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Abstract
Much knowledge is diffused by the exchange of property rights in intangibles. But tacit knowledge, not being subject to property rights, is instead diffused by migration of knowledgeable individuals between firms. The law impacts significantly on this diffusion mechanism, in particular those rules that determine the use individuals may make of their tacit knowledge after migration to a different firm. The general principle underlying the relevant law is that individuals are free to migrate with all their tacit knowledge. Nonetheless there are some narrow exceptions to this principle. That these exceptions remain narrow and carefully policed by the courts is important because imposing too many restraints on use of tacit knowledge post‐term would have a negative impact on real innovation.
Notes
1. My thanks to Peter Hall and his colleagues Max Tani, Garrett Upstill and Gary Lea at the UNSW/ADFA in Canberra and also to Peter Drahos of RSSS at ANU and Ulf Petrusson of the University of Gothenburg for helpful comments and discussions. The Faculty of Law at Bond University, Gold Coast, Queensland funded the invaluable help of my research assistant, Annie Gagne.
2. See Michael Polanyi, Personal Knowledge: Towards a Post‐critical Philosophy, Routledge and Keegan Paul, London, 1958; and M. Polanyi, ‘The logic of tacit inference’, Philosophy, 41, 1966, pp. 1–18.
3. P. Drahos ‘The regulation of public goods’, Journal of International Economic Law, 7, 2, 2004, pp. 321–99, at p. 321.
4. Mansfield refers to ‘embodiment’ to describe knowledge that is included in things rather than in codes: see Edwin Mansfield, The Economics of Technological Change, Norton & Co, New York, 1968, pp. 3–4, as referred to by Drahos in ‘The regulation of public goods’, op. cit., p. 328.
5. See W. van Caenegem, ‘Intellectual property and the idea of progress’, Intellectual Property Quarterly, 3, 2003, p. 237.
6. B. Ancori, A. Bureth and P. Cohendet point out that expansion of the codified knowledge base is often seen as the key characteristic of the development of modern economies and this has ‘contributed to the legitimation of the approach whereby the analysis of knowledge is restricted to its codified form’: see B. Ancori, A. Bureth and P. Cohendet, ‘The economics of knowledge: the debate about codification and tacit knowledge’, Industrial and Corporate Change, 9, 2, 2000, pp. 255–87 at p. 256. They maintain this view is challenged by evolutionary economists and others who ‘[…] highlight the importance of the learning processes by which knowledge is produced and underline its contextual features. Even the most codified knowledge‐scientific knowledge‐cannot systematically be transferred […] scientific knowledge is not diffused; it is replicated with high costs, because what is [sic] replicates are the structures of research […] and not the results themselves’ (at p. 257). Roberts also criticises the focus on codification: ‘[K]knowledge is distinct from information; indeed, it is more than information, since it involves an awareness or understanding gained through experience, familiarity or learning. […] Knowing is an active process that is mediated, situated, provisional, pragmatic and contested’. See J. Roberts, ‘The drive to codify: implications for the knowledge‐based economy’, Prometheus, 19, 2, 2001, pp. 99–116 at p. 110; citing F. Blackler, ‘Knowledge, knowledge work and organizations: an overview and interpretation’, Organization Studies, 16, 6, 1995, pp. 1021–46.
7. See on the balance between intra‐firm incentive and external incentive to create, B. Holmstrom and P. Milgrom, ‘The firm as an incentive system’, The American Economic Review, 84, 4, 1994, pp. 972–91. The authors point out that inventive or creative work demands a relatively high degree of autonomy and freedom of action, as well as communication, which tends to sit badly with the nature of internal organisation, and better with external contracting. In commenting on the choice between internal procurement and external contracting, they point out that the former usually involves supervision, use of firm resources and fixed wages, whereas the latter tends towards freedom of action, use of tools by the contractor and payment on the basis of what is supplied (at p. 972).
