Legal Incentive

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The Economic and Labour Relations Review Vol. 21 No. 2, pp. 2750

Legal Incentives to PromoteInnovation at Work:A Critical Analysis

Chris Dent *Colin Fenwick **Kirsten Newitt ***

AbstractTe allocation of any benefit that arises from worker-generated innovation iscomplicated by the importance o three separate areas o law employment law,intellectual property law and equity and the distinction between those types oinnovation that attract intellectual property rightsand those types that do not (thelatter being a category that is ofen reerred to as know-how). Te purpose o thisarticle is to engage with the legal scholarship on the principles that are relevant toinnovation. To date, the discussion has focused on two distinct approaches whatmay be termed the economicand the airnessperspectives. Te ormer may be

seen as a justification or the current regime, while the latter has ocused on theperceived needs of workers (in large part in opposition to the employers). Ourargument is that these two approaches are both incomplete. In an attempt to getcloser to a workable ramework or the effective allocation o benefits, we offer athird approach; one that is based on the practicesthat are central to the employer-worker relationship.1

KeywordsEmployment law; intellectual property; innovation; know-how; allocation of benefits.

1. Introduction

Tis article discusses the law that regulates innovation at work, in particularthose laws that regulate the way in which the benefits and outcomes o innova-tion at work are allocated between employers, and those who work or them.Our ocus is thereore predominantly on those aspects o employment law, intel-lectual property (IP) law and equity which establish the deault rules as to howthe outcomes o innovation are to be allocated. We use the term the outcomeso innovation to indicate, in a preliminary way, that the concept innovationis not one that fits completely or easily into the available legal categories. Most


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28 The Economic and Labour Relations Review

importantly, it must be remembered that not all outcomes o innovation that arevaluable give rise to intellectual property rights. Rather, many all into a broadcategory that is ofen reerred to as know-how. Te legal means by which toprotect valuable know-how, and indeed the very content o what is capable o

being legally protected, are subject to significant uncertainty.Te primary purpose o this article is not, however, to explore these uncer-

tainties, or even those that may attend the ostensibly more concrete field o IPrights. Rather, our aim is to re-consider what is known about the goals and effectso the deault legal rules in Australia concerning the allocation o the outcomeso innovation. As a starting point or our work, there is a considerable body oAustralian and international legal scholarship on employment law principles thatare relevant to innovation, although not all commentary directly contemplateshow these principles might affect incentives or innovation. Generally, the prin-

ciples are considered rom two main perspectives (Wotherspoon 1993), althoughthese are not mutually exclusive and contain overlapping elements. Te first isan economicperspective. It considers whether the current system o allocatingbenefits provides optimal economic incentives or innovation. Te second placesa premium on the importance oairnessand cooperation in employment re-lationships. It questions how the laws treatment o worker interests may affectincentives or innovation in the workplace, suggesting that innovation is bestencouraged by giving workers a air deal (see, or example, Riley 2005a; Stone2004; Orkin and Burger 2005).

Our central argument is that these two perspectives reflect different concep-tions o workers and employers. We argue the need to acknowledge this differencein order to think more clearly about whether the existing legal regime effectivelypromotes innovation in the workplace and, i not, what might be done to changethat. In an attempt to get closer to a workable ramework or the effective alloca-tion o benefits, we offer a third approach; one that is based on thepracticesthatare central to the employer-worker relationship. Beore we develop our analysiso the three approaches, we set out a preliminary discussion o what is meant byinnovation, and o the key eatures o the law in the area.

2. Background

Te value o the research in this area is ounded on the ever-increasing economicimportance o successul innovation demonstrated not least by the growthin government policy designed to promote innovation (see, or example, Pro-ductivity Commission 2007; Cutler 2008). Innovation has become increasinglyimportant to many businesses, providing a competitive edge that can lead toa stronger market position and higher profits. Indeed, according to Sullivan(2000: 3ff), Intellectual capital exploded onto the business scene in the 1990s

with strategies or encouraging and managing innovation then becoming coreto business practice.In the global knowledge economy enterprises rely increasingly on innova-


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Legal Incentives to Promote Innovation at Work 29

to generate innovative products and processes. Tis brings into ocus the rulesgoverning the allocation o interests, as between employers and workers, in theproducts and knowledge that are generated and which can only be gener-ated through innovation by workers. Te use o the term worker in this article

covers both employees and independent contractors; avoiding, where useul, thedifferences between the rights and duties owed by the two categories o workerin their work relationships.

