Taking the long view on competition and the mobile employee: lessons from the United States history of efforts to regulate employee innovation and the mobility of workplace knowledge

Electronic copy available at: http://ssrn.com/abstract=2259216

Legal Studies Research Paper Series No. 2013-105

Taking the long view on competition and the mobile employee: lessons from the United States

history of efforts to regulate employee innovation

and the mobility of workplace knowledge

Catherine Fisk cfisk@law.uci.edu

University of California, Irvine ~ School of Law

The paper can be downloaded free of charge from SSRN at:

Electronic copy available at: http://ssrn.com/abstract=2259216

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13. Taking the long view on competition and the mobile employee: lessons from the United States history of efforts to regulate employee innovation and the mobility of workplace knowledge

Catherine L. Fisk*

1. INTRODUCTION

An early twenty-first century effort by a national organization of lawyers and scholars in the United States to revise the law of employment provoked bitter disagreement over the proper contours of the law governing employee use of knowledge in competition with current or former employers. The controversy replicates a centuries-old debate over legal restrictions on employee mobility. Since the American colonies first began to recruit skilled British artisans to emigrate in violation of British law, Anglo-American courts and lawyers have disputed whether restric- tions on employee mobility help or hinder economic development and free intellectual inquiry. While some uses of confidential workplace knowledge in post-employment competition may be wrongful, many recognize that information flows associated with employee mobility foster innovation. Moreover, as knowledge is inevitably both an attribute of employees and an asset of companies, strong moral as well as practical considerations limit the extent to which companies can and should invoke law to prevent competition from former employees.

* The author gratefully acknowledges research assistance from Joshua Mayer, of the Duke University Law School class of 2010.

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Businesses are even less likely than lawyers to reach a consensus about the desirable level of protection against competition from former employ- ees. In cases pitting an enterprising employee against his or her former employer, it is always in the company’s interest to restrict employee mobility. In the aggregate, however, companies benefit from employee mobility at least as much as they are harmed by it, for departing employees usually go to work for other companies that recruit employees to gain the benefit of their knowledge. Although some companies may believe they will be net consumers of technology developed by others and thus may want relatively lax restrictions on employee mobility, others may believe they are and will remain industry leaders or tech- nology pioneers and may want stronger protections.

This chapter responds to an invitation to offer lessons from the past to inform debates about the proper scope of legal regulation of post- employment competition. I offer two. The first is that the relationship between law, the rate and direction of innovation, and the welfare of a region or an economy as a whole is difficult to assess objectively and the optimal legal rules are likely to be a matter of substantial controversy. From the persistence of controversy flows the inescapable fact that clarity and precision in the law are unlikely to be obtained. The lack of legal clarity stymies efforts to identify which legal rules are correlated with which patterns of economic development, simply because it will be hard to know what companies and employees actually regarded the law as being and what legal rules actually were enforced.

A second lesson of the past is that the norms of the workplace and the industry have always been as important as the law in determining the transmission of knowledge from employee mobility. In some eras, industries, and companies, employees controlled quite a bit of the intellectual property they produced. In others they did not. Even com- panies with restrictive policies toward IP ownership and post- employment competition negotiated individual arrangements granting some employees substantial control over their ideas. Moreover, scholarly and trade press literature documenting the twentieth century history of large companies’ knowledge management policies suggests that com- panies with internal labor markets struggled to develop suggestion systems and other policies to motivate their employees to innovate. Thus, companies recognized the importance of norms even as they confronted limits on their power to create or change them.

The conclusion that follows from these two lessons is that robust economic development can occur in legal regimes that treat employee knowledge as mobile and in those that treat it as the property of the employer and restrict knowledge mobility. Relatively little is known

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about the optimal level of restrictions on knowledge transmission associ- ated with employee mobility. In the US, until the late nineteenth century, companies had few legal rights to restrict competition or use of know- ledge by former employees, yet the nineteenth century witnessed rapid economic growth and technological development.1 Moreover, as scholars who have studied the growth of computer technology in the middle and late part of the twentieth century have shown, Silicon Valley grew notwithstanding, and may even have prospered precisely because, Cali- fornia does not enforce non-compete agreements against employees and Silicon Valley employers seldom resorted to trade secret litigation before the 1990s.2 In the early- and mid-twentieth century, however, some innovative companies did restrict transmission of employee knowledge. Both knowledge-protective legal regimes and lax legal regimes have existed in places and periods of economic growth.

