary for those workers to perform that labor in the
first place, thereby severely restricting the freedom of workers in fact to
switch employment. This control by the employer of the "means of
production" and the alienation of workers from that control was the heart
of the Marxist critique of the false promises of freedom in the "free
labor" liberal employment contract regime. n19
The problem for many modern firms is that this
implicit [*9] transfer of control over the means of
production to employers is undermined in the information age, where many of the
tools of creation produced in the workplace are not machines of steel but
processes of innovation. As Fortune magazine editor Thomas Stewart notes in his
book Intellectual Capital, "Far from being alienated from the tools of his
trade and the fruit of his labor, the knowledge worker carries them between his
ears." n20
For employers seeking control over the tools of innovation
located between the ears of their employees, at-will contract law is a weak
reed for asserting control. This weakness derives both from the philosophical
tradition noted above, and, as will be argued, because such a contract theory
of knowledge rights might imply an obligation to bargain with employees for
compensation for their contributions to such knowledge. Instead, employers have
increasingly turned to the framework of intellectual property rights in the
form of trade secret law.
The advantages for an employer of an intellectual property
regime over contract remedies are legion. Remedies are measured not usually in
terms of civil compensation for economic damage but through state-ordered
injunctions and even criminal sanctions to assure exclusive control by the
owner of intellectual property. If Debbie Does Dallas infringes on the exclusive
right of the Dallas Cheerleaders to control their trademarks, even the First
Amendment will not stand in the way of prior restraint injunctions to forbid
its distribution. n21 And if injunctions are not
enough, criminal sanctions exist against willful violations of most
intellectual property laws. n22
Yet this escape from Lockean
contract understandings of ownership also creates inherent limits on those
property rights by firms as well. Intellectual property is justified not based
on a broad rights-based assertion of exclusive and perpetual control, but only
as a utilitarian grant by the state [*10] to encourage firms to innovate and serve the
public. In copyright and patent, the Supreme Court has been crystal clear in
asserting the complete utilitarian nature of this grant. In the copyright area,
the Court has stated, "The primary objective of copyright is not to reward
the labor of authors, but 'to promote the Progress of Science and useful
Arts.'" n23 In the patent area, the court has stated, "The patent
monopoly was not designed to secure to the inventor his natural right in his
discoveries. Rather, it was a reward, an inducement, to bring forth new
knowledge. The grant of an exclusive right to an invention was the creation of
society - at odds with the inherent free nature of disclosed ideas..." n24
Congress and the Supreme Court have offered such grants
only to a narrowly defined set of innovations on condition that their nature be disclosed to the public to encourage further innovation.
The requirement of specification and disclosure has helped minimize any
ambiguity as to what copyright or patent assets belong to the firm and which are part of the public domain free for anyone to use,
including departing employees. n25 As well, the Court
has rejected protection for "sweat of the brow" accumulations of
knowledge, n26 such as databases, avoiding the implicit question of whose sweat
went into those compilations and whether they were fairly compensated.
On the other hand, "sweat of the brow" innovation
is exactly the kind of innovation that state trade secret laws most often
protect, e.g., customer lists, marginal process improvements, and new
combinations of previously known technologies. It is precisely because such
information goods [*11] are often not singular breakthroughs but
involve continual contributions by a firm's workforce that the line between
cumulative worker skill and firm-owned innovation is so unclear in the tangle
of cases that litter state courts in the trade secret arena. n27
Because trade secret laws are based largely on state law,
different rules apply to trade secrets in quite significant ways.
Most states have adopted versions of the Uniform Trade
Secrets Act (UTSA) n30 which outlines rules for protecting information of
economic value to a company that it has taken steps to keep secret, but the
exact definition of what is protected may vary in a state depending on
revisions of the statute.
Aside from what ideas are protected, courts have to
struggle with what kinds of enforcement mechanisms to use. Merely prohibiting
disclosure of a protected idea may not be enough for a court, so many have
barred employment of workers by any competitor in situations where the
"inevitable disclosure" of a protected idea is likely. The leading
case on this issue, PepsiCo, Inc. v. Redmond, n34 which was decided in the
Seventh Circuit, and barred a manager from taking a job at a competitor where
the court assumed he would inevitably use knowledge from his former employer in
making new decisions. Many other courts have made similar decisions, n35
although others have found the doctrine too expansive without proof of actual
misappropriation of trade secrets by the employee in question. n36 Courts have
struggled with the fact that access to trade secrets from a former employer go
hand-in-hand with the fact that the general skills an employee knows makes
employment at competitors often their most attractive option.
In any trade secret case, the problematic test a judge [*13]
faces is balancing the imperatives of freedom of job mobility implied in
the at-will tradition with the utilitarian imperatives of encouraging
production of innovation through trade secret protection. In the ideal of law
and economics, there would be some simple way to either shape the rules of ex
ante employment contract negotiations or declare judge-administered rules to
attain the optimal economic growth balanced with worker freedom. Unfortunately,
the judicial process inherently fails to find satisfactory results when balancing
such incommensurate values, a fact Robert Bork has
eloquently argued. When a judge faces such value tradeoffs, Bork noted in the
slightly different context of antitrust law, but the principle is the same for
trade secrets:
The case law
provides no guide whatever for judging such trade-offs. There is no common
denominator between [such incommensurate] values, and there is no economics, no
social science, no systemized knowledge of any sort that can provide the
criteria for making the trade-off decision... .
Stating the nature of the problem [when a court] attempts to reconcile
inconsistent values on a case-by-case basis should be enough to indicate the
impropriety of courts undertaking such a function. n37
But the problem goes deeper. Even if a judge
were to completely abandon individual worker welfare as a criterion, deciding
in favor of maximization of technological progress, there are tensions within
the incentives of innovation itself that make escaping this tension with worker
freedom impossible. As will be explored in more detail later in the article,
the incentives for creation of innovation need to be balanced with incentives
for dissemination of that innovation. In the area of trade secrets, the vehicle
for dissemination is the process of workers changing jobs, so the mobility of
particular labor markets largely determines what degree of trade secret
protection is appropriate, and the degree of trade secret protection will, in
turn, shape the mobility of labor markets. This creates a pattern of
reiteration and co- [*14] dependence of law and industrial formation
that makes simple abstract legal rules of wealth maximization problematic. n38
In place of the inconsistency of judges in applying trade
secret law, this article will argue for a solution based on rejuvenating the
role of labor unions and collective bargaining. Against the popular stereotype
of unions as dinosaurs in the information age, this article will make the case
that it is precisely through an expansion of collective bargaining over
innovation issues in the workplace that the contradictions we see playing out
in trade secret law can be resolved. More importantly, and again contrary to
much ideological opinion, labor union rejuvenation will not only serve justice
for workers but also will create the basis for more efficient economic growth
and technological innovation.
