Advantages And Disadvantages Of Trade Secret

3. Trading of the costs

3.1. Efficiency

When figuring out the most effective legal rules, the outcome should produce the best incentives and consequences when people alter their behavior in reaction to those incentives. The ultimate goal of trade secret laws should be optimizing the incentives for both, the party possessing the secret and the competitor, for them to behave efficiently. The key is not necessarily to maximize the protection of the trade secret, but to find the optimal degree of security, while the competitor is less likely to participate in inefficient and detrimental activities, such as bribery and espionage, in attempting to appropriate the secret.

Efficiency presumes that every resource is optimally allocated to serve

One of these weaknesses is the so called third party problem. In a contractual situation (for example NDA’s), where a third party has collected the secret information lawfully in good faith, the owner of the trade secret has no remedies against the third person. Furthermore, if the knowledge has somehow become public and common knowledge, anyone can use it, since it is not a secret anymore, even when the third party using the information knows that the information has been a secrecy protected originally between the two contracting parties. When trade secrets are protected by a contractual norm, the doctrine on the privity of the contract excludes the third party having rights of obligations arising from the contract. Consequently, the owner has limited legal powers towards the third party. Only in a situation where the third party knew or should have known that the contract in question is violated, the inventor may have remedies towards the third person, but this is merely an exception than a general rule.

Efficient trade secret laws could actually lead to greater knowledge diffusion. The optimal law protecting trade secrets, should result in the allocation of the information to more people, which could lead to more innovation and an increase in human capital, by minimizing the risk of distribution to competitors. Without effective trade secret protection by law, the protective measures taken by the companies having

Making a patentable invention this year, and not the next, gives only another year’s time to use the invention, but under patent law, the first inventor gets the monopoly for the time that the patent holds its validity (the time depending on the patent law of the jurisdiction in question). If the cost of making the invention falls swiftly over time, for example, because other inventions in the same area of expertise, the result would be an inefficiently early invention. Compared to the trade secret protection, the reward to an invention is lower the faster the cost of duplicating is falling, since an invention that will soon be inexpensive to duplicate will not remain a secret for long. Thus in the area of trade secret law, an invention whose cost is declining more quickly will be made later than one whose cost is declining less