Day 20 notes: IIIE2d, IVA1

III. Property
E. Intellectual property
2. Intellectual property law
d. Trade Secrets

Trade secret: "'Trade secret' means information, including a formula, pattern, compilation, program, device, method, technique or process, that (i) derives independent economic value, actual or potential from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." (Uniform Trade Secrets Act) (F139, The law)

Establishes
(i) rights against wrongful acquisition--breach of contract, employee disloyalty; trespass.

Ex: breach of contract: "An employee or contractor with a Silicon Valley company is routinely required to sign a non-disclosure agreement (NDA)." (CU121)

Ex: trespass: E.I du Pont deNemours & Co. v. Christopher 431 F.2d 1012 (1970) -- a competitor obtained information by hiring a pilot to fly over a chemical plant under construction and photograph it. The court held that this was a violation of du Pont's rights, even though the flight itself was lawful. (F139)

    (ii) limited rights against recipients of pirated secrets
    If you find out that what you have is a stolen trade secret before you do anything with it, you are not allowed to use it, but ...
    If you have already built the factory to employ the trade secret, so that not being able to use it would leave you worse off than you were before, you can run the factory.
   Damages usually; not usually an injunction against an innocent 3rd party beneficiary. (F139)

If the info leaks, it can be freely used. "Recent survey research concludes that trade secrets protection is not very effective in Silicon Valley." (CU122)
Ex: Church of Scientology cases -- they have won their copyright claims but lost their trade secret claims--not because the material is not in principle protectable, but because once one person has posted it on the net it is no longer a trade secret, and a second poster is therefore not liable. And things can be (and were) posted anonymously.

    Trade secret law does not establish a property right--someone who gets possession of the trade secret without doing anything wrong has a legal right to use it.
    Ex: reverse engineering is legal: "clean room" reverse engineering of IBM PC read only memory (ROMs): The software built into the PC's read only memory is copyrighted. But the software in clones has to function exactly the same way, in order that programs for the IBM will run on it.
    The solution is "clean room" reverse engineering. Team A looks at the IBM ROMs and writes out a detailed functional specification of exactly what they do. Team B is never allowed to look at the ROMs. Instead, they read team A's specifications, and write code that does exactly what team A says the original ROMs did. (F130)

Assessment
Kewanee Oil Co. v. Bicron Corp. 416 U.S. 470 (1974) established the principle that state trade secret law was not entirely preempted by federal patent law. (F140)

    fills gaps in patent law for cases where
    --invention is not worth patent process cost
    --secret might last longer than patent life.
    --examiner was wrong about obviousness

    Avoids rent seeking since the secret is still in the commons--other people can invent it for themselves.
    More efficient during rapid innovation: Trade secret has a "built-in timer."
    The faster the cost of inventing something is falling the shorter the period for which you can expect to maintain it as a trade secret, hence the lower the incentive to invent it early.

IV. Contracts

Property: elaborated the notion of ownership that we glossed over in micro theory
Enriched our perception

    Contract: we must revise the fundamental context we used in micro theory
    With contracts, we do not operate in an environment of perfect competition.
    At the outset, we can shop for a competitive contract, but once we enter into a contractual relationship, the environment is one-on-one.
    It's not a situation we dealt with micro theory

As usual, general purpose: to assess and promote the efficiency of contracts and contract law

    why is there contract law--why not enforce all contracts as written?
    (1) "courts may believe that they know better than the parties what the terms should have been."
    (2) "you still have to decide whether a contract exists and what its terms are" when parties disagree.
    (3) "contracts never say enough.... Contracts ... leave gaps to be filled in by the court." (F147)

    topic areas:
    the economics of contract
    making contracts--does a contract exist?
    enforcing contracts--does the contract deserve to be enforced?
    interpreting contracts--what are its terms; how should missing terms be inferred?
    breaking contracts--what should be done when someone breaches a contract?

A. The economics of contracts

Why do people make enforceable contracts?
Why not do everything on the spot market?

