Why the IP system works against the small

The IP system as it currently exists acts to protect huge monopolistic enterprises at the expense of everyone elseI worked for Dell through the 1990’s in Human Resources. In the fastest growing company of the 1990’s, that meant I was deeply involved in staffing. In the summer of 1999, we hired 975 new employees every week.   For a good part of my time at Dell, I ran the Product Group’s staffing organizations, which was where all the engineering and development of Dell products took place.

We were a young company rapidly taking the market away from our competitors, and as a result, we were critically short of senior engineering talent. To correct that, we focused on hiring senior engineers from our competitors.

Very quickly we learned that If we hired an engineer from Gateway in South Dakota, litigation quickly followed. Gateway had bullet proof non-compete agreements and South Dakota courts upheld those agreements as a way of protecting companies in South Dakota.

After the first couple of hires and the resulting lawsuits, we knew, as did Gateway engineers, that they would get sued if they went to work for us. After a couple of these suits, we no longer hired Gateway employees. This worked well for Gateway because they did not have to pay market wages to their best engineers. However, it did not work so well for Gateway’s best engineers. They were uniformly underpaid and stuck at Gateway.

Non-compete agreements are governed by state law. Fortunately for those hired by Dell in the 1990’s, most non-competes agreements are difficult to enforce, so most top engineers could move to competitors in a free market for their skills.

Does trade secret law effectively squelch the free market for top engineers in much the same was as South Dakota non-compete law did? Does it harm the small for the benefit of the big? The answers are made clear in Waymo v. Uber and it has everything to do the government’s decisions to destroy the patent system while strengthening trade secret protection.

Over the last 12 years, patent reforms have mauled every aspect of the patent system that once protected startups with better technology. Today, patents are basically useless: no injunctive relief, damages models destroyed, obviousness determinations untethered, mass patent invalidations in the PTAB and though the undefinable “abstract idea”, venue chaos, astronomical costs and decades spent in the USPTO and the courts creating and protecting inventions. The patent system is now dead for the small.

Then with the patent system destroyed, the Trade Secret Act of 2016 was passed creating a federal claim for trade secret theft. Waymo v. Uber is brought under this new law. Prior to the TSA, trade secret protection was a state level action, not a federal level action.

Waymo is a division of Alphabet and a sister division to Google. While Waymo does have a growing patent portfolio, Waymo chose to hold some of the company’s most important innovations related to driverless cars as trade secrets instead of patenting them. This is a binary choice. A patent discloses the invention to the public in exchange for a period of exclusivity. Naturally, disclosing a trade secret to the public via a patent application exposes the invention so it cannot be held as a secret. One must choose to either patent the invention or to trade secret the invention, but not both.

Protecting inventions as trade secrets has several advantages. Trade secrets grant a perpetual right so long as the invention remains a secret. On the other hand, a patent grants an exclusive Right to the invention for a limited time. As patents decrease in strength trade secrets have become a far more viable and valuable asset. But that means society is deprived of learning about innovations protected only by trade secret.

Keeping software and hardware related inventions as a trade secret is especially beneficial. Software and hardware inventions are difficult to reverse engineer because they are often buried in the bowels of a datacenter and protected by firewalls and code.

There is no concrete definition of what can or cannot be kept as a trade secret; any business information that is valuable because it is kept secret can qualify as a trade secret. However, in patent law Section 101 defines patentable subject matter. The courts have created an undefinable exception to patent subject matter called the abstract idea doctrine, which has obliterated patent protection primarily for software and other technologies. There are no corresponding restrictions on trade secrets so protection is assured.

Core technologies in driverless cars are related to hardware and software that interprets large amounts of data from sensors, GPS and other inputs and then sends commands to control the car. At the heart of this technology are algorithms, which are difficult to reverse engineer and thus very good candidates for protection as trade secrets. But again, when they are kept as a secret the public derives no benefit from learning and innovators are prevented from building upon the shoulders of those who came before. Building upon the work of others, improving the work of others is precisely how innovation marches forward. Trade secret laws prevent that advancement of science and technology.