8. Naturally employment is not the only organisational structure an individual can opt for when undertaking inventive activity; independent work as an external contractor is the principal alternative. The standard consideration for an employee is salary, which is relatively inflexible, and Holmstrom and Milgrom ask whether it might constitute a sub‐optimal incentive. They point out that ‘[…] the use of low‐powered incentives within the firm, although sometimes lamented as one of the major disadvantages of internal organization, is also an important vehicle for inspiring cooperation and coordination’ (Ibid., p. 989). As to the advantages and disadvantages of organisation as a firm, and concepts of the firm, see D. Burk, ‘Intellectual property and the firm’, The University of Chicago Law Review, 71, 2004, p. 3.
9. Migration of tacit knowledge between firms can be on a non‐competitive basis: see J. Gans, D.H. Hsu and S. Stern, ‘When does start‐up innovation spur the gale of creative destruction?’, Rand Journal of Economics, 33, 4, 2002, pp. 571–86 (concerning cooperation vs competition approaches to knowledge creation).
10. Such allocation is characteristic of planned economies but also of public sector research; see concerning planned innovation, W. van Caenegem, ‘Inventions in Russia: from public good to private property’, Australian Intellectual Property Journal, 4, 1993, p. 232. For a consideration of a non‐market approach, see S. Shavell and T. van Ypersele, ‘Reward versus intellectual property rights’, The Journal of Law and Economics, 44, 2001, pp. 525–47.
11. At the time of initial bargaining both employer and employee know relatively little about each other’s tacit knowledge and trade secrets, which, as Merges points out is ‘[…] notoriously difficult to disclose […] in a bargaining context’: see R. Merges, ‘The law and economics of employee inventions’, Harvard Journal of Law & Technology, 13, 1999, pp. 1–54 at p. 23.
12. A regulatory environment where migration between firms is not excessively restrained by other norms is presumed.
13. See e.g. M. Lemley, ‘Ex ante versus ex post justifications for intellectual property’, The University of Chicago Law Review, 71, 2004, p. 129. See also J. Duffy, ‘Rethinking the prospect theory of patents’, The University of Chicago Law Review, 71, 2004, p. 439; W. Kingston, ‘Innovation needs patent reform’, Research Policy, 30, 3, 2001, pp. 403–23; W. Kingston, ‘Why harmonization is a Trojan horse’, European Intellectual Property Review, 26, 10, 2004, pp. 447–60; and W. Kingston, ‘Intellectual property needs help from accounting’, European Intellectual Property Review, 11, 2002, pp. 508–15.
14. The parameters of the relevant literature are interestingly circumscribed in O. Granstrand, ‘Innovation and intellectual property studies’, in Ove Granstrand (ed.), Economics, Law and Intellectual Property, Kluwer Academic Publishers, 2003, p. 9.
15. See R. Cowan, P. David and D. Foray, ‘The explicit economics of knowledge codification and tacitness’, Industrial and Corporate Change, 9, 2, 2000, pp. 211–53. In their critique of this paper, B. Johnson, E. Lorenz and B.A. Lundvall, in ‘Why all this fuss about codified and tacit knowledge’, Industrial and Corporate Change, 11, 2, 2002, pp. 245–62, closely investigate the usefulness of the terms and deplore their vagueness and crudity. See also in the same issue, P.Cohendet and W. Steinmueller, ‘The codification of knowledge: a conceptual and empirical exploration’, Industrial and Corporate Change, 11, 2, 2002, pp. 195–209; and Ancori et al., op. cit. See also P. Nightingale, ‘If Nelson and Winter are only half right about tacit knowledge, which half? A Searlean critique of “codification”’, Industrial and Corporate Change, 12, 2, 2003, pp. 149–83; and R. M. Casselman and D. Samson, ‘Moving beyond tacit and explicit: four dimensions of knowledge’, IPRIA Working Paper, June 2004 (available from the Intellectual Property Research Institute of Australia website at http://www.ipria.org/publications/workingpapers.html).