It is worth noting that the rise of collective bargaining
was itself a response not just to injustice but to specific economic
contradictions in the at-will employment doctrine itself. At-will employment
was never the idyll of freedom its ideological proponents might paint, usually
serving the interests of employers more than their workers. n39 In practice,
at-will employment largely protected the interests of employers in being able
to lay-off workers during recession or to prevent them from demanding higher
wages, even ensconcing the employer's ability to fire at will as a [*15]
constitutional right at the turn of the century. n40
The inequality in bargaining power between workers and the emerging behemoths
of industrial capitalism made a farce of the republican principles justifying
at-will bargaining in the early post-Civil War period. And attempts by workers
to address that inequality through joint bargaining and union action were met
by the prevalent injunction of the Lochner era,
namely the labor injunction that would jail many labor leaders. n41 Similarly,
the "voluntary" non-compete clause of today had its parallel in the
"Yellow Dog" contracts then forcing employees to foreswear membership
in labor unions as a condition of employment. n42
It was with the Depression of the 1930s that some of the
contradictions and inequalities of at-will employment were addressed by new
pro-labor legislation. n43 This was followed by new
legislative mandates protecting the right of workers to organize and bargain
collectively, while banning "voluntary" Yellow Dog contracts and
company-run unions. n44 The argument for this new
collective bargaining model was not merely to deal with the inequalities in
at-will bargaining. Many saw unionization as a way to address broader
economic [*16] contradictions stemming from the at-will
system, where individual bargaining encouraged employers to accelerate lay-offs
in recessions, thereby furthering drops in consumption that in turn accelerated
the downward spiral of the business cycle. n45 In somewhat ironic honor of
Henry Ford, who had publicly promoted the idea of paying his workers more so
they could afford to buy the cars they built (even as he vociferously opposed
unions), this new model of stabilized work relations through higher wages and
collective bargaining has been dubbed "Fordism"
by many analysts. n46
In a parallel
way, integrating trade secret law into labor law would address the conflicts of
trade secret law with at-will employment traditions, as well as resolve many of
the internal paradoxes of workplace-based intellectual property in increasingly
knowledge-based industries. Collective bar-gaining is more likely to
approximate the ideal level of trade secret protection for maximum innovation
and economic growth than either individual bargaining or judge-determined
rules.
In place of the inconsistency of judges in applying trade secret law, this Note will argue for a solution based on rejuvenating the role of labor unions and collective bargaining. Against the popular stereotype of unions as dinosaurs in the information age, this Note will make the case that it is precisely through an expansion of collective bargaining over innovation issues in the workplace that the contradictions we see playing out in trade secret law can be resolved. More importantly, and again contra much ideological opinion, that labor union rejuvenation will serve not only justice for workers but create the basis for more efficient economic growth and technological innovation.
It is worth noting that the rise of collective bargaining was itself a response not just to injustice but to specific economic contradictions in at-will employment doctrine itself. At-will employment was never the idyll of freedom its ideological proponents might paint, usually serving the interests of employers more than their workers. In practice, at-will employment largely protected the interests of employers in being able to lay-off workers during recession or to prevent them from demanding higher wages, even ensconsing the employer's ability to fire at will as a constitutional right at the turn of the century. The inequality in bargaining power between workers and the emerging behemoths of industrial capitalism made a farce of the republican principles justifying at-will bargaining in the early post-Civil War period. And attempts by workers to address that inequality through joint bargaining and union action were met by the prevalent injunction of the Lochner era, namely the labor injunction that would jail many labor leaders. Similarly, the "voluntary" non-compete clause of today had its parallel in the "Yellow Dog" contracts then forcing employees to foreswear membership in labor unions as a condition of employment.
It was with the Depression of the 1930s that some of the contradictions and inequalities of at-will employment were addressed by new pro-labor legislation. This was followed by new legislative mandates protecting the right of workers to organize and bargain collectively, while banning "voluntary" Yellow Dog contracts and company-run unions. The argument for this new collective bargaining model was not merely to deal with the inequalities in at-will bargaining. Many saw unionization as a way to address broader economic contradictions stemming from the at-will system, where individual bargaining encouraged employers to accelerate lay-offs in recessions, thereby furthering drops in consumption that in turn accelerated the downward spiral of the business cycle. In somewhat ironic honor of Henry Ford, who had publicly promoted the idea of paying his workers more so they could afford to buy the cars they built (even as he vociferously opposed unions), this new model of stabilized work relations through higher wages and collective bargaining has been dubbed "Fordism" by many analysts.
In a parallel way, integrating trade secret law into labor law would address the conflicts of trade secret law with at-will employment traditions, as well as resolving many of the internal paradoxes of workplace-based intellectual property in increasingly knowledge-based industries. Collective bargaining is more likely to approximate the ideal level of trade secret protection for maximum innovation and economic growth than either individual bargaining or judge-determined rules.
II.
Historical Worker-Employer Conflict over Knowledge
A. The Rise
of the "Private Domain" of the Firm
To understand the economic interests behind today's trade
secret law regime, it is important to understand the structural reasons for a
different legal regime earlier in the century. It is worth emphasizing that the
current legal conflict over knowledge in the workplace is based not on any [*17]
radical change in the contribution of workers to innovation, but rather
on the expansion of employers' legal claims on workers' skills - skills and
innovation that have always been critical to productivity. n47
Traditional analysis of the economy once assumed that
efficient management utilization of labor along with the application of capital
was the key to understanding economic growth. However, economists and other
analysts have increasingly recognized the crucial, even decisive role of
technology and innovation contributed by everyday workers in accounting for
economic growth, not only in the present era but throughout the modern industrial
age. MIT Economist Robert M. Solow won the Nobel
Economics Prize for his work done in the 1950s arguing that technology was far
more important historically than capital investment or the raw supply of labor.
Subsequent research has emphasized that isolated, professionally-based research
and development spending could not account for this historical role of
technology in economic growth. Instead, the incremental process improvements
contributed by the workforce as a whole have accounted for the lion's share of
innovation in economic growth. n48
In a sense, this more recent research is just recovering
the taken-for-granted recognition in the nineteenth century of [*18] the dominant role of workers' knowledge over
that of management's. In the words of turn-of-the-century labor leader Big Bill
Haywood, "The manager's brains are under the workman's cap." n49
Labor struggles centered on who would control that knowledge and an evolving
battle by management to wrest ownership of knowledge in the workplace from its
employees. Haywood's belief was hardly a boast but was echoed by management's
spokesmen eager to change that inconvenient reality.