2. LESSON ONE: CLARITY AND HARMONIZATION ARE CHIMERICAL

The American Law Institute (ALI) in the United States – an elite organization of lawyers and judges engaged in law reform – is in the process of adopting a Restatement of Employment Law with a contro- versial chapter defining when an employee is prohibited from competing with a current or former employer using knowledge or information that the employee developed, used, or acquired in the employment relation- ship.3 A Restatement seeks to modernize, organize, and rationalize a body of judicial decisions in order to assist judges and lawyers to identify the most rational law undergirded by the most sensible policy. The Restatement of Employment Law is an ambitious and controversial project, largely owing to a wide divergence of opinion about what rules of employment are rational and supported by wise policy. Chapter 8, which is entitled ‘Employee Obligations and Restrictive Covenants,’ replicates longstanding vagueness in the law of trade secrets and non- compete agreements. As to the law of trade secrets, sections 8.01 through 8.05 of the Restatement propose to rebrand as a ‘duty of loyalty’ the obligation not to misappropriate trade secrets. Section 8.01 states that employees ‘owe a duty of loyalty to their employer’ which is breached by

1 Fisk (2008). 2 Saxenian (1996); Hyde (2003); Gilson (1999); Feldman (2006). 3 American Law Institute, Restatement (Third) of Employment Law (here-

after Restatement), Chapter 8 (2011).

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‘disclosing or using the employer’s confidential information (as defined in § 8.02) for any purpose adverse to the employer’s interest (including after termination of the employment relationship.’4 ‘Confidential infor- mation’ is defined as that information having ‘economic value because of its secrecy’ which the employer has taken ‘reasonable measures’ to keep secret. This is the conventional and widely accepted legal definition of a trade secret.5 The Restatement definition specifically excludes infor- mation ‘generally known to the public or in the employer’s industry’ or that is ‘part of the general experience, knowledge, and skills that its employees acquire in the ordinary course of their employment,’6 both of which are also conventional exceptions to the definition of trade secrets. Essentially, what the Restatement proposes to do is to incorporate the law of trade secrets into the duty of loyalty, which is a novel change of labels but not a radical redrawing of the rules.

The problem is that the rules have long been difficult to apply. Drawing clear lines between the knowledge and skills employees acquire in the ordinary course of their employment and that which is a company asset is a difficult task when the ordinary course of highly skilled employment requires immersion in technical details. Moreover, in an economy in which employees are hired precisely for their specialized knowledge, to conclude that any use of knowledge for another employer is unlawful would make people with highly specialized knowledge unemployable. It would also undermine the diffusion of knowledge that supported the rapid innovation and start-up culture of Silicon Valley.7 The proposed Restatement replicates these factual difficulties and the political controversy in distinguishing general knowledge from corporate property.

The Restatement encounters similar difficulty in sections 8.06 through 8.08, which restate the law of employee non-compete agreements. The formulation chosen is that non-competes are enforceable if they are ‘reasonably tailored in scope, geography, and time to further a protect- able interest of the employer,’8 the traditional three part reasonableness test under the law of non-competes in Britain and the US. Three of the protectable interests that define reasonableness are uncontroversial: con- fidential information as defined in § 8.02, customer relationships, and the goodwill of a business owned or managed by the employee. The somewhat novel protectable interest is ‘investment in the employee’s

4 Restatement, § 8.01. 5 Uniform Trade Secrets Act § 1(4) (1985). 6 Restatement, § 8.02. 7 Hyde (2007), 330. 8 Restatement, § 8.06.

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reputation in the market.’9 Without explaining how to distinguish the employer’s investment from the employee’s own efforts to develop her reputation, the concept that an employer owns the employee’s profes- sional or business reputation invites litigation.

