Do Non-Compete Agreements Really Impede Innovation?

I spent my entire practice career in California, representing clients who were, by and large, free to move from company to company due California's ban on covenants not to compete. At the time, the question of inevitable disclosure was unsettled in California; the law allowed for injunctions to stop "threatened" misappropriation, but the question was whether merely being in the same business is a sufficient threat. Most people though no, and the courts eventually went there.

But employees were not always free to do as they wished. I represented many employees against their awful former employers who (wrongfully) claimed that the employee had exited with trade secrets. And I represented many companies against their awful former employees who (wrongfully) claimed they had exited cleanly without trade secrets. For this reason, I've always bristled at the notion that California is a place where everyone happily moves from company to company and nobody cares or legitimately worries about trade secrets because it's all good.

But through this all, I always thought employee mobility was a good thing. I still do. And so do a lot of other people. Indeed, a sort of orthodoxy has arisen where you simply can't be honest, pro-innovation, and pro-noncompete all at the same time. It's as if an entire strand of the literature on how non-competes can improve investments in human capital training got lost in the mix, replaced by theory that says the contrary. This theory is supported by evidence from empirical studies on the matter. It seems crystal clear.

Not so, according to Jonathan Barnett (USC) and Ted Sichelman (San Diego). A draft of their paper, Revisiting Labor Mobility in Innovation is now up on SSRN. In it, they take on the orthodoxy:

It is now widely asserted that legal regimes that enforce contractual and other limitations on labor mobility deter technological innovation. First, recent empirical studies purport to show relationships between bans on enforcing noncompete agreements, increased employee movement, and increased innovation. We find that these studies misconstrue legal differences across states and otherwise are flawed, incomplete, or limited in applicability. Second, scholars have largely adopted the view that California’s policy against noncompetes promoted Silicon Valley as the world’s leading technology center. By contrast, Massachusetts’ enforcement of noncompetes purportedly stunted innovation in the Route 128 region near Boston. We show that this account is incomplete. During the rise of Silicon Valley, California noncompete law did not as vigorously preclude noncompetes as today and firms could substantially mimic noncompetes through contractual and other instruments. Rather, fundamental technological and economic factors more persuasively account for the rise of Silicon Valley and the Boston area has remained a significant innovation center. There is little compelling ground for the view that barring noncompetes and other limitations on employee mobility promotes innovation.

I believe this is an important paper, even if you are not inclined to agree with its conclusions. I'll discuss more after the jump.

Hidden in Plain Sight

I've posted a draft of my new trade secrets article at SSRN. Here is the abstract:

Software developers have long tried to appropriate the value of visible features and functions of their programs. Historically, they used copyright to do so, but then shifted to patenting as copyright protection for methods of operation waned. Given newfound difficulties patenting software functions, developers have one more place to turn: trade secrets.

Trade secrets have always protected the hidden aspects of programs, but can they be used to protect visible or easily discernible program features? This article suggests a new way developers might use trade secrets to protect visible program features. It examines how they might do so, relying on traditional case law and confidentiality precautions used to keep secrets. In doing so, the article considers whether and how such protection could be achieved in theory and in practice.

The article then asks how software licensing would change if trade secret protection of discernible features were achieved. It considers how software might be delivered (including software as a service), the potential for trade secret trolls, the role of open source development, and the potential effect on innovation incentives.

Finally, the article considers the alternative normative views associated with this new type of software protection.

 Comments are appreciated!

Ben Picozzi on the Role of the Solicitor General in Patent Law

This is a Guest Post by Ben Picozzi, J.D. Candidate at Yale Law School and Student Fellow at the Information Society Project. Ben discusses a prize-winning paper he recently posted on SSRN about the litigating relationship between the PTO and the DOJ. In the paper he argued that the DOJ has used its exclusive litigating authority as an administrative control mechanism in patent law. Ben summarizes his argument in the paper, and tells readers how he would have done things differently in hindsight.  Read more at the jump.

What If They Forgot to Record the Super Bowl?

I've been slow in my blogging due to a heavy semester, though I've got some new posts coming.