Frederick Taylor, made famous by his advocacy of
"scientific management," would argue, "The foreman and superintendents...
know better than anyone else that their own knowledge and personal skill falls
far short of the combined knowledge and dexterity of all the workmen under
them." n50 To combat that labor advantage, Taylor saw the goal of
management as aggressively taking possession of that knowledge through:
the
deliberate gathering in on the part of those on the management's side of all
the great mass of traditional knowledge, which in the past has been in the
heads of the workmen, and in the physical skill and knack of the workmen, which
he has acquired through years of experience. The duty of gathering in of all
this great mass of traditional knowledge and recording it, tabulating it, and,
in many cases, finally reducing it to laws, rules, and even to mathematical
formulae, is voluntarily assumed by the scientific managers. n51
Of course,
That such collective innovation was not recognized as
intellectual property during this crucial period was due partly to the
interests of employers of the time in fighting that recognition, but partly to
the broad failure historically of intellectual property to address the
collective nature of innovation in all its forms. All innovation and creativity
builds on the work of others, yet the law sections out innovation into discrete
units that create property claims. The danger is that if the whole space of
innovation is parceled out, there will be no public domain for the next round
of innovation to draw upon. The solution for the law, as legal scholar James
Boyle argues, has been to focus those rights on the figure of the romantic
"author," a singular actor whose claims can be circumscribed as
needed by mediating devices such as requirements of "originality" and
distinctions between idea versus "expression" of
"embodiment." n53
Against the romantic idea of the individual inventor,
workers' collectively-developed knowledge was considered "rule-of-thumb"
knowledge and a natural part of the public domain, while employers increasingly
were able to position themselves as managers of internal firm "private
domains" and the individual "authors" of inventions, usually
derived from employees, in the broader market of which they were a part.
However, at the end of the nineteenth and the beginning [*20] of the twentieth centuries, employers were
much more concerned with neutralizing the intellectual property rights of
employees than with asserting their own ownership. The early-to-mid nineteenth
century had been rather kind to the rights of the inventor-employee, but the
rise of large industrial firms began to reshape the view of the rights of the
employer over the inventions of the employee. n54 What
evolved was the doctrine of an employer "shop right," essentially a
free compulsory license for the firm to inventions made by an employee during
company time or with company resources. n55 The shop
right did not necessarily prevent the employee from patenting the invention and
selling a license to other firms, but it enabled the direct employer to avoid
paying a royalty.
These precedent-setting cases typically were based on
situations where an employee, after quitting employment or being dismissed,
sought payment for an invention the employer used regularly for its business.
In one case, the courts blocked a departing color mixer at a textile mill from
taking his recipes for mixing colors with him. n56
This ruling came even though the employee created many of these recipes before
he started employment and despite the traditional custom in the industry that
color mixers owned their recipe books. The Pennsylvania Supreme Court argued:
If a
color mixer could at his pleasure carry off the recipes and color books from
his employer's factory, and refuse to permit their further use except upon his
own terms, it would be in his power to inflict enormous loss on the manufacturer
at any moment, and not merely to disturb, but to destroy, his business. Such a
custom would not be reasonable, and could not be sustained. n57
In many ways, this argument parallels the more
general public defense of the public domain and the fear that overly strong
intellectual property rights will disrupt society.
[*21] Courts justified employer shop rights by observing that the employee inventions were made on employer time or using employee resources. n58 The doctrine expanded to include even cases where the invention in question had nothing to do with the employee's normal job or involved relatively little time at work. n59 This created an entitlement by the firm for a return on even inadvertent support of creative endeavor, a far tighter restraint on the rights of employee-inventors than is imposed on innovators in the broader public sphere who might receive economic or intellectual resources from the commons. In a sense, a nearly perfect "private domain" had been created within firms, unburdened by almost any legal or contractual n60 rights by employees to demand direct compensation for innovation within those firms.
B. The Embodiment of Knowledge in Machinery and Union
Bargaining over the "quasi-rents" of those Machines.
These twin trends,
scientific management and shop rights, would leave workers at the turn of the
century with [*22] increasingly less control and therefore less
bargaining power over use of their own innovation in the workplace. The rise of
dedicated, expensive industrial machinery mirroring the knowledge of a firm's
employees meant that even if workers walked out the firm's door, much of their
knowledge would not. This was one key reason in the early part of this century
that firms cared less about asserting their own intellectual property rights
within the firm and cared far more about extinguishing those of their
employees.
Part of the effect
of the new mass production machinery was the "deskilling" of work.
Craft skills were made nearly worthless as many workers became mere tenders of
machines, n61 with management using time and motion studies, based on study of
that craft knowledge, to maximize output. n62 However,
both proponents and critics overemphasized the deskilling aspect of the new
mass production systems. On one hand, management proponents of the new system
emphasized the deskilling to devalue the informational claims of workers for
compensation for their labor.
On the other hand,
labor activists often equated the deskilling process with a much broader
disempowerment that all workers suffered with the rise of the new mass
production machinery. The key to this broader disempowerment was that remaining
skills were increasingly machine-dependent and, with increasing economic
concentration, largely firm-dependent as well. Where firms held exclusive
patents to [*23] their machinery, this problem was obvious. n63 But for all workers, the dependence of the utility of
their skills and innovation on their employers' machines meant that the full
value of their skills were often anchored to the firm. At best, they could seek
employment at a competing firm where that dependence on the machine inevitably
lowered their bargaining power, but in many cases the sheer scale of investment
costs created few competitors using similarly configured machinery. n64 This sheer physicality of machinery allowed firms to tie
workers to them better than any legal protection could have, thereby explaining
why intellectual property disputes with departing employees were so few in this
period.
The wage gains
made by industrial unions have been explained increasingly in recent economic
studies by the ability of unions to recapture through bargaining a share of
such firm-specific "rents" due to capital investment or other
firm-specific advantages. n65 This is of key
importance, since traditional criticisms of unions were based on economics that
largely ignored such knowledge-based investments, thereby dismissing any wage
gains through unionism as inevitably coming at the expense of consumers or
other workers. Those criticisms argued that union wage gains were explained by
the establishment of "labor cartels" that could uniformly raise costs
and pass them onto consumers or unorganized workers in other sectors of the
economy. n66 While controversial as an explanation
even at the high tide of union power, the "labor [*24]
cartel" theory became increasingly untenable as wage gains remained
for union members within industries with large numbers of non-union
competitors. n67
Instead,
researchers have increasingly focused on union gains from extracting the
"quasi-rents" from firm-specific investments that operate in
competitive markets but give a firm a competitive advantage. Union bargaining
can gain for workers a portion of that advantage in higher wages. As Kenneth Dau-Schmidt notes:
For resources that are highly specialized and hard to
transport, such as a unique steel smelter, quasi-rents may constitute nearly
the entire competitive return on the resource. If the employees in an
occupation with barriers to entry can organize an employer who earns
significant quasi-rents on a specialized machine, then the employees can raise
their wages to the limits of their barriers to entry, and the employer will be
forced to pay the higher wages out of the competitive return she would have
earned on the machine. n68
Such a union
strategy is always balanced by the need to keep firms making such investments.
