Why Do Startups Use Trade Secrets?

David S. Levine* & Ted Sichelman**

Empirical studies of the use of trade secrecy are scant, and those focusing on startups, nonexistent. In this Article, we present the first set of data—drawn from the Berkeley Patent Survey—on the use of trade secrets by U.S. startup companies in the software, biotechnology, medical device, and hardware industries. Specifically, we report on the prevalence of trade secrecy usage among startups. Additionally, we assess the importance of trade secrets in relation to other forms of intellectual property protection and barriers to entry, such as patents, copyrights, firstmover advantage, and complementary assets. We segment these results by a variety of factors, including industry, company business model, overall revenue, patenting propensity, funding sources, innovation types, and licensing. From this segmentation, we implement a basic regression model and report on those factors showing a statistically significant relationship in the use of trade secrets by startups. Our results point to three major findings. First, trade secrecy serves other important aims aside from first-mover advantage. Second, trade secrets may act both as economic complements and substitutes to patenting. Third, trade secrets may serve as important strategic assets, functioning much in the same manner as patents in terms of licensing and setting the boundaries of the firm.

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© 2018 David S. Levine & Ted Sichelman. Individuals and nonprofit institutions may reproduce and distribute copies of this Article in any format at or below cost, for educational purposes, so long as each copy identifies the authors, provides a citation to the Notre Dame Law Review, and includes this provision in the copyright notice.

*Jennings Professor and Associate Professor, Elon University School of Law; Affiliate Scholar, Center for Internet and Society at Stanford Law School.

**Professor, University of San Diego School of Law. The authors thank Jasmine Abdel-Khalik, Robert Brauneis, Brian Broughman, Michael Burstein, Victor Fleischer, Llew Gibbons, Eric Goldman, Michael Guttentag, Christine Hurt, Shawn Miller, Lateef Mtima, Christina Mulligan, Sean O’Connor, Michael Risch, Elizabeth Rosenblatt, Gordon Smith, Neel Sukhatme, and participants at conferences, presentations, and workshops at ESMT Berlin, New York University School of Law, Santa Clara University School of Law, Swinburne Law School, University of San Diego School of Law, and the University of Washington School of Law for their helpful comments and suggestions. We also thank Courtney Ball, Chris Genheimer, Dustin Gill, Danielle Hardy, Rebecca Kilmon, Marissa Lim, Moreen Mekha, Merima Mustafic, Poline Pourmorady, Kalie Chumley, Neil Rankin, Russell Romeo, Parth Sagdeo, Rachel Stariha, Bree Ward, and Millicent Whitemore for their invaluable research assistance.