In the meantime, I have a new post at the Villanova Moorad Sports Law Journal page, in which I discuss the legal ramifications of broadcast network failure to retain copies of Super Bowl I (and the lone individual who made his own recording of the broadcast).

Larry Helfer on Access to Medicines

Readers interested in the social justice concerns described in Monday's post may be interested in a book chapter that was recently posted by Professor Laurence Helfer: Pharmaceutical Patents and the Human Right to Health: The Contested Evolution of the Transnational Legal Order on Access to Medicines. Helfer is one of the leading scholars of international IP institutions; see, e.g., his classic work on regime shifting.

In this new chapter, he describes the collision of two "transnational legal orders" (TLOs): one focused on IP, and one on the right to health. He breaks down the history into three phases. In Phase 1 (pre-mid-1990s) the two TLOs "existed in relatively stable but distinct policy spaces." In Phase 2 (mid-1990s to 2000), the IP TLO rapidly expanded. Phase 3 (2000 to the present) has involved "a backlash against pharmaceutical patents and a campaign by developing countries and civil society groups to increase A2M [access to medicines]." In broad strokes, this account is probably familiar to many IP scholars, but for those interested in the detailed institutional dynamics behind this story, Helfer's chapter is well worth a read.

In related news, the pharmaceutical firm GlaxoSmithKline made headlines with its recent announcement that it will stop filing patents in 50 low-income countries and will grant licenses to generics manufacturers in another 35 lower-middle-income countries.

Peter Menell on IP and Social Justice

Professor Peter Menell recently posted a new essay, Property, Intellectual Property, and Social Justice: Mapping the Next Frontier, from a conference celebrating Professor Joseph Singer. As he explains, "[t]he ascendency of intangible resources profoundly affects social justice—from access to life-saving genetic information to the control of knowledge dissemination, creative freedom, group identity, and, increasingly, the distribution of wealth." His essay canvases a huge array of topics in just 52 pages, and it is a great review of the literature in this area. (The essay is worth downloading even just for the collection of key works in footnote 13, from scholars including Anupam Chander and Madhavi Sunder and Amy Kapczynski.)

For each of the four main bodies of IP law, Menell examines the law's internal legitimacy (is IP the best way of achieving the law's goals?) and external effects (how does the law affect various social justice considerations?). For example, he compares patent law with the other legal institutions that Daniel Hemel and I discuss in Beyond the Patents–Prizes Debate, and he reaches the same conclusion we do: each institution has limitations, and "the patent system works best in conjunction with other institutions." On patent law's external effects, Menell notes the troubling implications of patent law's use of price as an allocation mechanism for certain technologies such as medicines. He notes that this does not require one to reject the patent system—rather, it highlights the need in certain areas for non-patent institutions such as government health care policies. (Of course, as Ted Sichelman nicely summarizes, we think the negative distributional effect of patents will be replicated by any system that taxes users of the technology—marginal cost pricing can only be obtained by requiring consumers to broadly subsidize each other's technology use, which is the whole idea of government health care and other health insurance programs.)

Shyam Balganesh: Causing Copyright

My last post on computer-generated IP noted my uncertainty about whether AI is making sufficient contributions to be viewed as a creator or inventor independent of its programmers. The problem is not just factual uncertainty about what any given AI is doing—it is also a theoretical and doctrinal uncertainty about what does or should count as authorship or invention. Shyamkrishna Balganesh addresses this broader problem in Causing Copyright (forthcoming Colum. L. Rev.), which argues that modern copyright doctrine lacks a coherent theory of causation: there is "no viable mechanism by which to examine whether someone is causally responsible for the creation and fixation of the work." This issue is important not just for creative AI, but also for issues like the monkey selfie controversy or simple accidental creation.

Balganesh explains that the requirement that the author caused the creative work is buried in a number of other doctrines. The originality requirements—that the work be independently created and minimally creative—might seem related to authorial causation, though in practice the former is basically a no-copying mandate and the latter focuses on the work itself rather than the act of creation. Joint-works doctrine tests whether each party independently qualifies as an author, which involves some inquiry into authorial causation, although it is not openly addressed as such. And work-for-hire doctrine automatically imputes authorial causation to employers based on having hired workers who executed the project (without the need for independent evidence of causation of specific works). Balganesh argues that rather than having snippets of causation buried in assorted doctrines, "modern copyright jurisprudence would be best served by confronting the question of causation directly through an independent requirement of protection."

