March 28, 2014

Understanding the Economic Value of Trade Secrets

Glenn Perdue – March 28, 2014

The economic value of trade secrets, like other forms of intellectual property (IP), lies in the proprietary competitive advantage gained from use coupled with the exclusion of others from such use. But unlike the right to exclude others from using a patent for a limited period of time, which arises from a government granted monopoly tied to disclosure, the right to exclude others from the use of a trade secret arises from limited disclosure and reasonable efforts to maintain secrecy.

This article explores economic factors relevant to trade-secret development, reverse engineering, and misappropriation as well as the manner in which value creation is shaped by various legal requirements to maintain trade-secret status.

In Search of Proprietary Competitive Advantage
Human beings respond to incentives. This fundamental tenet of economics is demonstrated every day by business managers working to maximize profits by selling more, selling at a higher price, or reducing costs. But, of course, such efforts do not occur in economic isolation. With the exception of governments and a handful of monopolies, such as utility companies, most enterprises function within industries that include competitors vying for the same customers. As a result, sources of advantage should be viewed relative to those of competitors. 

If two competing businesses have an equivalent "advantage"—whether in the form of a production method, internally developed software, marketing information, or some other capability—then it's really not an advantage after all.  In such cases, these businesses achieved competitive parity in a particular area while neither gained an advantage.

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