Some transactions take time

    Recall with property: assigning rights affects distribution of wealth => can use property law for goals other than efficiency
    Contract law: "concerned with facilitating the voluntary movement of property rights into the hands of those who value them most" (P31)
    Redistribution is much less feasible with contracts: Contracts are a "setting of low transaction costs, and therefore a judicial failure to discover the efficient solution can be retified in the future through a drafting change." So "contract law cannot readily be used to achieve goals other than efficiency." (P98)

    Purposes of contracts:
    --Aligning incentives
    --Allocating risk

1. Aligning incentives

a. The bilateral monopoly problem

Ex: I take you up to Alaska on my boat to help me harvest salmon

Bilateral monopoly = monopoly seller facing a monopsony buyer Arises once a transaction between 2 parties begins Per Posner: opportunism (P93,95) (1) monopoly seller's surplus-maximizing optimum (2) monopsony buyer's surplus-maxmimzing optimum

Result: inefficient and incompatible incentives

Remedy? Make an enforceable contract ex ante

b. The princpal-agent problem

    relational contract: one party (the principal) delegates actions to another (the agent)
    common agents in contracts: lawyers, accountants, brokers, trustees
    the problem: incompatible incentives--maximize welfare subject to contract constraints

game theory ((F,ch.8) Price theory coverage and explanation of solution concepts.)

    Ex: Investor-broker: i = 4%
    investment: $100 in Yr0 --> $112 in Yr1
    $2 for the broker / $10 for the investor

Case 1: No enforceable contract:

		Broker (agent, promisor)
		a. Perform		b. Breach
Investor (principal promisee)	1. Invest	a1	\ 2 \ 10 \	b1	\ 100 \ -100 \
	2. Don't invest	a2	\ 0 \ 4 \	b2	\ 0 \ 4 \

Outcome: Row 2--don't invest

Case 2: Enforceable contract--guarantee returns:
Agent has a fiduciary duty: must treat the principal as an alter ego. (P114)

		Broker
		a. Perform		b. Breach
Investor	1. Invest	a1	\ 2 \ 10 \	b1	\ -10 \ 10 \
	2. Don't invest	a2	\ 0 \ 4 \	b2	\ 0 \ 4 \

Outcome: Cell a1--invest + perform

So who gains from enforceable contracts? Both parties

Why might the promisor perform even without enforceable contracts?

    reputation: "may be the most important method for enforcing agreements in our society, although not the one of most interest to lawyers." (F145)
    -- works well when "the amounts at stake are small, the issues simple, and the parties are engaged in repeat dealings." (F145)
    Ex: "Trusted private arbitrators": Diamond industry in NY, "dominated by orthodox Jews, forbidden by their religious beliefs from suing each other." The trustworthy rabbi mitigated disputes. Helps explain why "particular trades are sometimes dominated by a single close-knit ethnic group." (F146)
    "commercial arbitrator": each party "posts a bond with [a] third party ... we both trust." the 3rd party arbitrates. (F147)
    has the advantage of providing market incentives to judge correctly (good arbitrators get rehired)

    reputation incentive: "someone known not to perform his side of bargins will find it difficult to find anyone willing to make exchanges with him in the future...."
    but... in some contexts, reputation does not work.
    It is dependent on reliable information about who was in the wrong
    The promisor might be old; the contract could be very large; or s/ he can function w/o contracts in the future. (P94)

Result: welfare-improving bargains fail to occur w/o enforceable contracts
Ex: "E may be willing to guarantee the superior durability of his shirt, but, if his promise is not legally enforceable, consumers may doubt the honesty of his claim" (P94)

The fundamental function of contract law (and recognized as such at least since Hobbes' day) is to deter contracting parties from behaving opportunistically, in order to encourage the optimal timing of economic activity and (the same point) obviate costly self-protective measures." (P94)
opportunism is not always obvious--paint a self-portrait "to customer's satisfaction." Court will not enforce payment, since terms implied customer satisfaction was necessary. (P95)

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