16. Nelson argues certain human pursuits are resistant to codification: see R. Nelson, ‘On the uneven evolution of human know‐how’, Research Policy, 32, 6, 2003, pp. 909–22.
17. Ancori et al., op. cit. set out the two extremes, the ‘absolutist position on codification’ (all knowledge can be codified), and the ‘absolutist position on tacit knowledge’ (codified and tacit knowledge are complementary; at p. 257). They emphasise the difference between information and knowledge. According to Nelson, researchers such as Cowan and Foray have argued that ‘the extent to which a technique is tacit or articulated and codified depends to a good extent on the magnitude and skill of the efforts to codify it’ (Nelson, op. cit., at p. 920).
18. Roberts emphasises that the drive to codify comes at the expense of tacit knowledge: ‘It is argued that the codification of knowledge favours procedural thinking and creativity whilst also reducing ambiguity and uncertainty. Intuitive thinking and serendipitous creativity, which often occur in ambiguous and uncertain circumstances, are consequently neglected’ (Roberts, op. cit., at p. 100). Roberts also emphasises the ‘dynamic qualities [of knowledge] and its connection to a specific social and cultural context’ (also at p. 100). Johnson et al., op. cit. at p. 4 say that Cowan, David and Foray, whom they criticise on many points, do recognise that codification is not the only way in which knowledge is made available for transfer, because they recognise that ‘Thick labour markets may substitute for the transfer of codified knowledge and knowledge may be stored in the people belonging to an organisation’. They stress that codification can in fact decrease efficiency because of a misallocation of resources. Codification misses things that are not codifiable: ‘Crucially important connections between different kinds of knowledge have been cut in a futile pursuit of codification based on exaggerated expectations of its benefits. The realm of tacit knowledge has been decreased and it is not obvious that it has been “to good effect”’ (at p. 7).
19. In terms of the human element in communication, Marschak distinguishes between transmission which is best conducted by machines, and the processes of encoding and decoding, which are human tasks: see J. Marschak, ‘The economics of language’, in D. Lamberton (ed.), The Economics of Communication and Information, Edward Elgar, Brookfield, USA, 1996, at p.523. As to ‘articulation’, see Nightingale, op. cit.
20. Newmeyer points out that language has two distinct purposes: one is for cognition, that is ‘for the representation of meaning and the process of thinking’, the other is the application of language ‘as the primary agent of interaction among members of our species’; in other words‐communication; see F. Newmeyer, ‘Cognitive and functional factors in the evolution of grammar’, European Review, 12, 2004, pp. 245–64, at p. 246. Codification relates to the use of language for cognitive processes.
21. Ancori et al., op. cit. point out that tacit knowledge is required to make sense of codified knowledge; and knowledge is, as well as being individual, also social and embedded: knowledge results from a social process. There is a risk of undervaluing the learning process and overvaluing the transfer of codified knowledge: the latter is only part of the story of the exchange of knowledge and information. The authors point out that ‘(i) knowledge is closely dependent on the cognitive abilities of the actors who hold it and (ii) knowledge cannot be considered separately from the communication processes through which it is exchanged’ (at p. 265).
22. As division of labour becomes more complex, the importance of the efficient exchange of information grows: see A. Leijonhufvud, ‘Information costs and the division of labour’, as reproduced in Lamberton (ed.), op. cit. at pp. 13–24. Authors also emphasise the importance of close connections between firms or between firms and academe; see e.g. Nelson’s emphasis on the importance of two‐way interaction between applied and basic science (Nelson, op. cit.); and also see Johnson et al., op. cit.
23. Roberts, op. cit. at p. 102. Roberts says ‘the transfer of tacit knowledge over distance requires the movement of people, without which tacit knowledge must be discovered independently’ (at p. 103).