The statement that an employer has a legitimate interest in enforcing non-compete agreements when it has invested in an employee’s reputa- tion begs questions about what is meant by an ‘investment,’ how much of an investment is required, and how to determine when employers’ investments outweighs the employees’ own investments such that employees should be deprived of the ability to capitalize on their reputation by obtaining competitive employment.10 Old cases raise that issue, such as one involving an effort to prevent Frank Rogers, the general manager of a silverware manufacturing company doing business under the name of William Rogers Co., from working for or lending his name to a rival silverware company. The Connecticut Supreme Court held in 1890 that Rogers was free to work for the competitor and refused to enforce a 25-year prohibition on competitive employment, finding no showing that Rogers was a trademark or that Rogers’s use of his own name ‘would do them any injury other than such as might grow out of a lawful business rivalry.’11 More recently, the European Court of Justice had to decide whether the English fashion designer Elizabeth Emanuel, who originally made her reputation designing Princess Diana’s wedding dress and who had founded an eponymous design company to which she assigned her name as a trademark, could prevent use of her name after leaving the company she founded. The European Court of Justice concluded that Emanuel’s name could be used as a trademark, over her objection, by the firm to which she had assigned the mark and business goodwill. The court left open the possibility that Emanuel could prove the use of her name by her former firm was intended to deceive consumers into believing that she was still involved with the firm. But Emanuel’s name, and some portion of the credit for her work, the court said, could validly be sold to another.12 It did not have to decide whether she could be prevented from doing business under her own name.

9 Ibid, § 8.07. 10 Scholars using economic analysis to identify the appropriate level of

post-employment restraint to reward employer and employee investment in employee human capital have suggested that current law is not optimal. Lester (2001); Lester & Talley (2000).

11 William Rogers Mfg. Co. v. Rogers, 20 A. 467, 468, 469 (Conn. 1890). 12 Elizabeth Florence Emanuel v. Cont’l Shelf 128 Ltd [2006] ECR I-3089.

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Finally, the Restatement proposes to restate the law governing owner- ship of employee-generated patents. Section 8.09 states that employees are entitled to their patents unless they have been ‘hired for inventive work,’ in which case the employee ‘is deemed to have agreed to assign patents’ to the employer. Section 8.10 gives employers a shop right in employee inventions developed using the employer’s time or resources. Section 8.11 makes agreements requiring employees to assign patents enforceable if the inventions ‘were created during work time or using the employer’s resources’ or ‘relate to the employer’s line of business or research.’ As with the other sections, these provisions generally restate the law as it has been abstractly stated in the US for nearly a century.13

These provisions fudge all the hard issues that have vexed the law for just as long, such as defining which employees were ‘hired’ or ‘assigned’ to invent and which inventions ‘use’ the employer’s resources or ‘relate to the employer’s line of business.’

Here, as elsewhere, the difficult questions are ones which the Restate- ment does not answer. Courts began in the mid-nineteenth century to say that employers may demand assignment of employee inventions related to the employer’s line of business, or when an employee was hired to invent, but there has been wide variation in when a court will find an employee was hired to invent and in how broadly courts will construe the employer’s line of business. In some cases courts found that employees hired to ‘improve’ the company’s business by innovating in a particular area were hired to invent and in other cases courts found they were not.14

Thus, for example, in Hapgood v. Hewitt, an 1886 US Supreme Court decision, the Court held that a managerial employee who had been hired ‘to devote his time and services to getting up, improving, and perfecting plows and other goods, and to introducing the same’ was not required to assign to his employer the patent for an improved plow he had conceived and developed while employed by the company and using company resources because he was not hired to ‘exercise his inventive faculties for the benefit of the company.’15 Depending on how a court construes those concepts, the law either allows inventive employees substantial latitude for entrepreneurship or assigns a wide range of employee inventions to the former employer.

13 Fisk (2008). 14 Fisk (2008). 15 Hapgood v. Hewitt, 119 U.S. 226 (1886). Some of the language quoted

above was in the Court of Appeal’s decision in the case, 11 F. 422, 424 (C.C.D. Ind. 1882).

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The principal practical problem with the Restatement is not that it seeks radically to move the law in one direction or another toward greater restriction or greater freedom, although it does suggest a number of overbroad rules restricting competition by current and former employees that many scholars consider unwise as a matter of innovation policy. Rather, the problem is that the effort to strike a middle ground on the controversial issues leads the Restatement to achieve little clarity. As the Restatement has evolved through successive drafts over the course of the decade it has been in progress, the Reporters have trimmed some of the more controversial anti-competitive provisions contained in early drafts. In particular, later drafts omit a proposed rule that would have limited employee use of ‘proprietary information,’ a concept with little recognition and no coherent definition in existing law.16 Similarly, the later drafts omit a hugely controversial rule prohibiting employees not subject to a non-compete agreement from taking competitive employment if the employment would ‘inevitably’ lead to disclosure of the former employer’s trade secrets.17 In the main, the Restatement is consistent with the majority of states’ approach to the laws in these areas, although it overstates certain rules (particularly those pertaining to competition by current employees and those governing non-compete agreements) and it missed a crucial opportunity to modernize the law so as to promote competition and innovation in the contemporary labor market in which employees frequently switch jobs and employers benefit from greater employee mobility. The reason why the Restatement is consistent with the law of many states, however, is that it states the law at such a high level of generality and abstraction as to skip over the controversies that have long kept judges and lawyers busy.