What is Included as Innovation

Innovation may be defined as creating value through doing something in anovel way (Cutler 2008: 4). Innovation is ofen associated with technologicalinventions, but not exclusively so. On the contrary: innovation can also reerto incremental improvements to existing products, processes or methods; ap-

plications o existing technology to new markets; or the use o new technologyto serve existing markets (see, or example, Casselman, Quintane and Reiche2006: 6). Innovation is best conceptualised as a complex, non-linear system orprocess with ongoing inputs and outputs (see, or example, Productivity Com-mission 2007: 7; Arup 1993: 78), that requires continuous public and privatesector investment. Te human dimension o this process is an important aspecto a firms (and the employees) human capital, with workers producing innova-tions innovating while also building relationships and negotiating chan-nels o communication between different actors including related businesses,

consumers and academic institutions. As we have noted, by no means do all othese types o innovation lead to outcomes (new technologies, or example) inwhich it is possible to say that IP rights can be sought and granted. Where theydo not, they all into the more nebulous category o know-how.

Te law o IP does, nonetheless, play a key role in determining who directlybenefits rom innovation in the workplace. Intellectual property can exist in arange o orms, in relation to a variety o innovative activity. IP includes copy-right, patents, designs, trademarks and plant breeders rights. Copyright coversoriginal expressions o creativity such as literary works, sound recordings, films

and perormances, while patents cover inventions such as drugs or methods tomanuacture drugs. rademarks have a similar unction to these other types oIP, but operate in a different way: they are signs used to link particular goods andservices to particular providers o the goods and services. Te requirements orthe protection o these orms o innovation, and the benefits that accrue to them,are regulated, in Australia, by specific (Commonwealth) statutes: the Copyright

Act 1968, the Patents Act 1990, the Plant Breeders Rights Act 1994, the radeMarks Act 1995, and the Designs Act 2003.

Concrete outputs, such as worker inventions, can be the subject o propri-etary rights. o be clear, one very important consequence is that IP involveslegal rights(to that IP) which may be held, assigned, or dealt with in other waysby the rights-holder (or example, Patents Act 1990 s 13). Property rights that


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the patent the patentee control over the use o the invention and the patent.Plainly this control can be exchanged or cash or other benefits.

Tere is o course a large body o scholarship which analyses critically theoperation o IP rights in practice, and a good deal o it casts doubt on the accepted

rationale or the grant o IP rights. Some commentators, or example, argue thatinnovation will still occur without monopoly protection (or example, Boldrinand Levine 2002); and others recognise that monopoly rights are not the onlyway to protect innovation (or example, Jaffe and Lerner 2004: 4648).

In the workplace context, such proprietary rights generally attract a legalpresumption o employer ownership.2As we consider below, there is legitimatescope to argue about whether or not deault rules shouldallocate IP rights toemployers rather than to workers. Leaving that to one side, however, IP rights,quarights, have important characteristics that differentiate them rom know-how.

Tat is, because it is a system o allocating rights, IP provides a simple basis oran employer and a worker to bargain over the benefits arising rom an innova-tion that might give rise to IP rights, including over the possibility o assigningthe rights themselves.

Know-how is different. It can include the special skills, experience and knowl-edge o individuals, in the perormance o teams and in organisational architec-ture and routines specific to particular workplaces or enterprises (Hunter 2002:13). What know-how does not, and cannot do, is have any o the characteristicso property. Perhaps as a result, there is no equivalent to the statutory regimes

established to regulate the operation o IP. Although know-how does not give riseto IP rightsper se, it is certainly not without legal protection, especially or tradesecrets and confidential inormation. Tese are regulated by a range o commonlaw and equitable doctrines and techniques, including contractual terms thatrestrict the post-employment movement o workers. In short, a combination ocontractual and equitable doctrines has the effect that a significant proportiono the value o any innovation by a worker during the course o any particularemployment will normally accrue to their employer. In practice, this means thatan employer has the ability to restrain a worker, or a ormer worker, rom usingthe value o that innovation or their own purposes. Indeed, within certain limits,courts will enorce restraint o trade clauses, which have the effect o limitingthe ability o an employee to compete with a ormer employer, usually within aspecified geographic area, and during a specified time period.

