«NOTES COMPARATIVE ANALYSIS OF TRADE SECRET LAW IN PRACTICE IN HIGHTECH INDUSTRIAL DISTRICTS: A LINK BETWEEN TRADE SECRET PROTECTION, KNOWLEDGE ...»
COLEY BOOK PROOF 1/10/2015 3:12 PM
COMPARATIVE ANALYSIS OF TRADE
SECRET LAW IN PRACTICE IN HIGHTECH INDUSTRIAL DISTRICTS: A LINK
BETWEEN TRADE SECRET
SPILLOVER, AND INDUSTRIAL
I. INTRODUCTIONOn February 28, 2014, the New York Times published an article about a class action lawsuit filed in the Northern District of California that accuses industry executives of agreeing between the years 2005 and 2009 not to poach one another‘s employees.1 Scattered throughout the article were the names of executives at the highest echelons of the most well known high-tech companies, including Google and Apple, that were all alleged to be directly implicated in a mob-like conspiracy to prevent employment mobility.2 The lawsuit will likely be closely covered by the media, who will have the opportunity to show the dark side of high-tech companies that are often portrayed as progressive and model employers.
Setting aside its shock value, however, the lawsuit also corroborates another unconnected story: Silicon Valley‘s growth as an industrial cluster has resulted from significant ―knowledge spillover‖ in the area caused by high levels of employment mobility. If top-level executives went to such lengths to restrain the normal free flow of labor, there is a good chance they * Class of 2015, University of Southern California Gould School of Law. The author loves running by the beach, podcasts, and learning about high-tech industrial districts. Thank you to Professor Jonathan Barnett for his tremendous help with the topic and note.
1. David Streitfeld, Engineers Allege Hiring Collusion in Silicon Valley, N.Y. TIMES, Feb. 28, 2014, http://www.nytimes.com/2014/03/01/technology/engineers-allege-hiring-collusion-in-siliconvalley.html?_r=1.r=1.
COLEY BOOK PROOF 1/10/2015 3:12 PM 204 Southern California Interdisciplinary Law Journal [Vol. 24:203 were afraid of losing more than talent. They were likely engaging in such practices to prevent departing employees from either intentionally or unintentionally sharing valuable, proprietary information with a competitor.
For nearly twenty years, theorists like AnnaLee Saxenian have argued that Silicon Valley‘s unique business practices and culture of mobility have given it a regional advantage over other industrial clusters. Legal scholars, such as Professor Ronald Gilson, have tried to determine whether California‘s legal infrastructure has helped or hindered knowledge sharing by way of employee mobility. Because California is unique in its outright ban on covenants not to compete (―noncompete covenants‖) in employment agreements, Gilson has argued that Silicon Valley‘s boom partially resulted from this ban‘s effect on employee mobility.3 This Note aspires to paint a fuller picture and determine whether trade secret protection, a legal doctrine affecting how and if a company‘s former employees can transmit that company‘s information to a competitor, has helped or hindered knowledge sharing. It seeks to do this by determining whether the protections afforded by trade secret law have been stronger or weaker in Silicon Valley as compared to the Route 128 region of Massachusetts.
Route 128 is a similar high-tech industrial cluster that has been frequently used as a point of comparison because of its decline relative to Silicon Valley.4 A noncompete covenant in an employment agreement is an arrangement between the employer and employee that prevents the employee from working for the employer‘s competitor(s) after his or her employment agreement is terminated. Generally, such a noncompete covenant provides that an employee is barred from working for an employer‘s competitor for a particular period of time within a specified geographic territory.5 Unlike the majority of jurisdictions in the United States,6 noncompete covenants between an employer and employee are not enforceable in California.7
3. Ronald J. Gilson, The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete, 74 N.Y.U. L. REV. 575, 578, 606, 607 (1999).