As Dau-Schmidt along with other recent analysts have
emphasized, the extraction of such quasi-rents are often matched by union
strategies that increase productivity within such firms. n69
What is notable in
this analysis is that for all firms, union and non-union, the competitive gains
from such quasi-rents are dependent on the costs of others matching the
investments in such product-specific machines. In the era of dedicated
machinery for mass production, those costs were high and the quasi-rents for
machinery were substantial.
[*25]
C.
How the rise of new technology undermined the older information regime in the
workplace
However, the rise
of "flexible production" based on machinery that can easily be
reconfigured for multiple uses has radically decreased the barriers to entry
for many aspects of production. n70 Starting with
numerically-controlled machine tools and advancing to fully computerized and
programmable tools, the barriers to use of many new technological processes
dropped dramatically. n71 Instead of needing to invest
in new physical machinery, companies can in many cases reprogram existing
equipment to meet advances by competitors. The cost to match advances by
competitors is increasingly limited to the costs of acquiring the knowledge
needed to do that reprogramming.
This technological
change dramatically threatens the control of knowledge by firm management. The
"private domain" of the firm in the mass production era encouraged a
largely one-way transfer of knowledge from workers to employers as knowledge
was embodied in dedicated machinery. It is now increasingly possible for
employees to extract the innovative knowledge embedded in a firm's machinery
and leave the firm, either to establish their own
startup companies or, more commonly, to take that knowledge to another firm
which can then reconfigure its equipment for the new innovation, usually paying
the workers handsomely for the innovations they bring with them. The "private
domain" of the firm, which had served employers so well for decades, seems
to be giving workers new power over knowledge in the workplace.
Yet as the
"information age" dawns and knowledge seems to have once more freed
itself from routinized machines, there has not been a
return to respect for the autonomy of workers'
[*26] knowledge. Instead,
as ideas threaten to steal away on the wires of the Internet,
workers' bodies have become the last solid anchor for employers to tie their
intellectual property down. That anchor increasingly takes the form of trade
secret law and its associated civil and criminal sanctions against workers'
ability to freely change jobs. With a crash, traditions of intellectual
property have collided, and are over-whelming traditions of at-will employment.
Where corpora-tions once depended on the costs of
replicating machinery n72 to win out in workplace negotiations with employees,
the law itself is emerging as a major weapon for employers in suppressing the
power of workers. Where quitting a job was the traditional threat backing up
any demand for increased wages, that threat is being increasingly neutralized
by trade secret law, since personal investment by the worker in firm-specific
knowledge or skills can be made legally valueless if taken to another firm.
Trade secret
fights related to the Internet, in some ways the ultimate in multi-purpose
machines, highlight how quickly traditional principles of at-will employment
are falling before employer demands for trade secret protection. Even in the
relatively recent past, injunctions would be enforced only if an employee had
made a specific contract not to work for a competitor and the contract
specified a limited geographic region for that limitation on freedom of
contract. n73 The Internet, on the other hand, blurs
who is a competitor and what geographic region any company operates within.
This was shown most dramatically in the suit by Wal-Mart against Amazon.Com for
hiring ten employees based in Wal-Mart's [*27]
Wal-Mart could
potentially have won an even more decisive victory in court given precedents
such as PepsiCo, Inc. v.
Ironically, this
upgrading in status increasingly means that such employees are more susceptible
to having their skills defined as "trade secrets," leading to a loss
of freedom on leaving a firm. Where the firm was a "private domain"
in the early part of the twentieth century, we now have an internal firm regime
of trade secret law that gives employers one-way intellectual property claims
on employees. In this way the legal system substitutes for the earlier process
where [*28] expensive dedicated machinery gave employers
de facto control of workers' knowledge in mass production workplaces and
created a very unbalanced choice for workers considering whether to stay at a
firm.
Traditional
economic theory had seen the choice for employees as either to continue
marketing their particular set of skills to their present employer or to seek
an alternative firm which might price them at a higher level. Even under
traditional models ignoring innovation, this choice rarely if ever was
costless, since there are usually high costs for leaving one's present employer
for an exactly equivalent job. n78 This basic dichotomy has been used to
explain the traditional reasons why workers preferred an enhanced
"voice" in the workplace through unions, over the "exit"
option of threatening to quit. Such a collective voice was needed, in this
view, to make up for the bargaining advantage employers had over employees due
to the costs of switching jobs. n79
When trade secrets
and innovation are integrated into these models, the failure of employment
markets and the need for collective bargaining become even clearer. Because
much of the value of a worker's skills may be linked to firm-specific trade
secrets, a worker's present employer has significant leverage over that worker.
Since any "exit" from the firm threatens to "strip them
naked" mentally of any skills they have learned, or created, on the job,
they have much [*29] less to offer the next employer. It is only
collective bargaining through unions at their present employers that is likely
to compensate workers for this legally-enforced failure of the employment
market to fully value their skills when switching employers. As well,
collective bargaining allows employees as a group to claim a fair share of the
"quasi-rents" generated by the employer through its competitive
advantage due to enforced trade secret protection.
III. Why conflicts over Trade Secrets exist: Balancing Innovation versus
Dissemination of Knowledge
A. Two
Conflicting views of Incentives for Innovations
Even as economic justice calls for strengthening the hand
of workers in negotiations over innovation, there is an equally strong argument
that strengthening their collective bargaining power will serve innovation and
economic growth as well. The conflicts and ambiguity in much of trade secret
law, such as what innovations will be covered, which workers will be covered,
and what contracts not to compete will be enforced, derive from the conflict
among analysts over how protecting firm investments in innovation affects the
broader economy. While trade secrets are seen by many as creating important
incentives for firms to invest in research and development, other analysts see
restrictions on the dissemination of knowledge as impeding maximum efficiency
across the economy.
Both sides of this question overwhelmingly concentrate on
modifications of judge-administered rules as the solution. However, despite the
often quasi-property manner of their discussion, trade secrets are ultimately
modifications of employment contract law and, therefore, any solution favoring
protection of research investment or dissemination of innovation's results
should be sought through modifying the nature of employment bargaining.
Strengthening the role of collective bargaining will serve these competing
economic interests better than either judge-made rules or individual
bargaining.