The decision whether to secure technology using a trade secret or a patent hinges as much on the technology as it does on access to capital. Small companies need funding to commercialize new inventions. A patent provides a private property right that can be leveraged to attract funding. However, most large companies like Waymo, one of the richest on the planet, do not need funding. This is no doubt why Alphabet and its Google subsidiary have lobbied to weaken the patent system. It is understandable because it is in the best interests of their well-funded enterprises. It is, however, not in the best interest of innovation more generally speaking, nor is it in the interest of society.

From a practical perspective, protecting inventions using trade secrets is a better way to protect driverless car technology and related innovations. The patent system probably won’t protect the software and hardware in driverless cars because of the current state of Section 101, and both are extremely difficult to reverse engineer. Furthermore, trade secrets can be perpetual, which locks competitors out for long periods of time, particularly where there is decreased mobility of the workforce due to non-compete agreements. Waymo also has no need for investment, so patenting offers no value insofar as attracting investment. And, disclosing the invention through the USPTO would give competitors access to the invention.

This all explains why the dispute between Waymo and Uber was a trade secret dispute and not a patent dispute. The most valuable information was kept by Waymo as a trade secret and not disclosed openly. Society loses when this happens.

However, none of this works if you are small guy with a big idea. Small guys need investment and patenting is often the only way to attract that investment. This means the small most likely need to disclose their inventions through USPTO in order to commercialize the invention. But with a weak patent system that means these disclosed ideas are ripe for the taking because either patent protection cannot be obtained, or if it is the patents obtained are easy to defeat if and when they are asserted.

Disclosing an invention enables competitors to improve the disclosed invention and then they can patent the improvement, which is also disclosed. This disclosure, improvement, disclosure process advances new technologies quickly by creating a competitive environment to improve what is known faster than competition. Trade secrets act in the opposite way. The invention is hidden so nobody can advance what is already known by the holder of the trade secret.

The current regime of weak patents and strong trade secrets tilts the playing field radically in favor of the big over the small. Under a trade secret regime, Waymo hides its secret sauce as trade secrets while startups must disclose theirs to the public through the USPTO. This allows companies like Waymo to incorporate the startup’s technology in their trade secreted hardware/software making it very difficult to prove infringement even if a patent is obtained.

But startups have no similar advantage. It is nearly impossible to reverse engineer the technologies that Waymo keeps as trade secrets, as is evident in Waymo v. Uber.

But the worst sin of trade secrets is that it eliminates a free market for the employees who develop the trade secrets. Once the brain figures out something, it is impossible to remove that from the brain. Any employee who is exposed to trade secrets knows the secret and can’t unlearn it. And while trade secret law generally seeks to accept that reality, it is a very fine line. With litigation so easy to bring, even if a mobile employee didn’t violate any laws it is just easier for a hiring company to not hire talent away from competitors, as Dell learned with respect to Gateway in the 1990s.

Trade secrets, like South Dakota noncompete agreements, mean that an employee who takes a better opportunity at a competitor can be sued. But it is worse than that because the company hiring can also be sued and both can have criminal charges brought upon them for theft. It just isn’t worth it.

I can tell you first hand that companies assess the risk of lawsuits when hiring. They will choose not to hire from competitors if there is a significant risk of costly and disruptive litigation. With the new employer directly liable for trade secret theft and possible criminal charges, companies are no doubt deciding not to interview candidates who work at their competitors.

The IP system as it currently exists acts to protect huge monopolistic enterprises at the expense of everyone else – employees, startups, job creation, innovation, and society at large. It is no wonder that startups in America continue to decline, as recently reported by none other than the NY Times.

Had Waymo patented their inventions none of this would be an issue. Uber would likely have read Waymo’s patents and developed technologies superior to Waymo and patented it. Waymo would likely have done the same on Uber’s patents. Both would likely have infringed each other so when Waymo sued Uber, Uber would have sued Waymo back for infringement on their patents. The infringement suit and cross infringement suit would have ended in a settlement and both companies could compete in a free market having leveraged each other’s technology and compensated each other for the respective value obtained.

In a world where patents are strong and trade secrets are not a viable alternative, employees can put their brains on the market, go to another company, and get paid a reasonable market wage. And importantly, a startup could compete if they invented something better because the patent would attract investment.