Can a Computer Get a Patent?

Artificial intelligence (AI) has been in the news this week. Yesterday's New York Times story about AI beating a human at Go earlier this month declared: The Race Is On to Control Artificial Intelligence, and Tech’s Future. That race may be a slow one: Microsoft's AI Twitter bot Tay was quickly hijacked by trolls, and the Japanese AI heralded for writing an almost-awarding winning novel actually did little of the creative work. But at some point, it seems plausible that AI will make independent contributions to creative and inventive processes—which, for IP lawyers, raises the question: who owns the IP?

Most takes on this problem have been primarily on the copyright side; see, e.g., pieces by Pam Samuelson (1986), Ralph Clifford (1997), Annemarie Bridy (2012), and James Grimmelmann (forthcoming). A recently posted article by Ryan Abbott, I Think, Therefore I Invent: Creative Computers and the Future of Patent Law, tackles the problem primarily from the patent side. Abbott argues that the USPTO has already (unknowingly) granted patents for inventions by computers (such as the Creativity Machine and the Invention Machine), and that such patents should belong to the owner of the inventive computer, rather than the software developer or user.

I'm not sure what the most efficient default is, or whether computers actually are making contributions such that it is sensible to describe the computer as an inventor independent of its programmers. But even if it is not an immediate problem, it would seem prudent for innovators working with AI to follow the same practices as those working with other humans: make sure the relevant contracts are clear on who owns any resulting IP.

Impression Cert Petition Misleads on International Patent Exhaustion Policy

As expected, Impression Products has petitioned for Supreme Court review of the Federal Circuit's en banc decision on post-sale restrictions and international patent exhaustion. I've followed the international exhaustion issue closely: see prior posts summarizing an essay I wrote with Daniel Hemel, the Fed. Cir. argument, and the Fed. Cir. decision. Professor Tom Cotter has said he is "reasonably certain" the Supreme Court will hear the case, and I agree that it is worthy of review.

To briefly recap, Impression wants an authorized foreign sale by a U.S. patentee to always exhaust U.S. patent rights; the Fed. Cir. majority maintained the status quo that U.S. patent rights are exhausted only if explicitly waived by the patentee; and the Fed. Cir. dissent (and the United States) prefer a middle ground in which U.S. patent rights are exhausted unless explicitly reserved by the patentee. (As before, I'm focusing only on the international issue, not post-sale restrictions.)

The cert petition sets forth three arguments for reviewing the international exhaustion holding. First, Impression argues that the Fed. Cir. holding is contrary to Kirtsaeng. This is clearly Impression's strongest argument, and I think it is an interesting and close legal question. Second, Impression argues that the Fed. Cir. majority "rejected the argument advanced by the United States" (which was adopted by Judge Dyk's dissent). Of course, as Impression acknowledges, it too rejects the U.S. position, but this still may be a decent argument for getting the Supreme Court to pay attention.

Third, Impression argues that the "question is important" because the current rule "will produce substantial practical problems." Impression cites two sources indicating that tech products involve many components from many countries (but without indicating whether patent exhaustion rules have posed a practical barrier to assembling these components or selling these products). And the only other source cited in the policy section of Impression's petition is a 2008 article by economists Gene Grossman and Edwin Lai, which is cited as showing that an international exhaustion rule "generates both an increase in consumer surplus in the innovative country and an increase in the world pace of innovation."