[*30] Chief Justice Warren Burger made one of the
strongest legal defenses of the economic role of strong trade secret protection
in Kewanee Oil Co. v. Bicron Corp., n80 the 1974 case
that held that state trade secret laws were not constitutionally preempted by
federal patent law. Speaking for the Supreme Court majority, Burger argued that
state trade secret laws encouraged innovation in areas "which would not be
proper subjects for consideration for patent protection." n81 They did
this by contributing to their "subsidization of research and development
and to increased economic efficiency within large companies through the
dispersion of responsibilities for creative developments." n82
Burger argued that preventing rival firms from easily
copying marketing ideas and other techniques for managing customers, will
encourage firms to create a broad diversity of "individualized plans of
operation ... This in turn leads to a greater variety of business methods"
n83 than if trade secret protection was not available. As well, the option of trade
secret protection creates certain administrative cost reductions for the Patent
Office by reducing the number of speculative patent applications for unpatentable innovations, saving both the Patent Office and
firms the legal costs of processing patents with little likelihood of
acceptance. n84
Most interesting in the decision were the losses Burger
envisioned if trade secret protection was unavailable. Since firms would not be
able to capture the full returns from their investments, research would be
reduced. Small firms would be discouraged from innovation, since they could not
enforce licenses granted in confidence to larger firms to facilitate
development. Most strikingly, Burger argued that for any remaining research,
workplaces would be organized inefficiently to keep average workers from
understanding the full scope of any innovative research:
[*31]
Alternatively with the effort that remained, however, would come an increase in the amount of self-help that innovative
companies would employ. Knowledge would be widely dispersed among the employees
of those still active in research. Security precautions necessarily would be
increased, and salaries and fringe benefits of those few officers or employees
who had to know the whole of the secret invention would be fixed in an amount
thought sufficient to assure their loyalty... As a result, organized scientific
and technological research could become fragmented, and society, as a whole,
would suffer. n85
Burger
emphasized how the organization of the workplace is used to disempower
employees to maintain management control of knowledge, much as
Other subsequent analysts have emphasized the broader
economic disadvantages of trade secret protection. n87 One of [*32]
the most comprehensive legal analyses arguing for the detrimental impact
of trade secret law on growth has been done by Rutgers Professor Alan Hyde, who
has argued that part of the explosive economic growth in Silicon Valley has
derived precisely from the fact that trade secret laws are weakly enforced
there. n88 As Hyde argues, "The 'natural
advantage' that facilitated
More broadly, the "endogenous growth" theories of
economist Paul Romer n94 challenge the economic
advantages of strong intellectual property rights. In studying firm innovation,
Romer argues that a property rights approach is a
misguided attempt to impose a market model of scarcity derived from capital and
labor markets on innovation. But it is precisely because information can be
freely shared and is [*33] "nonrivalrous"
(in Romer's phrase) that innovation plays such a
crucial role in economic growth. Where scarcity of physical goods creates an
economics of diminishing returns in physical production, information-based
goods become cheaper on a per unit basis, creating a world of massively
increasing returns. The creation of exclusive knowledge undermines growth,
since it is precisely the free-flowing expansion of non-rivalrous
knowledge that fuels economic growth.
There is an additional reason that the new growth economics
are suspicious of exclusive control of knowledge. Where Chief Justice Burger
promoted the consumer interest in facilitating a multiplicity of business
methods in marketing, economists like W. Brian Arthur have argued that
consumers have a broad interest in uniform practices that allow the integration
of different products and services. n95 Companies that
gain an initial advantage in establishing consumer adherence to their standards
may be able to "lock in" that advantage, often preventing superior
technology from gaining a foothold because the rival may be barred by
intellectual property laws from making its product compatible with the initial
market leader. n96 In this analysis, the sharing of
marketing techniques and strategies between firms without strong property
rights creates a greater likelihood of convergence on superior standards. n97
While trade secrets are seen as promoting firm-specific
investments in research and development, to the extent those same trade secrets
make firm-specific skills largely worthless for workers if they are forced to
leave the firm, they create a large disincentive for workers to invest time and
money in such firm-specific skills, especially in industries with little
job [*34] security. This sub-optimal investment in
firm-specific human capital was highlighted by Gregory Dow, n98 and elaborated
in a recent paper by MIT economist Michael Kremer. n99
The conflict over the traditional need for excludable intellectual property rights versus the need for softer enforcement to encourage the dissemination of knowledge and standards explains much of the fractured logic over trade secret law enforcement. And it explains why this conflict plays out over the body of the worker, since investment in skill processes are embedded in the work processes of workers, while at the same time the workers' bodies are the conduit for transferring knowledge throughout the industry when they switch jobs.
B. Why
Judge-Made Rules are Not a Solution
Proponents of strong trade secret law and critics share a
belief in the importance of creating the proper uniform set of statutory and
common law rules to clearly establish the right balance between these two economic
tensions. Where strong trade secret law would prevent an employee from sharing
any skill developed at her previous firm with a new employer, Hyde, for
example, would prefer legal rules that restrict trade secrets to "tangible
information, actually a secret in the industry, that would not have been
created by the employer unless secrecy was reasonably contemplated," n100
essentially the standard he feels that California courts have traditionally
applied. n101 General skills and processes would not
be protected, but customer lists, the location of an oil field, or the specific
formula for a poultry vaccine would be protected [*35]
if a court determined that the company would not have invested to
establish the information if it could not have remained secret. n102
However, when critics of trade secrets universalize the
trade secret rules of
Additionally, it is unclear that
Additionally, different industries in the
Hyde acknowledges the diversity of labor markets and along
with his rules on trade secrets would have courts "require economic
analysis of the likely effects of their decisions on incentives" and
inquire into the "the real contract the parties have, and enforce that
contract." n108 The problem with this solution is that it would turn every
trade secrets case into an economics debate on ideal incentives for individual
industries, while having courts also determine the "real contract,"
i.e., implicit contracts determined by un-spoken but broadly acknowledged norms
within particular industries or firms. The result would not eliminate workers'
uncertainty about their rights to change jobs, but instead place them at the
mercy of a widely arbitrary set of assumptions (as evidenced by the broad
debate on trade secrets) by judges as to economic incentives. This is a recipe
for judicial interventionism that is not only beyond the competence of most
judges, but largely disempowers workers as agents of
their own fate.
A better
alternative is to strengthen and clarify the role of bargaining by employees
with employers, which is more likely to reflect the specific realities of
individual industries and labor markets. What stability will be negotiated in
labor markets and in trade secret protection should reflect the reality of the
labor market, not be imposed in either a uniform legal
standard or through judicial anticipations of such negotiations. It is likely
that different industries with different degrees of labor market volatility
will end up with different negotiated solutions for this very reason.
However, [*38] as the next section will argue, individual
bargaining is unlikely to achieve these beneficial results, so collective
bargaining is the best solution to assure equity and overall efficiency in
information-based industries.