Disturbing the delicate balance that is the patent system has far reaching and unintended consequences. In this era we will see an increase in the number of trade secret misappropriate suits like Waymo v. Uber, the same way that these types of lawsuits were common some 30+ years ago. When patents are weak trade secrets drive innovation under ground and employees with technical skills suffer and wages stagnate. The significant decrease in number of startups is just the tip of the iceberg.


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Join the Discussion

16 comments so far.

  • [Avatar for Scott Smith]
    Scott Smith
    April 4, 2018 05:35 pm

    Are you not aware (or care) of the egregious attempts by Entrepreneur Media to claim the word “entrepreneur”.

    Follow me at twitter for updates. I’m the main guy fighting Entreprenuer.

  • [Avatar for Anon]
    February 17, 2018 08:59 am

    Wives and Church are outside the bounds of my comment, angry dude.

    The comment is “directed at” property (and the lack thereof specifically of personal property which is a distinction between the commune-driven views of the Liberal Left and the views of such as Adam Smith.

    Seeking to expand my comment beyond property to include some notion of religion is not appropriate and in fact lessons the point of the comment. No need to do so.

  • [Avatar for angry dude]
    angry dude
    February 16, 2018 09:14 pm

    Anon @12

    “commune” state?

    Is that a state where you are supposed to share everything including your wife with other members of the “commune” ?

    Sounds like Soviet Russia circa 1918, not like church-going America …

  • [Avatar for Tesia Thomas]
    Tesia Thomas
    February 14, 2018 03:56 pm


    It’s probably the older ones that remember the 80s.

    The younger ones think Google et all is their shepherd…

    Where are the young people getting jobs?
    NEW tech companies that absolutely hate patents and are changing 200 years of patent law.
    They’re starting their careers with that indoctrination.

  • [Avatar for Anon]
    February 14, 2018 03:54 pm

    I still can’t believe that programmers/EE people think it is great the patent system is being burned down.


    The “Lemming” factor is ultra high for a very vocal portion of that community. See all the garbage from the Slash/Dot and TechDirt sites.

    In fact, on this very site (ages ago now), I recall an indepth exchange on the nature of software with a rapid anti-patentist named PoiR. The thinking on Patents to what many in that (sub)culture believe as a near philosophy is very close to a “commune” state. Adam Smith is not likely recognized as a critical figure in innovation philosophy (as he should be).

  • [Avatar for Edward Heller]
    Edward Heller
    February 14, 2018 03:49 pm

    Night, I am not so sure that all EEE’s believe the patent system should be burned down. The IEEE filed an amicus brief supporting searcher Aria in MCM Portfolio LLC v. Hewlett-Packard and also filed a brief on the merits in Oil States.

  • [Avatar for Night Writer]
    Night Writer
    February 14, 2018 03:33 pm

    @9 Paul. That is great. I still can’t believe that programmers/EE people think it is great the patent system is being burned down.

    Most corporations I work for would not let the people present papers if not for patents.

  • [Avatar for Paul Morinville]
    Paul Morinville
    February 13, 2018 08:47 pm

    Night @7. I remember your many comments on IPW articles about the Trade Secret Act. That is what got me thinking about it and relating it to how corporate HR works to avoid litigation in non-competes.

  • [Avatar for Anon]
    February 13, 2018 07:47 pm

    Mr. Morinville,

    My apologies for the confusion, as my comment was directed to the post by Mr.Heller (as opposed the paragraphs of your article).

    As to your comment concerning “Nothing that could be protected by a patent ought to be allowed to be protected by trade secrets.” I will disagree heartily, as I am a firm believer in options for various forms of protection, and I see absolutely nothing wrong with anyone’s optional choice between patents and trade secrets.

    That being said, I am also a firm believer that if one opts for Trade Secrets, then one voluntarily runs the risk of some later person who opts for a patent to be legally, fully, and absolutely justifiably shut out of their own kept-secret items by the person opting to share, publish, and partake in the patent system.

    That option for trade secrets does not – and should not ever remove the stick from the “carrot AND stick” approach that makes up a strong patent system.

