Trade Secrets and Innovation: Evidence from the “Inevitable Disclosure” Doctrine

David Hsu, Management, The Wharton School, Iwan Barankay, Management, The Wharton School, and Andrea Contigiani, Management, The Wharton School

Abstract: Does heightened employer-friendly trade secrecy protection help or hinder innovation? A watershed legal case in Illinois in 1995 provides a setting to investigate the impact of a quickly shifting trade secrecy regime on individual-level patent productivity. Using a difference-indifferences design taking un-affected U.S. Midwest inventors as the comparison group, we find strengthening employer-friendly trade secrecy adversely affects innovation. To investigate why, we examine the possibility of firm’s shifting intellectual property protection strategy from patents into trade secrecy. Our analysis does not support this alternative. We also do not find support for an explanation rooted in dampened idea recombination explaining the negative effect. Our results are most consistent with reduced individual incentives to signaling quality to the external labor market. We conclude by discussing implications.

Read the full working paper here.