C. Why
Individual Contracts Fail
There is a body of scholars that argue that any judicial
prohibition of covenants not to compete or of other trade secret-related
binding employment contracts not only undermines the interests of employers but
also undermines important economic and efficiency interests of employees.
Building on the economic theory of human capital promoted by Gary Becker n109
and the legal theories of Richard Epstein n110 on the importance of the
alienability of property, Professor Stewart Sterk
argued strongly that the judicial prejudice against the full alienation of
human capital and against the ability to make binding contracts not to compete
on that basis is economically pernicious for employers and employees. n111 It
is relatively obvious that this lack of alienability may discourage investments
in trade secret-related technologies, but Sterk notes
that it may also lead to underinvestment in the firm-specific human capital
necessary to take full advantage of those and other firm-specific technologies.
n112 Especially for lower-skilled workers looking for
on-the-job training, the inability to make binding long-term contracts may
prevent workers from bargaining for increased skills training in a situation
where the firm cannot be assured that such investments will not walk out the
door and be used by a competitor. n113 The existence
of the threat of judicial injunction to enforce such binding agreements serves
as a credible guarantee for employees seeking training for [*39]
and access to firm-specific capital. n114
Yet even as strong a proponent of human capital
alienability as Sterk acknowledges that judicial
intervention is based on skepticism that such binding agreements in practice
will benefit employees. "Rules limiting enforcement of anticompetitive
covenants may be based, in part, on recognition that the contract itself is
unlikely to reflect the agreement the parties would have reached if they both
had access to the same information." n115 Individuals are unlikely to
negotiate either fair or broadly economically rational deals over trade secrets
ex ante before employment. It is hard enough to argue that each worker can
fairly judge and bargain over the opportunity cost of their time compared to
the wage and benefits offered. It is precisely because of inequalities of
information and bargaining power that collective bargaining has traditionally
been justified. n116
Trade secret agreements add information uncertainty where
employees permanently give up rights over unspecified technologies and skills,
many of them not even in existence yet, in exchange for no set economic
consideration, since an at-will employee has no specific employment guarantee.
Tracy Staidl argues that unless employers explicitly
forego their right to terminate employees-at-will as part of an employment
contract over trade secrets, any imagined benefits for the employee are
"illusory" since the foregoing of alternative employment
opportunities is not backed by any guaranteed employment. n117
Even if a binding agreement includes a specified time
element of employment in the contract, it is impossible to expect the
individual to have adequate information to calculate the opportunity cost of
the agreement. He or she will not know what skills will be learned in the
course of employment or what skills will be required in changing labor markets
if his or her employment is terminated. n118 Especially [*40]
given the bargaining inequality, there is large likelihood of the worker
trading off long-term employment prospects in exchange for short-term economic
benefits due to this problem of information inequality. n119
Even if the issue of consideration is addressed for
existing knowledge, there is the problem of negotiating over knowledge that the
worker will participate in creating in the future. This adds the problem of an
employee trading off rights in a presently non-existent but potentially
valuable unknown good, where the employer as a repeat player in contract
negotiations is much more likely to negotiate contracts advantageous to itself
over its employee-innovators. n120 This combines the
problems of speculative results and of maintaining incentives for productive
effort by workers whose benefits from that knowledge are ill-defined. n121
[*41] Adding to the information problem is the
chronic legal uncertainty of what will and will not count as a trade secret.
The opportunity costs of such agreements will only be revealed ex post by the
harshness of judicial definition of trade secrets if the worker seeks to leave
the firm. On the other hand, the value of consideration offered by the employer
for such agreements, especially if the consideration takes the increasingly common
form of stock option plans, n122 will in turn be heavily defined by how tightly
the firm is able to retain its intellectual assets through trade secret law
enforcement.
Problems in judge-made rules and individual contracting are
mutually reinforcing. The traditional skepticism of judicial enforcement of
trade secrets is based partly on the perceived inadequacy of ex ante
negotiations, while the inadequacy of ex ante negotiations is shaped partly by
the uncertainty of judicial enforcement. This uncertainty is made even more
chronic by the uncertainty over which state's rules will apply if an employee
leaves for a job in another state.
Any hope that individual bargaining will clarify what
innovation should be deemed part of general workers' skills and what should be
protected as trade secrets will be lost precisely because individual
negotiations are made "blind," i.e., without the worker being able to
evaluate the trade secrets in question and specify exactly the limits of what
rights to them he or she is foregoing.
When you add together the problems of negotiating over
skills and processes that the worker has not experienced, of negotiating over
skills and processes that may not yet exist, all the while measuring the
opportunity cost of reentering future labor markets whose skill requirements
the individual cannot know ahead of time and in a legal environment of [*42]
uncertainty, it is clear that depending on individual ex ante
negotiations for a rational and fair outcome is an even less credible alternative
to judge-made rules. This is due not to any incompetence on the part of
employees, but because of the information asymmetry and even information unknowability over rapidly changing technology markets at
the start of employment.
The alternative of negotiations at the time of employment
termination solves many of the information problems listed above, but viciously
flips the imbalance of bargaining power in favor of the departing employee. n123 One departing employee, especially a higher-placed
supervisory employee, could potentially threaten to reveal trade secrets valued
far higher than the employee's contribution to the firm over his or her tenure.
That employee could theoretically demand payment equivalent up to that trade
secret's value to a firm, a process that could be duplicated with a second
departing employee and thereby make any negotiations to prevent disclosure an
almost lost cause. Some information-intensive industries provide stock options
and other incentives to bind key employees, but this economic problem means
that it is hard for any broad-based incentives on their own to overcome the
lure for a single employee to defect to a competing firm with the company's
trade secret "crown jewels."
Such a defection will harm not only the firm owners but
also the other employees who had dedicated time and investments in
firm-specific human capital in anticipation of collective returns from that
innovation. There is a form of prisoner's dilemma at work here. An agreement to
forego taking a firm's intellectual property assets to another job can be
valuable if all employees agree, but it is worthless if other employees
"defect" and are able to sell those assets legally in the form of new
job offers. In the latter case, the rest of the employees will be punished for
abiding by the agreement. The incentives for defection and the value of any
individual agreement will inevitably be shaped by the legal restraints on [*43] other employees taking trade secrets to
another employer. Not having full knowledge of the agreements by other workers
with the firm, and therefore the real value of any individual agreement, just
adds uncertainty to any individual negotiations.