3. LESSON TWO: THE NORMS OF THE WORKPLACE AND THE INDUSTRY ARE MORE IMPORTANT THAN THE LAW

Whether or not the law grants employer rights in employee knowledge and restricts competition by former employees, many employers – and many scholars – have discovered that the norms of the workplace and the industry are more important than law in stimulating employee innovation and in controlling the dissemination of workplace knowledge. Not only

16 Montville (2007). 17 Pepsico, Inc. v. Redmond, 54 F.3d 1262 (7th Cir. 1995).

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do norms explain patterns of knowledge transmission associated with employee mobility among firms,18 but companies have also attempted to create workplace cultures and employee suggestion systems that stimu- late innovation within the firm when bureaucratic employment practices, corporate ownership of workplace knowledge and post-employment restrictions have removed entrepreneurial incentives for employee innov- ation.

Examples of the significance of industry norms over legal rules stretch back to the earliest period of US history. In Wilmington, Delaware in 1808, the du Pont family gunpowder company (now known as DuPont) enjoyed robust demand for its product and the competitive advantage of extensive knowledge of the chemistry of gunpowder. Competitors wished to lure away workers with knowledge of the techniques for mixing the powder and wanted to get their hands on the devices that were useful. At that time, the law of enticement prohibited recruiting employees under contract, but there was some uncertainty about whether that law could be applied to skilled male labor whose freedom to quit their employ was one of the hallmarks of their distinction from slaves or indentured servants. The various civil and criminal cases filed after an employee was persuaded to leave DuPont and to take some manufacturing devices with him ended inconclusively. But du Pont discovered that the most effective remedy was discouraging employee mobility through persuasion and force.19 A century later, when a research chemist working on artificial leather left DuPont to join his family textile firm, DuPont sued for misappropriation of trade secrets on the theory that the chemist’s knowledge was a product of DuPont research and would enable his family company to be a serious competitor in the artificial leather business. The chemist defended on the ground that the knowledge he proposed to use was only that which was common knowledge among chemists familiar with that arcane branch of materials science.20 DuPont litigated the case all the way to the US Supreme Court on the issue of how much of the company’s alleged trade secret must be revealed in litigation in order to prove misappropriation, a question that remains a hot issue for litigators today.21 But DuPont never succeeded in proving the chemist had misappropriated company knowledge. Although neither the chemist nor DuPont succeeded in the artificial leather business in that era, the case marked a conceptual transition at the company, as the

18 Feldman (2002; 2003; 2006). 19 Fisk (2008), 45–54. 20 Fisk (2008), 196–206. 21 E.I. du Pont de Nemours Powder Co. v. Masland, 244 U.S. 100 (1917).

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company insisted that the highly specialized knowledge possessed by its PhD chemists was corporate property rather than the scientific expertise of its research staff.

A company’s approach to using innovation to enhance its market position also affects how it manages employees. DuPont believed that rigorous control over the chemical knowledge of its laboratories was necessary to protect its competitive advantage. Kodak took the same position, although it also recognized that aggressive use of trademarks and marketing were as important as controlling its patents and trade secrets. In contrast, many railroads did not regard innovation, or control- ling employee innovation, as essential to their market position. Thus, the Reading Railroad did not insist on assignment of all employee patents, and was willing to ask for and pay for the use of technologies incorporating patents that its employees had developed on the job and using company resources. It did not matter that the company could claim either to own the patent outright or to have, at a minimum, a shop right to the patent.22

Whatever the default rules of corporate control of employee innov- ations may be, the historical record of many companies suggests that many employees negotiated specific arrangements that allowed for greater employee control. For example, the high-level employee at the Reading Railroad who owned the patents to an important innovation in locomotive engines may have negotiated more favorable treatment than the default rules of law would have imposed because he was in a position of power within the company. Similarly, the Rand McNally Company may have been willing to share control of copyrights to an innovative map developed by a University of Chicago geography professor who consulted with the company because the professor-cartographer enjoyed status within the firm.23 The lawyer who advised DuPont about intellec- tual property issues in the early twentieth century lamented the difficulty of getting every employee in the laboratories to sign invention assign- ment and trade secret nondisclosure agreements.24 Even in the middle of the twentieth century, when many large companies had developed bureaucratic legal and personnel policies to govern intellectual property issues, some employees maintained ownership of their patents and copyrights notwithstanding a general company policy asserting owner- ship of all employee-produced intellectual property. One example is a

22 Fisk (2008), 120–125. 23 Fisk (2008), 231. 24 Fisk (2008), 206.

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songwriter employed by the J. Walter Thompson advertising agency who copyrighted a song used in a particularly successful advertising campaign (for Kodak, as it happens).25 Successful companies differed in the degree to which they encouraged employee innovation, recruited talent versus restricted later competition, or urged employees to be entrepreneurial as an incentive to innovate as opposed to allowing them to in fact be entrepreneurial by leaving the firm.

As consolidation of intellectual property rights in the corporation reduced opportunities for individual entrepreneurship, companies began to experiment with using personnel policies to motivate employees to innovate and to capitalize upon employee tacit knowledge. One of the principal lessons to be drawn from the twentieth-century history of business innovation policies is the difficulty companies faced in using financial and other rewards to induce employees to suggest innovations. A major recent study of Bell Laboratories, the research and development arm of AT&T which pioneered the semiconductor and the laser, among other advances, suggests that the physical layout of the workplace and the company’s deliberate effort to support a combination of pure science research, engineering, and manufacturing were essential to the production of innovations.26 The study also shows that AT&T’s willingness to disseminate information about and license its inventions was crucial to the revolution in computing. The academic and trade journal literature on employee suggestions programs illustrates the limits of company power to shape the norms governing innovation.

The first study of organized efforts of companies to induce employee innovation through suggestion systems, published in 1927 by the Univer- sity of Michigan School of Business Administration and based on 60 American and British companies’ employee suggestion programs, reported that the earliest known programs (in the 1880s) were a modest form of profit sharing animated by the companies’ concern with motivat- ing employees to invent.27 At the turn of the twentieth century, many large American companies, including the National Cash Register Com- pany, Kodak, and Westinghouse, inaugurated such programs.28 The Michigan study found disagreement among managers as to whether enhancing employee voice in the workplace or monetary rewards were more effective, but the study concluded that a combination of both was

25 Fisk (2010). 26 Gertner (2012). 27 Dickinson (1927), 56. 28 Ibid; Mishra (1994), 587.

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more effective than either alone.29 One obstacle to the success of programs, said the study, was complacency among managers. It did no good to induce employees to suggest innovations if executives were unwilling to reconsider ‘their own methods and judgments.’30 Among the plans surveyed, the study found that cash awards generally were approxi- mately 10 percent of the estimated first year’s saving attributable to the innovation, although 90 percent of accepted suggestions received close to the minimum award. Successful plans included ‘continuous and varied publicity,’ ‘arrangements which tend to assure fair consideration, such as concealing suggestor’s name during investigation,’ and prompt reviews.31

A suggestion’s originality or patentability often had little to do with the size of the award, and successful suggestions often were based on better practices observed by employees in other establishments.32

In the 1950s and 1960s, a number of trade journals published articles on how to establish an employee suggestion program. They discussed cost reduction measures, the proper design of a suggestion plan manual, and ways for supervisors to stimulate idea submission. Those written by accounting staff focused on how to efficiently process suggestions, report savings, and ‘sell’ the program to employees.33 Articles by engineers concentrated more on ensuring that supervisors stimulate idea submission by remaining open to criticism and recognizing the value of employee suggestions.34 Some companies experimented with variations on employee awards. Following one employee’s suggestion, Wisconsin Power & Light created a new system: employees were issued a number of $20 certificates, which they could award to one another as they saw fit.35 In the 1970s employee suggestion systems became common in clerical and administrative operations, not just in manufacturing firms where they originated.36 Another study found suggestion systems more prevalent at large companies than at small firms.37

A number of studies attempted to document the impact of idea submission programs in the mid-twentieth century. The editor of the journal Industrial Management reported that by 1965, the tenth year of

29 Dickinson (1927), 2. 30 Ibid. 31 Ibid, 1. 32 Ibid, 13. 33 Sullivan (1949), 30; White (1952), 34. 34 Fehr (1967), 206, 208. 35 Thornburg (1994), 58. 36 Reuter (1977), 78, 81. 37 Reuter (1976), 37, 46.