4. See Vivek Wadhwa, The Valley of My Dreams: Why Silicon Valley Left Boston’s Route 128 in the Dust, Tech Crunch (Oct. 31, 2009), http://techcrunch.com/2009/10/31/the-valley-of-my-dreamswhy-silicon-valley-left-bostons-route-128-in-the-dust/.
5. LAURENCE H. REECE III, BUSINESS TORTS IN MASSACHUSETTS § 8.1 (MCLE, Inc. 2002).
6. Gilson, supra note 3, at 577.
7. CAL. BUS. & PROF. CODE § 16600 (Deering 2014); JENNIFER BALDOCCHI, 4–70 CALIFORNIA EMPLOYMENT LAW § 70.09 (M. Kirby Wilcox & Erica B. Grubb eds., 2013).
COLEY BOOK PROOF 1/10/2015 3:12 PM 2014] Comparative Analysis of Trade Secret Law 205 On the basis of the theory that firms agglomerate geographically because of the benefits of knowledge spillover in a specific area, Gilson suggests that California‘s ban on noncompete covenants in the employment context is a causal antecedent to knowledge spillover.8 Generally, employees transfer to their employers‘ competitors without restriction, and valuable knowledge is more readily shared with other firms and startups.9 Gilson illustrates this theory by comparing the California and Massachusetts law on noncompete covenants.10 He focuses on these two jurisdictions in order to juxtapose the success of Silicon Valley on the San Francisco Peninsula and the decline of Route 128 outside of Boston.11 In Massachusetts, noncompete covenants are enforceable under the ―rule of reason‖ standard derived from English common law: the duration and geographic area specified in a covenant not to compete must be no greater than necessary to protect an employer‘s legitimate business interests, and not otherwise contrary to the public interest.12 Gilson‘s argument relies on other theories of economic agglomeration and growth, including AnnaLee Saxenian‘s theory of Route 128‘s decline.13 Saxenian, a distinguished scholar of Urban Planning,14 attributes the respective success and decline of Silicon Valley and Route 128 to differences in business cultures.15 Gilson does not displace Saxenian‘s theory, but argues that the legal rules governing employee mobility have contributed to the Silicon Valley business culture that Saxenian describes.16 Silicon Valley‘s legal rules support a business culture of job-hopping, while Route 128‘s legal rules support a business culture that discourages it.17 Nonetheless, Gilson‘s theory does not take into account differences in trade secret protection in the two states.18 Trade secrets are governed by
8. Gilson, supra note 3, at 578.
11. Id. at 577.
12. Id. at 603–04. This formulation is commonplace in Massachusetts covenant cases and dates to the late nineteenth century. See Boulanger v. Dunkin' Donuts, Inc., 815 N.E.2d 572, 577 (2004).
13. Gilson, supra note 3, at 578.
14. AnnaLee Saxenian, U. CAL. BERKELY, http://people.ischool.berkeley.edu/~anno (last visited Oct. 4, 2014).
15. Gilson, supra note 3, at 578.
18. Gilson does not ignore trade secrets. He considers Professor Alan Hyde‘s theory discussed later in this Note, which discusses the role of trade secret enforcement in Silicon Valley. However, Gilson ultimately concludes that Hyde‘s theory presumes a business culture that supports high-velocity COLEY BOOK PROOF 1/10/2015 3:12 PM
206 Southern California Interdisciplinary Law Journal [Vol. 24:203
state law,19 and they can cover a wide range of information that a firm has.
Since a trade secret claim is a way for an employer to prevent knowledge spillover, the strength and breadth of trade secret protection also determines whether knowledge spillover can occur between firms in a region.
Thus, based on a case study of trial court orders deciding trade secret claims, this inquiry seeks to determine whether differences in trade secret protection exist. The case study will compare cases where an employee leaves an employer and is alleged to have misappropriated trade secrets in order to determine (1) whether there are differences in trade secret protection afforded by the two high-tech industrial districts and (2) whether courts in Silicon Valley do in fact give employees more freedom to share valuable proprietary information with competing employers. Ultimately, this Note will illustrate why trade secret protection in the two districts does not differ in any meaningful way, and discuss the implications of this finding for Gilson‘s thesis.