This last point highlights the collective nature of
innovation and the inevitable need to resolve tensions not just between
individual and firm, but also between all workers with a stake in the shared
information assets created by their collective effort. Such collective
knowledge is critical for taking a job and knowing how much firm-specific human
capital each worker can profitably invest in without losing out economically. n124 The failure to address this collective nature of
innovation contributes to the growing trend toward "winner-take-all"
economic results that undermine shared commitments to long-term shared
productivity and thereby increase economic inequality. n125
Intellectual property epitomizes this problem. A large range of people
contribute to innovation, yet the government ends up selectively rewarding a
limited set of economic actors with rights in that innovation. Lower level
employees are often faced with seeing the proceeds of their innovation
appropriated either by their firm employer or by higher-end employees who
defect to another firm in exchange for lucrative compensation. This distributional
problem between employees is paralleled in Sterk's
defense of binding contracts, since he argues that judicial voiding of such
contracts benefits those with already existing human capital or the young with
little to lose. n126 The losers from such judicial
intervention are those with fewer skills seeking to negotiate longer-term
training or older workers seeking to maintain the value of their
firm-specific [*44] human capital. n127
While these concerns may highlight why flat judicial rules ill-serve many workers, the problems of bargaining inequality makes individual bargaining unlikely to resolve these economic tensions or to establish efficient and fair social results from collective innovative processes. Beyond the concerns about equity and innovation at particular firms, this returns us to an analysis of why individual bargaining is unlikely to address the broader societal interest in balancing the interests between incentives for creation of innovation and incentives for its dissemination. n128 The problem is that employers as employers have no stake in mediating this ambiguity in their own industry. They will seek to negotiate the tightest restraints on workers' liberty possible, far beyond what is optimal for information dispersal and growth in the overall economy. Similarly, individual workers will have an interest in the maximum liberty possible. Given the widely varying ability of different workers to take advantage of defection, it is unlikely that individual bargaining will achieve a simple uniform balance between the needs of innovation in the industry as a whole or address the varying interests of workers in all parts of the workforce.
IV. Why Collective Bargaining is the Best Solution
Collective bargaining through labor unions, on the other
hand, is much more likely to embody the balancing of interests between
protection and dissemination of innovation.
[*45] To preserve their
jobs and income, workers will collectively support some restrictions on trade
secret disclosure to preserve the value of their collective innovative
processes. However, because of and in proportion to the general volatility of
their particular labor market, workers as a group will also out of
self-interest preserve large areas of skills within the public domain to keep
themselves employable if they are laid off or treated badly at work.
Collective bargaining has always been best understood not
just as a mode of empowering workers to gain a larger share of the economic
pie. It is also a bargaining model that increases social wealth and achieves
bargaining goals for the average worker that are unattainable in an individual
contract system targeted at the marginal, privileged worker most likely to come
and go. In the case of trade secret law, that
privileged worker is exactly the one most likely to leave, leading to
overcompensation of such workers and undercompensation
of labor as a whole. Richard Freeman and James Medoff
in their pioneering study, What Do Unions Do?, n129 argue that attention to
such marginal workers leads to an underinvestment in public goods in the
workplace - safety rules, pensions, formal grievance structures, and
collectively beneficial workplace structures. The collective benefits of
innovation fit neatly in their category of public goods that individual
bargaining, as we have noted, is unlikely to properly value. Freeman and Medoff argue that the democratic tabulation of worker
interests in the form of a collective bargaining agreement thereby serves not
only the interests of the median worker but serves economic efficiency in
promoting such public goods:
With respect
to public good at the workplace, the union can add up members' preferences in
much the same manner as a government can add up members' preferences for
defense, police protection, and the like to determine the social demand for
them. In sum, because unions are political institutions with elected leaders,
they are likely to respond to a different set of preferences from those that previal in a competitive labor market... The union contract
- by taking account of all workers and by appropriately [*46] considering the sum of preferences for work
conditions that are common to all workers - can be economically more efficient
than the contract that would result in the absence of union. n130
Such collective negotiations and sharing of
the proceeds of innovation are likely to end the lottery-like quality of many
innovation-based markets. Despite the growth in such markets, many analysts
worry that their "winner take all" nature often encourages
overinvestment in certain short-term innovations likely to yield either high
returns or directly marketable patentable or copyrightable innovations, while
leading to underinvestment in the day-to-day workplace innovation needed to
sustain good jobs for all workers in society. n131
The game in intellectual property is largely which forms of
innovation and which actors get protection versus which do not. Public
research, workers' skills and consumers' personal information are all not given
property rights, but they are a base that can be repackaged by firms through
copyright and patent into forms that are legally protected, implicitly
devaluing those sources not given explicit protection. n132
While Alan Hyde, among others, finds much to be admired in the
With this understanding, trade secrets are an interesting
anomaly in the system of intellectual property. Trade secrets are a partial
conversion of non-protected innovation, usually the day-to-day innovation of
workers, into a protected property right that is only partially commodified, used primarily only as a restraint on worker
freedom without having a market function that would lead to accurate pricing
and negotiation. In a sense, collective bargaining would help commodify trade secrets at each stage of innovation, at
least within the firm. This in turn would especially help average workers
demand their fair share in the proceeds of innovation and limit the
"winner take all" gains of opportunistic defecting workers,
management and shareholders.
Therefore, the equity goal of collective bargaining will be
to assure that workers broadly share in the economic proceeds from innovation
within the firm. Just as bargaining in the earlier industrial age allowed
unions to share in the "quasi-rents" that firms extracted from
markets through investments in machinery, n133 collective bargaining over trade
secrets would allow workers to fully share in the quasi-rents gained by firms
through trade secrets. As both Dau-Schmidt and
Freeman & Medoff emphasize, such agreements have
historically been matched by worker commitment to long-term productivity, since
their self-interest in such gains is increased precisely because they share in
its fruits. n134
Union negotiations will also lead to legal clarity on
exactly what constitutes a trade secret, since negotiations will occur on a
continual basis, not only ex ante to individuals being offered employment.
Particular innovations can be negotiated over separately with full information
available on both sides to facilitate reasonable standards for what innovations
should be protected and which should not. Current employees can more adequately
judge the value of the information they learn and the collective opportunity
costs of agreeing to place it under trade secret protections. Collective bargaining
would [*48] force employers to decide what innovation was
worth paying to protect and therefore force them to negotiate specific
consideration for each trade secret protected. The legal definition of a trade
secret would be clearly specified as those innovations or processes specifically
negotiated for consideration with employees. Since the contract would be
negotiated for all positions in the company, what degree of trade secret
restrictions exist for each position would be clear and would avoid the often
arbitrary judicial attempts to evaluate each trade secret in terms of a
departing employee's position within the firm.
Since unions usually represent employees at multiple firms
within the same industry, they will likely develop negotiating standards over
trade secret protection that reflect interests in overall innovation in the
industry that are likely to balance the conflicting interests in incentives for
its creation and dissemination. Whether the reflection of that balance of
interests will exactly match the exact economic model of efficient information
dispersal is an open question, but it will likely match it far better than
ad-hoc judgements by judges.
