Markets for Trade Secrets

Abstract

Trade secret licensing can generate substantial private and societal benefits, yet prior work largely treats such transactions as unlikely due to knowledge leakage risk. We examine mechanisms that mitigate such risk and enable firms to “rent” trade secrets through co-licensing with patents. We argue that concerns about monitoring and enforcement costs underpin leakage risk, and that reductions in such risk increase both the prevalence and scope of trade secret co-licensing. Using contract-level data on patent and trade secret co-licenses, we exploit the adoption of the Uniform Trade Secrets Act (UTSA) across U.S. states as an exogenous reduction in leakage risk. Stronger UTSA protection leads to a substantial increase in trade secret co-licensing. We further document that firms adopt deal structures previously constrained by leakage risk, including non-exclusive deals, without additional registered intellectual property, and spanning greater geographic distance. Using a novel methodology to distinguish technology and commercial trade secrets, we find that both types respond to reductions in leakage risk. These findings nuance prior literature on corporate strategy and markets for technology, highlighting how firms navigate information sharing in leakage-prone settings. Joint paper with Rohin Vrajesh and Colleen Cunningham.