But Grossman and Lai's conclusion is not absolute, and it is not based on any real-world data. Rather, they construct a stylized two-country model to question the "prevailing wisdom" that international exhaustion always decreases innovation incentives and global welfare. In short, they show that if the less-innovative country in their two-country world uses strong price controls, then in theory, an international patent exhaustion rule may allow the patentee to credibly threaten to withhold its product from the price-controlled market and thus to demand higher prices. This is a clever and important result, and as Daniel and I explain in our Columbia Law Review Sidebar essay, it means that the net global welfare impact of a U.S. international exhaustion rule is theoretically ambiguous. What is not ambiguous, as we emphasize, is that a U.S. international exhaustion rule creates a net welfare loss for consumers in low-income countries. Even in Grossman and Lai's model, "the legalization of parallel imports by North [the high-income, innovative country] spells a welfare loss for South."

This isn't to say that there aren't genuinely interesting policy questions about which international patent exhaustion rule is optimal, or that the Supreme Court shouldn't hear the case—the issues are undeniably important, and there are enough confusing things about the Fed. Cir. opinion that I think the Court should grant cert. I just hope some of the other cert-stage briefing will do a better job explaining the relevant concerns.

Most-Cited IP Law Articles Published in the Last 10 Years

Guest Post by Ted Sichelman, University of San Diego School of Law 

(A description of the methodology used to construct these lists follows the tables.)

Intellectual Property (All) (2005-2009) 

Rank	Cites	Author(s)	Title	Journal
1	423	Lemley, Mark A.	Property, Intellectual Property, and Free Riding [article]	83 Tex L. Rev. 1031 (2005)
2	322	Lemley, Mark A.; Shapiro, Carl	Patent Holdup and Royalty Stacking [article]	85 Tex. L. Rev. 1991 (2007)
3	232	Frischman, Brett M.; Lemley, Mark A.	Spillovers [comments]	107 Colum. L. Rev. 257 (2007)
4	195	Gibson, James	Risk Aversion and Rights Accretion in Intellectual Property Law [article]	116 Yale L.J. 882 (2007)
5	181	Raustiala, Kal; Sprigman, Christopher	Piracy and Paradox: Innovation and Intellectual Property in Fashion Design, The [article]	92 Va. L. Rev. 1687 (2006)
6	176	Beebe, Barton	Empirical Study of U.S. Copyright Fair Use Opinions, 1978-2005, An [article]	156 U. Pa. L. Rev. 549 (2008)
7	162	McKenna, Mark P.	Normative Foundations of Trademark Law, The [article]	82 Notre Dame L. Rev. 1839 (2007)
8	147	Parchomovsky, Gideon; Wagner, R. Polk	Patent Portfolios [article]	154 U. Pa. L. Rev. 1 (2005)
9	144	Samuelson, Pamela	Unbundling Fair Uses [article]	77 Fordham L. Rev. 2537 (2009)
10	139	Moore, Kimberly A.	Markman Eight Years Later: Is Claim Construction More Predictable [article]	9 Lewis & Clark L. Rev. 231 (2005)
11	138	Schwartz, David L.	Practice Makes Perfect - An Empirical Study of Claim Construction Reversal Rates in Patent Cases [article]	107 Mich. L. Rev. 223 (2008)
11	138	Smith, Henry E.	Intellectual Property as Property: Delineating Entitlements in Information [article]	116 Yale L.J. 1742 (2007)
13	133	Golden, John M.	Patent Trolls and Patent Remedies [comments]	85 Tex. L. Rev. 2111 (2007)
14	130	Beebe, Barton	Empirical Study of the Multifactor Tests for Trademark Infringement, An [article]	94 Cal. L. Rev. 1581 (2006)
15	124	Hemphill, C. Scott	Paying for Delay: Pharmaceutical Patent Settlement as a Regulatory Design Problem [article]	81 N.Y.U. L. Rev. 1553 (2006)
17	123	Nard, Craig Allen; Duffy, John F.	Rethinking Patent Law's Uniformity Principle [article]	101 Nw. U. L. Rev. 1619 (2007)
16	121	Lemley, Mark A.; Weiser, Philip J.	Should Property or Liability Rules Govern Information [article]	85 Tex. L. Rev. 783 (2007)
17	115	Lichtman, Doug; Lemley, Mark A.	Rethinking Patent Law's Presumption of Validity [article]	60 Stan. L. Rev. 45 (2007)
17	115	Dogan, Stacey L.; Lemley, Mark A.	Merchandising Right: Fragile Theory or Fait Accompli, The [article]	54 Emory L.J. 461 (2005)
19	113	Benjamin, Stuart Minor; Rai, Arti K.	Who's Afraid of the APA - What the Patent System Can Learn from Administrative Law [article]	95 Geo. L.J. 269 (2007)
19	113	Sunder, Madhavi	IP3 [article]	59 Stan. L. Rev. 257 (2006)
21	111	Samuelson, Pamela; Wheatland, Tara	Statutory Damages in Copyright Law: A Remedy in Need of Reform [article]	51 Wm. & Mary L. Rev. 439 (2009)
22	110	Goldman, Eric	Deregulating Relevancy in Internet Trademark Law [article]	54 Emory L.J. 507 (2005)
23	107	McDonough, James F, III	Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy, The [comments]	56 Emory L.J. 189 (2006)
24	106	Bone, Robert G.	Hunting Goodwill: A History of the Concept of Goodwill in Trademark Law [article]	86 B.U. L. Rev. 547 (2006)
25	103	Graham, Stuart J.H.; Merges, Robert P.; Samuelson, Pam; Sichelman, Ted	High Technology Entrepreneurs and the Patent System: Results of the 2008 Berkeley Patent Survey [article]	24 Berkeley Tech. L.J. 1255 (2009)
25	103	Balganesh, Shyamkrishna	Foreseeability and Copyright Incentives [article]	122 Harv. L. Rev. 1569 (2009)

