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How Employers Can Enforce Confidential Information

My reply to a question re my article “Goods, Scarce and Nonscarce”: the questioner asked:

Would contract that ask employee not to reveal secret production information about the firm where he work would be legal?

Can contract protect firm from their employee about revealing nonscarce information?

My view is the Evers-Rothbard title theory of contract is basically correct–I elaborate on it in my JLS article A Libertarian Theory of Contract: Title Transfer, Binding Promises, and Inalienability. See also the “Trade Secret” section (note 90 etc.) of Against Intellectual Property.

Under this view, there are at least two ways to look at this. First, the employer can require as a condition of employment that the employee contractually obligation himself to pay certain monetary damages to the employer, in the event he reveals certain confidential information.’

Another possible way to look at it is that the owner of property–say, a factory–has the right to grant or deny permission to people to use it. If someone uses the property without permission it is a form of trespass, which is a crime or tort, with associated damages or penalties. The permission can also be conditional–you may use my factory for XYZ purposes but not ABC uses. I the employee knowingly does ABC with the property it is an unconsented to use and arguably at type of trespass, and may be treated as such (though in my view this would probably still just be handled by contract instead: the contract would say that IF the employee does ABC with Employer’s property, THEN certain monetary damages are owed–just a title transfer).

The problem I see with treating the trade secret breach as a trespass instead of contractual damages issue is that when the employee is at his home or off company premises and reveals information, he is not trespassing since he is not using the company’s property (information is not property, it’s just knowledge). So this can only trigger a contractual damages payment. For there to be trespass he would have to misuse company property. But when he is using the company property and learning its trade secrets presumably this is consented to. But suppose he uses company property (building, rooms, computers) to access information he is not supposed to have access to–in this case, he is committing trespass to acquire the confidential information. In this respect he is just like a burglar who breaks in and acquires information by an act of aggression (trespass, breaking and entering). When there is a crime or tort, there are certain penalties or consequences to the malfeasor–monetary damages (restitution) at the least, and possibly retribution or incarceration (for more on this see my JLS article Punishment and Proportionality: The Estoppel Approach).

Note, however, that once the employee does make the information public, there is nothing the previous “owner” of the information can do to stop third parties from using this information (this is the law right now, by the way, with respect to trade secrets: once the information is no longer secret, it’s just not a trade secret any more. The only remedy is against the former employee. See also the discussion in Against IP of “Cooter” and the oil information in the “Contract vs. Reserved Rights” section.

{ 1 comment… add one }
  • Joel August 27, 2010, 5:26 pm

    What about non-secrets? Could an author, for example, effectively recreate copyright through contracts, by refusing to sell any copies of his book unless the purchaser agrees to sign a contract agreeing to never make any copies or allow anyone else to make any copies of the book? Would such contracts be legal?

    Of course even if the contract is binding, if a purchaser broke the contract and gave a copy to a third party, then that third party is not bound by it and could copy freely, though the purchaser would be liable for damages? But other than that difference, couldn’t we end up with roughly the same copyright & patent restrictions we have now?

    I think this is roughly what Rothbard thought was okay. I was wondering what are your thoughts on this.

    What about particular forms of this, such as the “if you remove this shrink-wrap you agree to this contract not to copy”, or when installing software, you have to click “I Agree” to the EULA that binds you from copying or reverse engineering or whatever?

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