Trade secrets hamper progress

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Dear Editor,

I would like to bring to the notice of your readers an area that would benefit from some regulation and perhaps even legislation. I refer to the protection of trade secrets, which has not been analysed under any policy and which is the source of an existing yet unfounded problem.

As your readers will appreciate, trade secrets constitute certain confidential information of commercial value held by a business enterprise, which gives it a commercial advantage over competitors in the market. This is the intellectual property (IP) of an enterprise, which it holds and exploits. The unauthorized access or use of such information is considered an unfair trade practice. Yet, whether trade secrets are deserving of IP protection is questionable, and some may regard it as treading in murky waters.

This conundrum calls for an analysis from a philosophical and economic viewpoint. The philosophical justification of trade secrets as IP is derived from the celebrated “labour theory” of philosopher John Locke. Labour and effort put in by an individual to convert publicly accessible resources into an intellectual creation are rewarded by deeming and acknowledging such creation to be the property of such person, thus enabling the creator to obtain the returns of the financial investment in such labour. Thus philosophically, trade secrets deserve IP protection.

The economic justification comes into the picture when discussing the method of protection as a reward for the labour. This is where trade secrets differ from other categories of IP rights such as patents, designs and trademarks. The former enjoys protection for an unlimited duration of time, albeit non-exclusive, by retaining the trade secret as confidential, while the latter category of IP enjoys exclusive protection for a limited duration.

The non-disclosure of commercially valuable information can have considerable implications for the market. When trade secret holders retain information, their competitors are compelled to incur costs and time on research and development (R&D). This acts as a barrier to the entry of new entities, by disincentivizing them to innovate and develop new products, which in turn impairs dynamic efficiency in the market.

The increase in know-how, through the investment into R&D by competitors, is not commensurate with the costs incurred to obtain the know-how, as the expenditure by competitors is in addition to that incurred by the trade secret holders. This leads to sub-optimal allocation of resources in the market, i.e. an allocative inefficiency in the market, which in turn affects pricing, i.e. productive efficiency.

To conclude, the marginal costs of protecting trade secrets appear to outweigh the marginal benefits of the same to society. A mechanism is thus needed to regulate trade secret protection to remedy this situation of asymmetric flow of information and prevent detriment to healthy competition in the market.

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