Douglas Lichtman: Can Courts in Patent Litigation Slow Down?

In a new essay, Patient Patents: Can certain types of patent litigation be beneficially delayed?, Douglas Lichtman makes a provocative and original argument. If, post-Ebay, injunctions are no longer available for patent infringement, then maybe courts can and should take more time on patent litigation cases in order to improve the accuracy of their determinations of validity and infringement. The paper is available here.  For patent scholars in New York City this week, Lichtman will be presenting the paper at the Spring 2016 Innovation Policy Colloquium will take place on Thursday, March 24 from 5:00-6:50pm at NYU School of Law, 40 Washington Square South, room 208.

Two New Studies Challenge Conventional Wisdom on Chinese Patenting

Foreign firms can't get a fair shake in patent litigation in China, and Chinese firms are filing an exceptional number of low-quality patents in the US—right? Not according to two new empirical papers, each of which seeks to debunk one of these pieces of conventional wisdom.

The first, Patent Litigation in China: Protecting Rights or the Local Economy?, is by Brian Love, Christian Helmers, and Markus Eberhardt, and has already been reviewed on Tom Cotter's excellent Comparative Patent Remedies blog. In short, they analyze five years of patent suits in the courts with the 50 most active IP dockets and find that foreign companies win as often as Chinese patentees.

The second, More than BRIC-à-Brac: Testing Chinese Exceptionalism in Patenting Behavior Using Comparative Empirical Analysis, is by Jay Kesan, Alan Marco, and Richard Miller. They study Chinese patenting trends in the USPTO and find that despite claims of Chinese exceptionalism, these trends are "strikingly similar to the patenting trends of other Far East Asian countries whose inventors have applied for patents in the United States. In other words, Chinese innovation is moving up the value chain in product development much like other Far East Asian countries have done in the past. We also find that China appears to be setting itself apart from other BRICS (Brazil, Russia, India, China, and South Africa) countries in successfully seeking patent protection for technological innovation and in producing products with higher levels of technological sophistication and innovation."

42 IP Profs: AIA Didn't Change Meaning of "On Sale" and "Public Use" in § 102

Mark Lemley and Rob Merges just filed a Federal Circuit amicus brief on behalf of 42 IP professors in Helsinn v. Teva, arguing that the AIA did not change the meaning of "on sale" and "public use" in 35 U.S.C. § 102(a)(1). Under pre-AIA caselaw such as the classic Metallizing Engineering, secret commercial use is not prior art against a third party, but it does start a one-year clock for the inventor to encourage the inventor to disclose. The district court opinion in Helsinn held that the AIA changed this rule: sales and offers for sale only count as prior art if they are "available to the public."