24. Whitley focuses on migration between public and private sector R&D: or in his terms, research primarily undertaken for publication, and other research: R. Whitley, ‘Competition and pluralism in the public sciences: the impact of institutional frameworks on the organisation of academic science’, Research Policy, 32, 6, 2003, pp. 1015–29, at p. 1016. In a rapidly changing research environment, it is crucial for advanced technology firms to be able to ‘acquire new skills rapidly’ (at p. 1017). Whitley emphasises that what advanced firms need in conditions of ‘technical uncertainty’ is rapid and flexible access to the requisite skills and knowledge of what he calls ‘generic processes and phenomena’.
25. R. J. Sternberg, J. C. Kaufman and J. E. Pretz, The Creative Conundrum, Psychology Press, New York, 2002, define creativity as ‘the ability to produce work that is novel (i.e. original, unexpected), high in quality, and appropriate [by which they mean useful, meeting task constraints]’ (at p. 1), where they also argue that ‘Creativity may be viewed as taking place in the interaction between persons and their environments’ [italics added], citing some literature to support this. ‘Thus the essence of creativity cannot be captured as an intrapersonal variable’ (at p. 1). Similarly, for Whitley, op. cit. the term innovation is used here to refer to ‘public, social and communicative process rather than to a private, intellectual and psychological act’ (at p. 294).
26. Roberts refers to the point made by Nonaka and Takeuchi that it is in the interaction between tacit and codified knowledge that new knowledge is created: ‘Their [Nonaka and Takeuchi’s] dynamic model of knowledge creation is anchored to a social interaction between tacit knowledge and explicit knowledge’, Roberts, op. cit. at p. 102; citing I. Nonaka and H. Takeuchi, The Knowledge‐creating Company: How Japanese Companies Create the Dynamics of Innovation, Oxford University Press, Oxford, 1995.
27. As to the restraint on the sharing of information due to patent‐consciousness, see J. Grushcow, ‘Measuring secrecy: a cost of the patent system revealed’, The Journal of Legal Studies, 33, 2004, pp. 59–84.
28. The negative effects of rigid labour markets on innovation are well recognised. It is clear that in a flexible labour market individuals are motivated to learn about other firms and organisations, which they would not do if nothing was to be gained from it. One of the functions of codification of knowledge and of intellectual property acquisition, is the publication of the firm’s knowledge and technological base for the purpose of building reputation and thus attracting productive staff.
29. For instance, Di Gregorio and Shane observe that university intellectual property policies have a bearing on the question of incentives and the motivation to shift organisations: see D. Di Gregorio and S. Shane, ‘Why do some universities generate more start‐ups than others’, Research Policy, 32, 2, 2003, pp. 209–27. Practical issues, such as family, work conditions and economic incentives, naturally affect diffusion of knowledge through personal mobility.
30. Subramanian points out that ‘[a] firm provides an employee with access to its critical resource, in order to foster the right kind of firm‐specific investments [sic] from the employee. In doing so, however, the firm allows the employee to develop human capital that can be used even outside the firms’: see Narayanan Subramanian, ‘The economics of intrapreneurial innovation’, at http://people.brandeis.edu/∼nsubra/wp/intrap.pdf. Whether and why start‐ups are ever efficient given the loss of complimentarity involved is also examined in J. Bankman and R. Gilson, ‘Why start‐ups?’, Stanford Law Review, 51, 1999, p. 289.
31. As Cooper says: ‘Intense movement of workers and information suggests a limited capacity of firms to appropriate the gains from their knowledge, leading to under‐investment’: see D. P. Cooper, ‘Innovation and reciprocal externalities: information transmission via job mobility’, Journal of Economic Behaviour and Organization, 45, 4, 2001, pp. 403–25, at p. 405. Arguably there is a competition between firms and workers: workers try to develop their own knowledge base with a view to benefiting from it in the labour market place, whereas firms want to exploit the knowledge of their workers. As Cooper says: ‘The story fits one of workers and firms, where workers invest in human capital and firms invest in techniques to utilize that human capital’ (at p. 407).