Given this
starting point, the goal of reforms should be to assure that the self-interest
of workers and employers engaged in collective bargaining will as closely as
possible approximate the broad interest of society in balancing the rewards to
trade secret development and the gains from innovation dissemination.
V. Conclusion: Steps to Trade Secret and Labor Law
Reform
One reason that trade secret law
has long remained legally divorced from labor law is that most traditional
trade secret controversies have centered on high-level skilled technical,
professional or management employees who were usually not covered by collective
bargaining agreements. n135 [*49] Recently, however, there has been a
pronounced movement in the law down the skill hierarchy as companies seek to
define all but the most generally known skills of their employees as
"trade secrets." The end of the long separation of labor law from
concerns over trade secrets is also being fed by the rise of production
"teams" of workers promoted by employers to improve production
processes - exactly the realm of innovation traditionally involving trade
secrets. It is within this debate over teams and unions that labor advocates
concerned with the rights of workers should highlight the contradictions of
trade secret law and its relationship to innovation and economic equity.
The other reason for the legal separation of trade secret
law from labor law is rooted in the empirical deunionization
of many technological fields and technical occupations and in labor law itself
which indicated that labor law was to center on routine labor, not innovation.
The 1947 Taft-Hartley Act fed the deunionization of
technical fields by requiring separate approval by any group of "professionals"
before they would be included in a general union at a firm. n136 The law makes
telling distinctions between the "routine mental, manual, mechanical, or
physical work" of normal union members versus "professionals" whose
work is defined in contrast as "predominantly intellectual and varied in
character" involving "discretion and judgement"
and "of such character that the output produced or the result accomplished
cannot be standardized in relation to a given period of time." n137
That distinction was only partially valid in the past, as
this article has emphasized, but the whole thrust of recent management-led firm
restructuring has been to promote the collapse of even formal distinctions
between routine and professional workers to create "process-centered organiza-tions." n138 The rise of employment
participation committees [*50] aimed at improving productivity has collided
head-on with the labor law ban on "company unions." n139 And in its
first major legal encounter, Electromation, Inc. v.
N.L.R.B, n140 the National Labor Relations Board struck down one such committee
as a violation of labor law. While not a definitive ruling on the fate of all
such committees, the ruling made clear that any such committees that might
involve employee discussions of compensation or working conditions involved in
innovation would run afoul of labor law. The ruling caused not only howls of
grief by management, but inspired attempts at legislation in Congress called
the Teamwork for Employees and Managers (TEAM) Act to specifically divorce such
productivity-based committees from the labor law tradition. n141
This article argues for defending this ban on
company-dominated committees to encourage unionization in such team processes
likely to demand compensation for group efforts in innovation. But the debate
on "teams" offers a chance for unions to go beyond the status quo
defense of the traditional ban on company unions. By bringing trade secret law
into the discussion, unions can put the question of the costs of innovation
systems to workers and put workers' fair claim to compensation squarely in the
middle of the "team" debate.
The main reform suggested by the analysis of this article
is for unions and other advocates to argue for legislation requiring that any
trade secret be declared invalid unless fair compensation has been negotiated
collectively with employees involved in developing them. There is an opening
for labor advocates to force "team" advocates to argue why management
should receive the benefits of innovation in the trade secrets framework
without a channel for workers to demand fair compensation. The very focus on group [*51] involvement in the process of innovation
highlights the limits of both traditional intellectual property doctrine and
individual contract traditions in the workplace. Labor
advocates need to press on the point that the collective nature of
process-innovation in the workplace just emphasizes why both compensation for
the generation of innovation and the acceptable limits on worker freedom make
sense only through collective bargaining negotiations.
This reform need not even be pursued through modifications
of federal labor law, n142 since state-by-state amendments to state trade
secret law could accomplish much of this goal. Essentially, state laws would
mandate that workers be free to switch jobs without any trade secret
restrictions, unless a collective bargaining agreement is in place to assure
fair compensation. This would be similar to other state laws that allow
collective bargaining agreements to modify default rules of state statutes,
such as the overtime statute in
If state trade secret statutes thereby barred employers
from protecting their trade secrets without a collective bargaining system in
place, most employers would be converted from vociferous, and often lawbreaking,
opponents of unionization into grudgingly inviting hosts to workers expressing
their rights to organize collectively. Many employers would see any profit loss
from higher union wages offset by increased profits due to being able to
maintain a stronger economic position in the marketplace if they can more
easily protect their trade secrets through binding [*52]
collective bargaining agreements. With less employer resistance,
unionization rates would be more likely to match the 50 percent or more of Americans
who express a desire to join a union. n144 Even
business magazines like Business Week highlight "the increasing use of
anti-union tactics by private employers" to explain the disparity between
low unionization rates and the high expressed desire of Americans to unionize. n145 Using the threat of the loss of trade secret protection
to encourage employers to accommodate collective bargaining would go a long way
in ending those anti-union tactics.
If the Senate filibusters that have blocked serious labor
law reform could be overcome, there are modifications to the national labor
laws that would also reinforce equity in worker compensation for trade secrets
protection. To have collective bargaining cover more of the workforce involved
in innovation, modifications should be made in labor law to end exclusions from
labor law protection of large numbers of professionals with minor management or
supervisory responsibilities. n146 One of the most
important cases in this regard is NLRB v.
Notably, though, even under present hostile legal
conditions, union organizing has accelerated in technology fields
n150 and reflects general agitation over work conditions in the technology
field, particularly fears over age discrimination and lack of retraining. n151
With the threat of employer retaliation and legal exclusion diminished, there
would be an [*54] upsurge in collective bargaining in
technology-based industries based on the interests of employers in protecting
their trade secrets and employees in negotiating agreements that would give them
a fairer economic share of their value. n152 With a greater mandate for
negotiating compensation over trade secrets, most technology workers in
fast-changing fields would have an interest in making certain binding
agreements if they could be assured in exchange of fair consideration -
particularly training and more assurance of job security - while preserving in
the public domain those skills most needed if they are forced to change
employment. n153
If a more flexible legal definition of who can engage in
collective bargaining can be achieved, the resulting labor organizational
structures and trade secret rules would likely be as diverse as the labor
markets over which they would negotiate. In firms with long-term employment, we
might likely see more independent, company-specific unions as have existed at DuPont and among engineers at Boeing for most of the
post-war period. n154 In areas with moderate [*55]
employee turnover, we would likely to see more traditional labor
organization across multiple firms, mixing both pattern bargaining with
individual firm customization of contracts. And in industries with
"flexible" high-turnover labor markets, we would likely see more
industry wide "craft" unionism along the lines of the building trades
or, more to the point, like the
The end result of this organizing would be (except in the most stable labor markets) the creation of multi-employer labor organizations. These would enhance not only internal [*56] firm bargaining over intellectual property but would set standards across