    As you might tell from this view, I abhor any type of “Prior User Right” and view such as an abomination and an absolute denigration of the patent system.

  • [Avatar for Night Writer]
    Night Writer
    February 13, 2018 07:17 pm

    I’ve been saying this for years. And, I was an engineer in the 1980’s and trade secrets were used to make your life miserable.

  • [Avatar for Paul Morinville]
    Paul Morinville
    February 13, 2018 07:15 pm

    Anon, When I started at Dell there were less than 2500 employees. When I left there were about almost 50,000 employees. The collision of the first two paragraphs happened in those few short years leaving the company with not enough senior engineers to get product out on time.

    The implied advice is to balance patent protection with trade secret protection. Nothing that could be protected by a patent ought to be allowed to be protected by trade secrets. Things like customer lists, business strategy, etc., are trade secrets. Things like the software processes or hardware designs are patentable and should not be allowed to be trade secrets.

    This would then fulfill the purpose of the IP system to promote the progress through disclosure, improvement, disclosure while also allowing employees to move from company to company in a free market for their skills.

    If we fixed the broken patent system, it would also enable funding of startups developing patented technologies.

  • [Avatar for Anon]
    February 13, 2018 04:38 pm

    Your first paragraph collided with your second paragraph and it is uncertain what advice you are actually giving.

  • [Avatar for Edward Heller]
    Edward Heller
    February 13, 2018 04:34 pm

    Paul, big companies that develop processes (including software) that can be secret should always consider the use of trade secrets to protect vital technology. A patent covers at best one country. But the disclosure of a patent informs the world. Typically, since big companies face global competition, this informs their competitors and will allow their competition in many countries legally unless the company invests in patents virtually worldwide like drug companies do. Thus effective patent protection becomes prohibitively expensive especially in contrast to trade secret protection.

    In contrast, despite your argument to the contrary, it is hard to keep truly revolutionary technology secret if it is embodied in products sold. Reverse engineering is difficult, but it can be done if what is revealed allows competition or acquisition of the technology by 3rd parties. I think it is seldom that a startup can rely on trade secrets. They will have to rely on patents because what they are doing can normally be reverse engineered. That said, many startups are acquired simply because they do have vital trade secret technology and know-how.

    From a company manager point of view, the issue is complicated.

    From and engineers point of view, they should preferably join companies located in California because California is extremely hostile to the use of trade secret litigation to protect against potential, as opposed to actual, trade secret misappropriation. I believe the Waymo suit was about actual misappropriation.

  • [Avatar for Passing Torches]
    Passing Torches
    February 13, 2018 02:15 pm

    Interesting theory, Paul! I hope companies don’t follow this trend of protecting trade secrets. For you are right, society loses when innovation is kept in the dark. And further, China wins because they will invariably hack companies having such trade secrets without repercussion.

  • [Avatar for Steve L]
    Steve L
    February 13, 2018 10:47 am

    Very good points Paul, and if I have it right, both Copyright and Trade Secret theft is subject to federal criminal penalties, while no such situation exists for patent theft (only expensive, often non effective civil litigation options)? Seems like federal criminal penalties would be helpful to the small and large inventors in protecting their creations from theft and could certainly be justified based on the need and the precedence set by copyright penalties. Appreciate your thoughts and if you think this is doable with our law makers as we work to improve inventors protections. Thanks, Steve

  • [Avatar for Tesia Thomas]
    Tesia Thomas
    February 13, 2018 10:32 am

    Great article Paul!
    Trade secrets make Subject Matter Experts Unemployable

    How ridiculous is it that a single person will be pitted against a huge company just for the assumption that he or she is giving away ‘secrets’ in order to obtain their next job!

    Levandowski and others like him can be thrown in prison, bankrupted, and whatnot just for having another job in the field of his expertise all because large corps want trade secret protections.

    That makes it impossible to get another job in ‘your industry’ after leaving a company for whatever reason.

    Also, all non-competes should have buyout clauses so that people like Levandowski can continue to innovate for the world and not be stuck, unemployed, and unfulfilled because some words in a document booted them out of their Subject Matter Expert territory.

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