32. Cooper focuses on the firm’s ability to appropriate the benefits resulting from research, and sees employee mobility as a potential loss: ‘[w]orkers may exercise de facto property rights by migrating to a higher‐paying rival’ (Cooper, op. cit. at p. 404). His paper ‘examine[s] firms’ incentives to undertake research activity in a competitive environment where such job mobility is a consistent possibility’ (also at p. 404). He makes the point that intensive inventive activity often seems to coexist with ‘significant information externalities, of which job mobility is a prominent example’ (at p. 404). He asks the question: ‘Can the market compensate firms for information lost to the competition through worker‐migration?’ (at p. 404). He points out that worker mobility conditions ‘[…] always increase the overall rate of technical progress. As a result, contractual clauses and other means intended to reduce mobility, will generally be welfare decreasing’ (at p. 404). Nonetheless we also need to stress the need for firms to control knowledge to some extent, even tacit knowledge. Cooper analyses the concept of spill‐over and points out that ‘Arrow (1962) recognized worker‐mobility as a distinct source of potential spill overs’ (at p. 405). But where it comes to worker mobility as a spill‐over there are important differences with the traditional notion of spill‐over: (1) information only spills to one additional firm rather than globally; (2) the spill‐over rate is endogenously determined by the rate of job mobility; and (3) the firm loses some of its knowledge when the worker leaves as it is embodied knowledge: it loses the benefit of that knowledge (all at p. 405).
33. Or, in other words, there are complementarities between the knowledge of the employee and the other assets of the firm; hence, as Merges points out, inventions of employees are likely to be related to the business, if made with firm resources etc.: see Merges, op. cit.
34. However, see e.g. the Restraints of Trade Act 1976 (NSW).
35. There are other rules, such as those concerning ownership of inventions, that could be considered relevant as having an impact on employees’ knowledge resources, but they are relevant to codified and recorded knowledge as opposed to tacit knowledge.
36. This duty can be seen as an implied term of the contract of employment; see the very comprehensive work by Robert Dean, The Law of Trade Secrets and Personal Secrets, Law Book Company, Sydney, 2002.
37. For a recent consideration of these issues see Victoria University of Technology v Wilson & Ors [2004] VSC 33 (18 February 2004).
38. Merges refers to an ‘escape hatch’ by which the law allows employees to leave a firm before an idea is materialised (Merges, op. cit.). He says ‘[…] an employee is in general free to leave a firm, develop an inchoate concept, and enjoy full ownership of the resulting invention. Thus, employee mobility continues to be an important policy informing both trade secret law and the law of ex‐employee invention ownership’ (at p. 51). See also Secton Pty Ltd v. Delawood Pty Ltd (1991) 21 IPR 136.
39. In Wright v Gasweld (1991) 22 NSWLR 317 Gleeson, CJ said: ‘An employer is not entitled to protect himself against mere competition by a former employee, and the corollary of that is that the employee is entitled to use skill, experience and know‐how acquired in the service of the former employer in legitimate competition. It is in the public interest that this should be so. … At the same time the law will protect trade secrets and confidential information, and will intervene to prevent their misuse’. See also Kone Elevators Pty Ltd v Mcnay & Anor (97001518; NSWSC); and Stenhouse Australia Ltd v Phillips [1974] AC 391, 400.
40. See e.g. AT Poeton Ltd v Michael Ikem Horton [2001] FSR 169.
41. Faccenda Chicken Ltd v Fowler [1987] Ch 117.
42. It may be that in some jurisdictions the courts are more ready to categorise certain kinds of knowledge as ‘true’ trade secrets or confidential information. But even if there are more successful cases or more cases taken to litigation, they still only represent the tip of the iceberg of tacit knowledge, and are severely constrained as far as legal threshold tests are concerned.
43. See e.g. GD Searle & Co Ltd v Celltech Ltd [1982] FSR 92.
44. In United Indigo Chemical Company Ltd v Robinson [1931] RPC 178 Bennett J held that it would be almost impossible to restrain the defendant from using ‘information he could not help acquiring’ (at p. 187). An injunction would restrain him from using his knowledge, skill and experience in the service ‘of any one else but the plaintiffs’ (at p. 187, quoting from Herbert Morris). The key point is that information can be confidential during employment, but not necessarily remain so after employment, a point stressed by Laddie J in Ocular Sciences, as pointed out in B. Gray, ‘Ocular Sciences: a new vision for the doctrine of breach of confidence?’, Melbourne University Law Review, 23, 1, 1999, p. 241 ff.