This note will in some ways mirror Gilson‘s article, with two important differences. First, this Note will focus on the legal infrastructure surrounding trade secrets in the aforementioned high-tech industrial districts, not the legal infrastructure surrounding noncompete agreements.
Second, the goal of this Note is to analyze the application of trade secret law in the trial courts serving the high-technology districts of Route 128 and Silicon Valley, and determine the differences in trade secret protection afforded in practice. While substantive trade secret law will inevitably be implicated, this Note will not be a study of the governing state law.
In Part II, I will provide a succinct overview of theories of agglomeration in general. First, I will explore the central economic theory that explains how agglomerations occur and grow: Alfred Marshall‘s Industrial Organization Continued: The Concentration of Specialized Industries in Particular Localities. Second, I will describe more recent, non-legal theories that link the growth of high-tech districts to knowledge spillover. I will also include a theory that challenges this hypothesis. Part II will contextualize the importance of understanding whether the legal employment, but does not explain how the legal infrastructure contributed to that business culture.
Ultimately, he argues, differences in the law on noncompete covenants still remain the most likely causal antecedent in the legal infrastructures of Silicon Valley and Route 128 to the two districts‘ different paths and cultures. Id. at 612–14.
19. ―Unlike patent, copyright, and trademark law, trade secret regulation is a creature of state law.‖ HENRY H. PERRITT, JR., TRADE SECRETS: A PRACTITIONER‘S GUIDE 1 (2d ed. 2013).
COLEY BOOK PROOF 1/10/2015 3:12 PM 2014] Comparative Analysis of Trade Secret Law 207 infrastructure in a certain region helps or hinders an employee‘s ability to act as a conduit for knowledge spillover.
In Part III, I will briefly summarize the differences between California‘s substantive trade secret law and Massachusetts‘s trade secret law. In Part IV, I will get to the heart of this Note and complete my case study. This case study will compare trade secret claims in the two aforementioned frequently compared high-tech industrial districts. The scope of the study will be limited to federal courts because trade secret claims are frequently joined with federal claims. While findings at the state trial court level might differ, the explicit reasoning in United States District Court (―U.S.D.C.‖) opinions and equivalent procedural standards employed allow for a useful comparison between the two districts. The analysis will also be limited to the following federal courts in the high-tech districts of Silicon Valley and Route 128 outside Boston: (1) U.S.D.C. for the District of Massachusetts, which hears claims in the greater Boston area, and (2) U.S.D.C. for the Northern District of California, which hears claims in the greater Silicon Valley area (San Francisco, San Mateo, and Santa Clara counties). My research will be limited to situations where an employee left his or her employer and is alleged to have taken the employer‘s trade secret information upon departure. I will group the analysis by motions filed, qualitatively comparing and contrasting (1) motions for injunctions or temporary restraining orders, (2) motions to dismiss, and (3) motions for summary judgment. My analysis will include a chart of successes and failures, and a descriptive analysis of the differences.
Finally, in Part V, I will conclude this case study by highlighting key similarities and differences in trade secret protection in the two jurisdictions. Based on my findings, I will demonstrate why trade secret protection in the two jurisdictions does not differ in any meaningful way, and the implications of my findings for Gilson‘s thesis. I will also briefly analyze other theories discussing the utility of trade secret law in the hightech sector, and discuss how my findings relate to these theories.
II. THEORIES OF AGGLOMERATIONIn Book IV, Chapter X of his Principles of Economics, Alfred Marshall developed the concept of an industrial district—the special concentration of firms in the same or a related industry.20 The original
rationale for the industrial district rests on the creation of external economies of scale, which are economies that are external to the firm but internal to the area, for groups of small firms.21 The atmosphere of industrial districts can enhance the ability of small firms to acquire tacit knowledge and other forms of informal skills in order to support the development, adoption, and diffusion of innovations.22 Marshall describes
the benefits of industrial districts: