The possible scope for competition policy safeguards in the field of trademark law has received relatively little attention from policymakers in recent years, at least by contrast with other areas of intellectual property (IP). Yet, given the significant market power afforded by brands in the contemporary marketplace, the exercise of rights by incumbent trademark owners may have a significant effect on competition.

Innovation is both a central aspect of industry policy and a crucial management issue for individual firms. Governments strive to devise policy settings that encourage innovation in industry; and no individual firm can ignore the innovation imperative in its decision-making. The distinct factors that determine the shape and size of the innovation spend are many and varied, complex in their interaction and challenging to conceptualise. Inventive individuals, firms and institutions are motivated by incentives ranging from the purely personal to the structural, including the competitive imperatives of market dynamics. In industry, a firm's R&D investment decisions are influenced by its perceived ability to capture sufficient returns from innovative products introduced into a competitive market where consumers determine commercial success. By deploying various strategies, individually or in combination, an innovative firm can profit from innovation even in the presence of avid imitators. Many available strategies are practical (for instance keeping an invention secret, or relying on imitation lag), and are considered in the broader innovation management literature. This book focusses on the role of law, ie of reliance on the various rights and remedies of intellectual property law to prevent or limit imitation and increase returns from innovation.

The subsistence, structure, scope and interaction of relevant intellectual property rights impacts on individual decisions to invest in innovation, so they are a significant topic of study and evaluation from the innovation and technology policy perspective.

Introduction

Policy context

[Form and function] Intellectual property law makes a significant if imperfect distinction between monopolisation of form and of function. Patents law bestows rights related to the functionality of inventions; by contrast, copyright and designs legislation grants exclusive rights in form or visual appearance only. Copyright and design rights, with their narrower scope, are therefore relevant only if a firm sees commercial value in the specific appearance of its product. As an illustration, take an original technical drawing (a copyrightable ‘artistic work’) of an automotive spare part incorporating improved functionality compared to the prior art. Such a drawing may serve the purpose of describing the invention as claimed in a patent application. If a patent is granted, others will not be able to make a product with the same improved functionality even if it looks different. Contrast that with copyright or design rights in the same drawings: they prevent competitors from copying the drawing as such, or from making a three-dimensional (3D) article reproducing the drawing, but not from making a product that looks different but incorporates the same improved functionality. Nonetheless copyright or designs registration may go some way to monopolising function, if the shape or appearance of the product is integral to its functionality – in other words, if an article must have the same form to achieve the same functionality.

Introduction

[The contents of this chapter] Chapters one to four considered various legal regimes that are technology-neutral; ie whose subject matter is not limited to a specified technology or product. The majority of intellectual property law is of this nature, promulgating abstract standards that apply to a wide range of products and processes, innovations and technologies to determine whether they are entitled to some form of legal protection. However, two regimes are technology-specific: layouts of integrated circuits are the subject matter of the Circuit Layouts Act 1989 (Cth) and plant varieties are covered by the Plant Breeder's Rights Act 1994 (Cth); these regimes are known as sui generis, in that they are tailored to a specific product.

The emergence of computer programs triggered a debate on the adequacy and suitability of existing technology-neutral regimes, and the option of crafting a new special regime; but ultimately the alternative of adapting the rules of copyright to accommodate computer programs prevailed. Nonetheless, since computer programs are functional, unlike any other copyright subject matter, statutory rules and judicial approaches have since been adapted, so that computer program copyright has developed into a ‘sui generis system within a system’. This is one reason for covering the topic here, but this also permits comparing computer program copyright with software patents, the other available option. After initial resistance, over time the suitability of patent protection has become accepted, so software patents are now more common.

Introduction

[This chapter] This chapter concerning trade secrets or ‘confidential information’ consists of two main parts. The first part initially focusses on policy context, and then on the elements of the equitable action for breach of confidence itself; the second on a significant sub-category of confidential information: knowledge acquired by employees. This topic merits separate attention: first, because of the frequency of conflict about and the density of contractual terms concerning the dividing line between employers' trade secrets and employees' private knowledge. Secondly, because portability of employee knowledge impacts significantly on knowledge diffusion and therefore on innovation as a whole.

[Trade secrets?] This book is primarily concerned with technical trade secrets, ie information related to product and process innovation in a broad sense. But the applicable action in Australian law, the equitable action for breach of confidence, has a far broader remit, covering all confidential information, whatever its nature: from private confidences, to commercial or business secrets, to what is sometimes known as ‘know-how’, ie those technical secrets associated with patented inventions. Section 1a below considers some policy issues concerning the legal protection of trade secrets, against the background of a significant strategic choice for the innovative firm: between trade secrets protection and patenting. As will be further addressed in the next chapter, patents law is a system of monopolistic proprietary rights in inventions, based on application and grant on the basis of threshold tests of novelty and inventiveness, and with a limited monopoly term of 20 years.

[This chapter] This chapter concerns the relationship between intellectual property (IP) law and innovation in technology and product design in general. Further chapters return to this topic but within the specific confines of particular legal regimes, such as patents, designs or copyright. A major premise underlying this book is that innovation and imitation are predictable competitive behaviours in a market economy. The choice between the two strategies, in the absence of rule constraints, seems to favour imitation: innovation is uncertain, requires diversion of scarce resources from other activities, and risks immediate subversion by competitive imitation. Imitators on the other hand tread a known path, avoid all the risk and expense of innovation, and can enjoy the full benefit of their natural advantages. Nonetheless, to innovate is a natural ambition, and non-legal strategies allow innovators to capture greater returns from innovation than imitators. Naturally, even though we speak of imitation and innovation as alternatives, they are often closely intertwined processes: firms innovate but also imitate, or imitate but also innovate, and the competitive process may not be accurately identified as entirely one or the other.

[Law, innovation and imitation] Certain parts of intellectual property law act to recast the parameters within which imitation/innovation decisions are made. These rules constrain imitation as a competitive conduct. The central argument justifying this normative interference is that greater social welfare results where the ‘natural’ balance between imitation and innovation is disturbed to favour the latter.

Introduction

[Relationship with trade secrets law] The previous chapter discussed how the law assists commercial actors to preserve secrets, including innovative products or processes. But relying on trade secrets law leaves the innovative firm exposed to two major risks of subversion: by independent invention and by reverse engineering by competitors. The law of confidence recognises neither property rights nor anything approaching a monopoly in secrets. It has particular drawbacks for a firm investing substantial resources in innovation, where commercial exploitation exposes it to the risk of reverse engineering and subsequent imitation.

Trade secrets law is also beset by problems of demarcation and by uncertainty. Patents law addresses these problems by ex ante demarcation of subject matter and grant of exclusive rights, more akin to a real monopoly: neither reverse engineering nor independent invention nor publication gives competitors the right to use a patented invention – even if and when in genuine ignorance of the patentee's invention or the patent. This absolute right to prohibit commercial exploitation has potentially serious implications for competitors, so a patented invention needs to be carefully identified, demarcated and circumscribed, and a system devised to alert others of the existence of legal rights (a public register). Furthermore, some quality assurance is essential to ensure that whatever attracts such extensive rights meets certain standards of innovativeness, so that the system induces dynamic competition and is potentially welfare-enhancing.