45. In Printers and Finishers Ltd v Holloway [1965] RPC 239 at 256 Cross J points out that an employee cannot be restrained by a court of law from using matters he generally recalls about the plant, processes, machinery of his ex‐employer. ‘Recalling matter of this sort is, to my mind, quite unlike memorising a formula or list of customers or what was said (obviously in confidence) at a particular meeting’. There is nothing wrong with an ex‐employee relying on such recall and even if what he recalls was rather particular to the ex‐employer’s processes and factory, it ‘is not readily separable from his general knowledge […] and his acquired skill […]’ (at p. 256).
46. In Maggbury Pty Ltd v Hafele Australia Pty Ltd [2001] HCA 70 (13 December 2001) the judges of the High Court split on the question whether the traditional rule rendering restraints of trade even voluntarily entered into unenforceable should continue to apply today, when there is more equality of bargaining power between better‐informed parties.
47. In Triplex Safety Glass v Scorah [1937] RPC 21 a contractual clause stipulated that the knowledge that the employee gleaned or discovered ‘shall be the exclusive property of the Company’. This was too wide a term and unenforceable (at p. 28). See also Electrolux v Hudson [1977] FSR 312; and A. Monotti, ‘Who owns my research and teaching materials: my university or me?’, Sydney Law Review, 19, 4, 1997, p. 425.
48. See Nordenfeldt v Maxim Nordenfeldt, Guns & Ammunition Co Ltd [1894] AC 535; and Herbert Morris Ltd v Saxelby [1916] 1 AC 688, 715.
49. Nordenfeldt v Maxim Nordenfeldt Guns & Ammunition Co Ltd (1894) AC 535, also stands for the exception to the general principle. Partial restraints of trade are enforceable if reasonable, that is ‘[…] in reference to the interests of the public, so framed and so guarded as to afford adequate protection to the party in whose favour it is imposed, while at the same time it is in no way injurious to the public’ (per Lord Macnaghten at p. 565). See also e.g. Haynes v Doman [1899] 2 Ch 13, 19 and Littlewoods Organisation Ltd v Harris (1977) 1 WLR 1472, 1485.
50. In Herbert Morris Ltd v Saxelby [1916] AC 688, Lord Atkinson points out that the employer is ‘[…] undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value. And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use’ (at p. 702). But his skill and knowledge of his trade or profession he must be able to use: so much benefits him, and is also in the public benefit. Thus a restraint to protect a real trade secret, such as a manufacturing process, is legal, but one which stretches beyond that is not. In Commercial Plastics v Vincent (1964) 3 WLR 820, the judgement of the Court (Sellers, Pearson and Salmon LJJ) contains the following passage: ‘It is clear from the authorities that the plaintiffs were not entitled to impose a restriction which would prevent the defendant from using in competition with the plaintiffs the skills and aptitude and general technical knowledge acquired by him in his employment by the plaintiffs. The restriction has to be justified in this case as being reasonably required for the protection of the plaintiffs’ trade secrets by preventing the defendant from disclosing confidential information imparted to him by the plaintiffs in the course of his employment’ (at p. 826).
51. In Brightman Rich J held the object must be ‘to prevent rivals in trade becoming acquainted with the secrets of the internal management of the business and with the names of customers’: Brightman v Lamson Paragon [1914] 18 CLR 331.
52. See the discussion in Wright v Gasweld Pty Ltd (1999) 22 NSWLR 317 Gleeson CJ disagreeing with Kirby P and Samuels JA as to what kind of information can justify the protection of a covenant. For another example, see also Weldon & CO v. Harbinson [2000] NSWSC 272 (7 April 2000).