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the Federal Employees’ Incentive Awards Act, government employees had made a total of 118,564 suggestions that had returned measurable benefits totalling more than $76 million.38 At General Electric, the head of employee benefit programs reported that about one of every three suggestions resulted in an award.39 By 1966, the sixtieth year of GE’s plan, more than 34,700 ideas had been adopted for an average award of $32 each.40 In 1985, members of the National Association of Suggestion Systems reported saving $1.24 billion from employee suggestions and paying out $128 million in awards.41

The dominance of Japan as a technological powerhouse in the 1970s and 1980s prompted American management theorists to propose that the US emulate the Japanese approach for encouraging and rewarding innovative employees. In a 1999 study, a team of psychology professors began with the premise that suggestion plans are a key feature of corporate productivity, and that ‘Europe in particular should be con- cerned with this issue because European workers provide very few suggestions in comparison to the Japanese’ (0.4 suggestions per year for each worker and 61.6 per year, respectively).42 They approached employee suggestion rates as an indicator of individual initiative, believ- ing that the ‘innovation at work literature should systematically include initiative as important explanatory concept.’43 By studying suggestions at a Dutch steel company, they concluded that the best way to increase suggestion rates was to focus on ‘self-efficacy and doing away with suggestion inhibitors,’ but that ‘increasing external awards for giving suggestions will probably not result in a large increase.’44 The authors reached conclusions similar to those of many Japanese companies: high employee participation results more from personal initiative than from the size of cash awards.

Scholars of knowledge management at Japanese firms identified the importance of focusing not only on hugely profitable ‘big’ ideas, but also on the hidden store of tacit knowledge among employees:

38 Burns (1965), 13. 39 Ibid. 40 Burns (1967), 15. 41 Good Suggestions Bring Good Money (1987), 14. 42 Frese, Teng, & Wijnen (1999). 43 Ibid, 1151. 44 Ibid.

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The centerpiece of the Japanese approach … depends on tapping the tacit and often highly subjective insights, intuitions, and hunches of individual employ- ees and making those insights available for testing and use by the company as a whole. The key to the process is personal commitment, the employees’ sense of identity with the enterprise and its mission.45

Japanese productivity experts call this approach ‘Kaizen Teian,’ or continuous improvement. It depends on employees’ willingness to freely contribute even the smallest ideas:

Kaizen improvement is quite different from innovation, the sort of improve- ment with which many Westerners are more familiar. Innovation implies significant, breakthrough-level progress by only a limited number of trained professionals such as engineers or managers. Kaizen improvement, on the other hand, means a continual and gradual accumulation of small improve- ments made by all employees.46

Japanese data from 1989 showed more employee participation (75 percent in Japan and 9 percent in America) and more frequent adoption of suggestions (87 percent in Japan and 32 percent in America). The disparity in participation rates was attributed to American systems being designed to promote ‘big-result ideas,’ with the result that two out of three suggestions are not used, and the Japanese system welcoming even small ideas.47 Japanese observers noted that the drawback of the Japanese system is that it can create wasteful efforts to collect, collate, and reward inept suggestions. The drawback of the American system, by contrast, is that it rejects most proposals, leading employees to feel frustrated by the system.48

The conceptualization, design, and use of employee suggestion sys- tems evolved in the 1980s and 1990s as theories of company manage- ment changed and companies began to focus more explicitly on knowledge management rather than just on idea submission. Ever since Peter Drucker declared in 1969 that America had switched from an ‘economy of goods’ to ‘a knowledge economy’49 and predicted that information-based companies would shift away from command-and- control structures as workers became more knowledgeable within their specialty, scholars and management consultants have pondered how to manage the careers of knowledge workers and to figure out how to