The district court decision is based on the addition of "or otherwise available to the public" to § 102(a)(1), but the IP prof brief notes that this interpretation is hard to square with the statutory text of § 102(b)(1), which distinguishes between 102(a)(1) art that is (A) "disclosed" by the inventor (or those who obtained the subject matter from the inventor) versus (B) "publicly disclosed" by third parties. Under the district court's Helsinn's opinion, this distinction between disclosures and public disclosures becomes "nonsensical."

The legislative history of this provision is complicated. For the pro-overturning-Metallizing view, see p. 470-71 of this account by Joe Matal, who was a staffer to Senator Jon Kyl. But the IP profs argue that Senator Kyl tried and failed to make this change in the statutory text, and that the supporters of overturning Metallizing are now trying to use ambiguous statutory text and manufactured legislative history to accomplish what they didn't have the votes to accomplish by clear statutory amendment. Preventing this kind of gambit is the underlying rationale for statutory interpretation canons such as "Congress does not hide elephants in mouseholes."

The IP prof amicus brief concludes with a thorough explanation of how the district court's reading of § 102(a) "attributes a quite radical intent and effect to the new prior art provision" that "would sweep away scores of cases" and cause "decades of uncertainty as to the scope of prior art." Congress reenacted the same statutory terms—"on sale" and "public use"—which is normally presumed to ratify judicial interpretations of those terms. There were no legislative hearings on eliminating secret prior art, and the IP profs argue that it is implausible that Congress intended "a major sea change in this very old and very much relied-upon body of law" without clear notice or explanation.

Dan Burk on Perverse Innovation

Innovation is the focus of IP law, but innovation is rarely viewed as an end in and of itself—rather, it is desirable because it often leads to economic growth, development, human flourishing, etc. So when might innovation not be desirable? In a new forthcoming article, Perverse Innovation, Professor Dan Burk considers innovations that are purely directed toward exploiting regulatory and legal loopholes. For example:

• Mutagenic chemical or radiation treatments have been used to circumvent the EU's limits on genetically modified crops, even though most scientists would call mutagenic crops "genetically modified" and might think they raise greater concerns than crops created through more controlled recombinant DNA techniques.
• Chrysler's PT Cruiser was created with an innovative "footprint" that allowed it to be regulated under the EPA's rules for "light trucks" rather than "passenger cars."
• Grokster was created to avoid the copyright liability that befell Napster; Aereo's "Rube Goldberg" antennae system was created to fit through a copyright loophole. (Neither attempt was ultimately successful.)

Regulatory circumvention can be concerning not only because these innovations may thwart the regulatory aims, but also because the resources directed toward these innovations might have been better spent elsewhere. Burk argues, however, that some perverse innovation "may prove to be unexpectedly beneficial," and that "[r]ather than try to close the formalist loopholes that prompt perverse innovation, which would likely become an ongoing exercise in futility, regulators might intentionally design loopholes so as to purposefully, rather than haphazardly, promote innovative responses."

Burk explains why these loopholes must be designed such that innovating is "the least costly alternative, with literal compliance, lobbying, and non-compliance following in increasing cost order," and that preventing socially wasteful innovations that serve duplicative ends is best accomplished through "some enforcement rule similar to the patent Doctrine of Equivalents." Of course, Burk acknowledges that designing such loopholes is not easy—and it may end up being as much an exercise in futility as trying to close them in the first place. But it is a tremendously important problem, and I'm glad Burk is shining light on it.

Steven Yelderman: Do Patent Challenges Increase Competition?

In his new paper, Do Patent Challenges Increase Competition, forthcoming in the University of Chicago Law Review, Stephen Yelderman tackles the perception, oft-stated by courts in antitrust cases, and "taken as a given" by many scholarly commentators, that courts should be wary of permitting settlement in lieu of a challenge to a patent's validity due to the potential benefits of invalidation for competition. This preference for litigation, Yelderman observes, is an exception to the general rule that settlement “should be facilitated at as early a stage of the litigation as possible.” (3, citing Fed. R. Civ. P. 16(c) advisory committee note to 1983 amendment).