The innovative incentive is the same as the plan.

Whatever their theoretical basis, trade secret laws confer an exclusive right on the possessor of valuable information not generally known to or readily ascertainable by competitors. 69 This is the hallmark of an IP right. Both patents and copyrights confer similar rights to prevent use by others on the developers of new and valuable information. In so doing, it is generally acknowledged that patents and copyrights serve a utilitarian purpose – the grant of that legal control encourages the development of new and valuable information by offering the prospect of supracompetitive returns, returns possible only if the developer does not face competition by others who use the same idea. In so doing, patents and copyrights avoid the risk of underinvestment inherent with public goods, which are more costly to invent than to imitate once invented.70

Trade secrecy has the same effect. It gives the developer of new and valuable information the right to restrict others from using it, and therefore the prospect of deriving supracompetitive profits from the information.71 This may be true of business as well as technical secrets, since some protection for business ideas helps insure a first mover advantage for those who take risks on untested business models. 72 True, the right of exclusion in trade secret law is not absolute. The trade secret owner cannot sue someone who develops the idea independently, or who reverse engineers a product on the open market to learn the secret. 73 But the same is true of copyright law. 74 A right to exclude does not have to be absolute to be effective in rewarding and therefore encouraging innovation. It need merely provide sufficient advantage in terms of lead time or relative costs to minimize or eliminate the public goods problem.

The Supreme Court has acknowledged that trade secrets give companies incentives to innovate. In Kewanee Oil v. Bicron, 75 the Court refused to hold that patent law preempted trade secret law, reasoning in part that “the patent policy of encouraging invention is not disturbed by the existence of another form of incentive to invention. In this respect the two systems are not and never would be in conflict . . . Trade secret law will encourage invention in areas where patent law does not reach, and will prompt the independent innovator to proceed with the discovery and exploitation of his invention. Competition is fostered and the public is not deprived of the use of valuable, if not quite patentable, invention.” 76

The additional incentive provided by trade secret law is important for innovation.77 Trade secret law reaches into a number of corners patent law cannot. The definition of trade secret (valuable information) is broader than the definition of patentable subject matter, for example, protecting business plans, customer lists, and so-called “negative know-how” against use by others. Patent law cannot protect valuable information of that sort. 78 Further, inventors must apply for patents, publish their applications after eighteen months, and then wait perhaps four years for the Patent and Trademark Office to decide whether to grant protection. 79 That significant delay renders patents unavailable as a practical matter in fast-moving industries. Trade secrets, by contrast, are automatically protected upon creation provided the requirements of the statute are met. Finally, patent litigation is as much as three times as expensive as trade secret litigation, with a price tag – a median of $5 million per side in legal fees for large cases – that puts it out of reach of many small firms. 80 Small wonder, then, that economic literature suggests that some firms, particularly start-ups, rely heavily on the incentive to invent provided by trade secret law. 81 In many cases patents are simply not an adequate substitute.