One o the consequences o know-how notbeing, or giving rise to, a bodyo hard legal rights is that it is a ar more difficult subject o negotiation, and itis much more difficult to transer rom one person to another. For some, it isalso harder to justiy in terms o providing protection. rade secrets, a commonexample o know-how, can be seen as suspect as they do not involve the sociallybeneficial public disclosure which is part o the patent and copyright process(Hettinger 1989: 52). In addition, as we note below, there is a significant degreeo uncertainty about the operation o the various legal and equitable doctrines


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lack o a statutory regime that regulates the allocation o interests in know-how,coupled with the contingent nature o the application o those legal and equitabledoctrines that are relevant, mean that know-how raises particular issues aboutthe extent to which the law operates as an incentive to innovation.

Employment Law as it Relates to Worker Innovation

Employment law, as it stands, provides a (loose) ramework or the allocationo benefits that arise rom worker innovation. Te employment contract that isthe undamental legal basis or the relationship between the employer and theworker is the primary instrument or regulating interests arising out o workerinnovation. One o the core obligations in all contracts o employment is thatan employee will serve their employer in good aith: that is, an employee has aduty o fidelity to their employer (regulated via an implied contractual term).

Te application o this doctrine is at the heart o most disputes over the right toexploit the value in know-how. At the same time, or these purposes employmentlaw should be taken to include the application o certain equitable doctrines,in particular the accepted notions first, that an employee will ofen stand in afiduciary relationship to their employer, and secondly, that they owe their em-ployer a duty o confidence. Other workers, such as independent contractors,may also owe a fiduciary duty to the person or company who is paying them.Whether any person owes a duty to another depends upon the nature o therelationship between the two (see Hospital Products Ltd v United States Surgical

Corp[1984] 156 CLR 41).Te application o these equitable and legal doctrines to the specific context

o particular employment relationships can be a complex, indeed sometimesan indeterminate process, leading to uncertainty or all parties (Stewart 1992).What might generally be accepted, however, is that in many situations the em-ployer is in a strong position to claim rights and interests in relation to workerinnovation (Raper 2004: 1). Tat is, there is a presumption at common law thatan employer will have the right to control the value in any innovation that iscreated by a worker during the course o employment. In the absence o any ex-

press agreement, a term is implied into the employment contract that a tangibleinnovation made by a worker in the course o employment is held on trust orthe employer (Sterling Engineering Co Ltd v Patchett[1955] AC 534). Whereknow-how is involved, the employer will be able to insist on the enorcement ocertain negative rights, that is, rights to require a worker or ormer worker notto use certain inormation, either at all, or in certain specified circumstances.

Central to an employees common law duty o good aith to their employer,and its application to innovation, is the rather indeterminate question whetheror not the innovation occurred in the course o employment. o determinethis question, courts consider a number o actors, including the use o time,opportunity, inormation or acilities provided by the employer (Sappideen etal. 2009: 245246). Courts also examine the nature o the workers tasks, and the


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that courts will find that the invention was made in the course o employment,and the employer will be able to claim ownership rights. Also, the more seniorthe worker and the higher the salary, the greater the likelihood that they arebound to share the invention with the employer (Worthington Pumping Engine

Co v Moore[1902]RPC 41). Where a worker has used an employers resourcesto develop an invention, the employer will have a stronger claim to ownershiprights. On the other hand, i a worker uses their own resources to develop aninvention in their own time, which is wholly unrelated to their employment,they will probably retain ownership rights in the invention.

Ownership rights are less clear-cut in other situations, which might arise,or example, rom the flexible nature o the modern workplace: the boundariesare ofen blurred between a workers home and the workplace, or between crea-tive pursuits and work time (Harris 2004: 67). Further, an express clause in the

employment contract that assigns all invention rights to the employer will notnecessarily mean that the employer is entitled to ownership: courts have beenreluctant to uphold assignment clauses that purport to give employers owner-ship o inventions created outside the scope o a workers employment (see, orexample, Electrolux Ltd v Hudson[1977] FSR 312).

As noted, the employment relationship can give rise to a fiduciary duty (see,or example, Hospital Products Ltd v United States Surgical Corp(1984) 156CLR 41), whereby a worker is under a duty not to profit rom the relationshipat the expense o the employer. An employee also owes their employer a duty o

confidence. Both these equitable obligations overlap with the contractual dutyo good aith, and in some respects they go urther: the duty o confidence, orexample, can endure past the end o the employment relationship. It can alsooperate to restrain third parties to the employment relationship rom usingcertain inormation (Sappideen et al. 2009: 240).