45 Nonaka (1996), 19. 46 Japan Human Relations Association (1992), 4. 47 Ibid, 21. 48 Ibid, 22. 49 Drucker (1969).

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control the sharing of the knowledge they possess.50 In order to stay competitive, companies would have to maximize the shared knowledge of their employees. In particular, by conceptualizing employees as capital rather than as labor, Drucker insisted that employee knowledge was crucial to productivity.51 Based on his study of the McKinsey Consulting Group, Tom Peters also promoted the shift to information-based com- panies which abandoned centralized management in favor of empowered small teams. These teams would require ‘knowledge management,’ a deliberate and continuous effort to share knowledge among employees that requires tracking and attributing employee contributions. Successful employees at McKinsey ‘contributed to the knowledge base,’ and became known for doing so, which made them more valuable in the McKinsey network.52 Peters insisted that the value of information depended not only on its availability, but also on ‘the degree to which it’s attached to credible people.’53 The shift that both Drucker and Peters described – from centralized management to diffuse teams of specialists sharing knowledge throughout the organization – may have been the secret to success at places like Lockheed’s Skunk Works, Disney, and Apple.54

Scholars who studied those organizations emphasized the importance of teambuilding and corporate culture, rather than specifics about how to manage intellectual capital. Those companies, and others with exception- ally creative teams, were held up by management experts as ‘organ- izations of the future’ because they ‘depend on the creativity of their members to survive. And the leaders of those organizations will be those who find ways both to retain their talented and independent-minded staffs and to set them free to do their best, most imaginative work.’55

Growing out of the literature on knowledge management, management scholars began to emphasize the notion that organizations must con- stantly learn in order to stay competitive. A successful learning organ- ization depends on a framework for bringing organizational patterns into focus, pays attention to the assumptions that expand or limit the goals deemed possible, and shares a vision that galvanizes the organization and teams, rather than just individuals.56

50 Drucker (1988), 45, 50. 51 Drucker (2002), 70, 76. 52 Peters (1992). 53 Ibid, 390. 54 Bennis & Biederman (1997). 55 Ibid, 8. 56 Senge (1990; 2006), 6–10.

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It is no longer sufficient to have one person learning for the organization, a Ford or a Sloan or a Watson or a Gates. It’s just not possible any longer to figure it out from the top, and have everyone else following the orders of the grand strategist. The organizations that will truly excel in the future will be the organizations that discover how to tap people’s commitment and capacity to learn at all levels in an organization.57

The advent of the Internet prompted some companies to take an open-source approach, allowing employees to post their suggestions in an online forum where others may comment on them.58

Although luminaries of the management literature agreed that organ- izations must learn by attracting ideas from their employees, and suggested the possibility of technology to enhance the process, they offered little in the way of practical guidance for recognizing employee contributions: what types of ideas to solicit and how to reward them. The Employee Involvement Association59 continues to propose lessons from successful businesses – build an integrated system rather than a stand- alone program; screen out ideas that lack value; put the burden of proof on the employee proposing the suggestion to work out the details of implementation; make the immediate supervisor the first review point; and allow teams to submit suggestions – but remains a bit vague about how exactly to do all those things.60

Moreover, for all the cheerleading in trade publications about the savings and innovation made possible through knowledge management and employee suggestions, there have been cautionary voices as well. Two principal lines of criticism emerged. First, systems often failed when they overlooked the morale of those employees who had suggestions rejected and those who did not participate.61 Without transparent proced- ures for evaluating ideas, management loses the trust and initiative of its employees. Ideas are submitted only if employees believe that the expected reward equals or exceeds the cost of creation for the individual. ‘[S]ince expectations regarding reviewer evaluation are based primarily on reviewer actions on previous ideas,’ if reviewers are perceived to have rejected too many ideas in the past, employees will believe that there is no point in submitting ideas even if reviewers change their behaviors to become more welcoming.

57 Ibid, 4. 58 Nalebuff and Ayres (2004), 18. 59 <http://www.eianet.org>. 60 Darragh-Jeromos (2005), 18. 61 Stranne (1964), 17.

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Thus, expectations regarding organizational rewards for idea flow effort are modified downward … . As new employees enter the organization they learn these low expectations from the veterans who have traversed full cycle. In such an environment it is little wonder that potentially creative employees fail to realize their potential and appear to ‘go dry’ over time.62

A second criticism of corporate efforts to solicit employee innovations focuses on the difficulty of coordination among groups. Although groups of employees working together might be most likely to make the strongest suggestions, the promise of cash rewards can make it difficult for groups to cooperate in the design of the suggestion.63 One study found that ‘individuals often are reluctant to share large rewards, and therefore are less likely to embrace developing their ideas in teams. This means that large rewards actually may inhibit implementation.’64 More- over, team members hold back when they lack trust in the organization: ‘Potential participants fear the credit for their ideas will be stolen’ and ‘do not want to become detached from their ideas. They don’t want others to work on and implement their ideas without their involvement.’65