Te case o Victoria University illustrates the operation o the equitable doc-trine o good aith in practice. Te broad principle can be more narrowly ex-pressed and applied in the employment context to the proposition that wherea worker is presented with an opportunity to claim an interest in an inventionor creation, and that opportunity could have been exploited by the employer,the worker breaches their fiduciary duty by taking that opportunity without theexpress agreement o the employer. In Victoria University, the employer was ableto claim an equitable interest in a worker invention because the worker was oundto have breached his fiduciary duty to avoid conflicts o interest by taking an op-portunity that the university might have exploited itsel. As with legal doctrines,however, the precise application and scope o the relevant equitable doctrineswill vary according to the exact position and duties o the worker. For a critiqueo the application o the doctrines, see Riley (2005b).

Issues Raised by the Intersection of IP and Employment LawTe binary division we have sketched here between IP and know-how is neces-


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3. Economic Approach

Tis discussion o the economicperspective on the allocation o benefits oworker innovation is in two parts. Te first relates to innovations protected byIP rights what might be thought o as hard IP particularly copyright and

patents. Te second relates to know-how. Tis distinction is necessary given thedifferent control issues that arise rom the two categories o innovation, as wellas the differing legal doctrines that are relevant.

Hard IP

In terms o the allocation o benefits o hard IP, the ocus here relates to the own-ership o the property rights that arise rom innovation, in this case, the rightsattaching to inventions by workers. Tis is a different issue rom that o whomay exploit the innovation. Van Caenegem argues that, in most cases involving

patented inventions, it is more efficient or employers to exploit the invention,as they can most effectively gather the necessary skills and resources (2007a: 95).Tis may be the case irrespective o who owns the patents. Te worker couldown the patent, and thereore the right to exploit the invention, but there couldbe a licensing deal between the worker and the employer to actually exploit theinnovation or the benefit o both.

Tere are several economic arguments to support the legal status quo regard-ing worker inventions. Merges (1999: 23), or example, argues that the verdictrom economic theory is that the presumption o employer ownership o worker

inventions is overwhelmingly justified. Indeed, McKeough, Stewart and Griffith(2004) consider that arguments regarding worker ownership are so outdated as tobe no longer relevant. In their view, the question o worker incentives should belef to the market, suggesting that the prime issue is how to encourage investmentin innovation rom business rather than how to encourage workers to engagein the process: the assumption being that those with private capital or publicexpenditure at their disposal will themselves create the necessary incentives orindividuals to be creative (2004: 24).

From an economic point o view, it is argued that employer ownership o

worker innovations is more economically efficient than allowing proprietaryinterests to accrue to workers. I inventions, in the case o patents, were ownedby workers, it is suggested that this would potentially lead to higher costs orenterprises, which would act as a dampener on business investment in innovation

(Merges 1999: 13; van Caenegem 2007a: 95). Te argument goes that worker own-ership would lead to increased transaction costs, as workers may try to bargainor abnormally large sums o money rom the employer, potentially holding upthe process o commercial exploitation o an invention (see urther Landes andPosner 2003: Ch. 1). Further, Morgan reasons that a workers idea may only be

the starting point or innovation, and that considerable investment is required tocommercialise an invention, with respect to matters such as prototypes, tooling

t l t t d k ti (M 1994 156)


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workplace. Tat is, workers who create intellectual property should be no moreentitled to extra reward than workers who manually create physical propertyor an employer (1994: 153). Second, as most innovation involves teams opeople rather than individuals (Merges 1999: 21; van Caenegem 2002: 12), it

may be difficult to work out appropriate compensation systems where teamsare responsible or an invention.

Further, as Landes and Posner (2003: 318) emphasise, innovation, particularly

with respect to patentable inventions, tends to be cumulative rendering theissue o appropriate compensation or all contributors even more problematic.I workers were given a fixed pro-rata share o the increased profits generatedby the team, Merges (1999: 22) suggests that this could encourage individuals toidle and allow other team members to do most o the work. Further inefficienciesmight be created as workers might be more inclined to ocus on inventing work

to pursue personal gain at the expense o other business tasks, including teamwork, marketing and product manuacturing (Merges 1999: 26).

Merges, urther, claims that this prospect more than anything else explainswhy researchers are compensated primarily by salary (1999: 27). Van Caenegem(2007a: 95) notes that salary is a blunt instrument to encourage innovation butMerges (1999: 38) argues that enterprises recognise this and implement workerreward systems in response. Tese rewards may include: payments tied to patents;

bonus schemes; enhanced prospects or promotion; career path progressions thatreward significant inventions; spot bonuses or significant inventions; output

based bonus schemes, and; more elaborate reward systems based on administra-tive assessment o the value o an invention and an individuals contribution.For Merges (1999: 3840), it is more effective to allow the market to devise

incentives or workers than to construct a statutory worker ownership right,since private worker reward schemes offer greater variation and flexibility orindividuals and enterprises. On the other hand, Collins (2003: 114) argues thatbonus schemes may be too discretionary to be a real incentive and that the bestincentive may be that workers with good ideas can leave and set up their ownbusinesses, either in competition with their ormer employer or as a joint venture.Indeed, Van Caenegem (2007a: 95) contends that worker ownership might makeit more difficult to retain talented workers, as they would be more likely to leavethe employers business in order to better exploit patent rights.