Compared to other types of merit pay, one study found that ‘idea generation is not an effective strategy for obtaining organizational rewards because the mechanisms for scheduling review and measuring achievement are less well defined.’66

A 1972 study of employee trust in knowledge management used the concept of knowledge ‘markets’ to explain how ideas are exchanged within a company.67 The study found that credit and attribution are essential to a successful knowledge market, because they are necessary to establish trust. Trust ‘is an essential condition of a functioning knowledge market, as it is of any market that does not depend on binding and enforceable contracts. … [T]he knowledge market – with no written contracts and no court of appeals – is very much based on credit, not cash.’68 In this analysis, employees will trust the organization enough to transfer knowledge to their colleagues only if trust is ‘visible’ (people are seen to get credit for knowledge sharing), trust is ‘ubiquitous,’ and upper management refrains from ever exploiting another’s knowledge for

62 Baker & Freeland (1972), 105, 110, 111. 63 Stranne (1964), 18. 64 Wood (2003), 22, 26. 65 Ibid, 23. 66 Baker & Freeland (1972), 105, 110. 67 Davenport & Prusak (1998). 68 Ibid, 35.

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personal gain without giving credit and reward to the person who shared the knowledge.69

At the advent of the twenty-first century, scholars pored over the law and business practices of Silicon Valley, trying to discern the legal regime most conducive to the vibrant innovation and start-up culture of the 1980s and 1990s. One theory was that California does not enforce non-compete agreements, which enables employees to switch jobs and take economically valuable knowledge to places where it will be put to its best use.70 Other theories focused on trade secret law. Much of the knowledge that employees took with them might be protectable as a trade secret and thus knowledge transfers associated with employee mobility might have been prevented regardless of the existence of non-competes. The similarity between California trade secret law and that of many other states (and that in the Restatement described above) has prompted other scholars to focus on reasons why Silicon Valley employers refused to file trade secret litigation against competitors who lured away valuable employees.71 Among the theories offered for the reluctance to sue were the possibility that employers thought litigation would be useless and the possibility that they did not want to get the reputation of restraining entrepreneurial employees and they cared more about their reputation for recruiting the best and the brightest than about protecting their trade secrets.72 Still other scholars have explored the role of social norms in explaining what employees regard as a trade secret and when they divulge information that they might regard as a trade secret.73

4. CONCLUSION

Over the last two centuries, companies have pursued a wide array of policies for the management of employee workplace knowledge and mobility, recognizing that the norms of the workplace and the industry were more important for exercising control over employee innovation than were legal rules. Of course, the management of employee know- ledge is only part of a company’s overall strategy with respect to intellectual property and innovation. Nineteenth-century railroad com- panies were fairly lax about employee-generated intellectual property, but

69 Ibid. 70 Saxenian (1996). 71 Gilson (1999). 72 Hyde (2003, 2007). 73 Feldman (2002, 2003, 2006).

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they also did not seek market dominance through innovation. Kodak, on the other hand, was very aggressive about technical innovation and about controlling employee knowledge, but its aggressive pursuit of innovation was also tied to aggressive marketing of its products. Given all the other factors that affect company success, it is difficult to say whether one strategy or another is more or less conducive to economic growth or market dominance. Eventually, of course, technological change left both railroads and Kodak behind. In the aggregate, rigorous protection of corporate property rights in employee-generated innovations is un- necessary for robust economic growth.

Although this chapter was invited to consider the lessons of history for legal scholars interested in business innovation, and it duly offers two, the lessons of history can often be stated with confidence only at such a high level of abstraction as to offer little guidance on the concrete choices facing contemporary actors. The lessons offered here – (1) the law governing ownership of employee innovation and controlling employee mobility will likely remain messy; and (2) the norms of the workplace and the industry may be as important as law in shaping employee innovation – are more in the nature of cautionary notes than they are proposals for action by lawyers or testable hypotheses for scholars.

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Drucker P.F. (2002), ‘They’re Not Employees, They’re People’ (Feb.) Harvard Business Review 70

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(Summer) Journal for Quality & Participation 22

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PART IV

The competition law perspective on protecting business research and development

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  • ADP99BF.tmp
    • Taking the long view on competition and the mobile employee: lessons from the United States
    • history of efforts to regulate employee innovation
    • and the mobility of workplace knowledge
    • Catherine Fisk