Finally, it is argued that the presumption o employer ownership o the ben-efits o innovation is also justified on an economic risk analysis: the employerbears most o the risk in relation to the process o innovation, in return or whichit is appropriate that they receive ownership o innovations in return or bearingthat risk. Merges points out that employers bear the risks associated with in-novation and contribute significant resources to ensure that innovation can takeplace, while workers get paid whether or not a particular line o research bearsruit. Tat is, by taking a salary, worker inventors are expressing a preerence ora low-risk reward instead o the high risk-reward that they might attain i they


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Know-how

Te economicperspective on worker-generated know-how ocuses on the validityo post-employment restraint clauses in employment contracts (or a review othe economic analyses o such restraints, see Lester 2001). Merges (1999: 45), or

example, argues that the ultimate economic stimulus to competitiveness and in-novation may be the reedom o workers to leave their employment and becomeentrepreneurs by starting up their own companies. Further, he considers thatthe possibility o worker departure helps to constrain employer opportunismin relation to worker innovation, and that this acts as a counterbalance to pro-employer rules regarding worker inventions. In short, this perspective has anemphasis on an efficient market as the regulating institution while it is betterthat employers own IP rights so that they can make the investments and exploitthe outputs, at the same time they should be kept on their toes by a ree flow o

workers and the knowledge they retain.Opportunities or worker mobility also contribute to innovation by allow-

ing the movement o knowledge and human capital between businesses. Eventhough it may be logical rom an individual enterprises point o view to restraincompetition rom a ormer worker, there are strong economic arguments thatthe overuse o post-employment restraints is not an efficient use o human capi-tal, and that this impedes industry competitiveness over the long run. Gilson(1999), or example, argues that the mobility o workers between enterprisesleads to crucial knowledge spillovers or cross-ertilisation between enterprises

and a more dynamic, innovative and competitive business environment (seealso Saxenian 1994). Gilson (1999: 586) compares the perormance o two hightechnology districts in the US Silicon Valley in Caliornia and Route 128 inMassachusetts and concludes that Silicon Valleys superior success is due, atleast in part, to Caliornias blanket prohibition on post-employment restraintsand the consequent ability o workers to move easily between employers or tostart up their own businesses. It may be noted, though, that Gilson does notargue in avour o the total abandonment o post-employment restraints, as heacknowledges that they may be used to protect valid business interests: rather,

restraints should be treated with caution.Others also argue, rom an economic perspective, in avour o some use o

post-employment restraints. Posner, riantis and riantis (2004: 1) note thedifficulties in balancing the economic objectives o labour mobility and humancapital investment: When labour is mobile, human capital moves to its highest

valued use, but employers are discouraged rom investing in training their work-ers because the investment pay-offs are captured by uture employers. Further,Rubin and Shedd (1981: 9798) argue in avour o a limited version o post-employment restraints (ones that apply only to trade secrets) on the grounds o

creating incentives or employer investment. Tey consider that employers aremore likely to invest in the development o worker knowledge o trade secretsi they can protect it with a restrictive covenant that prevents its use on behal


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danger that some employers might use restrictive covenants in a more generalway to restrain workers rom using not only trade secrets, but rom using theirgeneral human capital.

Summary of Economic ApproachFor the most part, economic theory evaluates the allocation o the benefits oinnovation in terms o which incentives are most likely to result in increasedlevels o innovation; it also tends to ocus on encouraging employer investmentby maximising returns. Although successul innovation can offer significantfinancial reward to businesses, innovation involves risk: it can take time andmoney to develop innovative processes or products, with no guarantee o successat the end and there is the possibility o imitation by competitors. Te economicapproach described here relies in large part on the assumptions o neo-classical

economics, and applies them to the employment relationship.Tis means, to a large extent, both parties to the relationship are perceived as

independent, rational parties with sufficient knowledge and bargaining powerto contract as equals. For example, Morgan argues against workers receivingcontrol o the value in their innovations as o right, but instead is in avour othem receiving a reward separately negotiated (1994: 153). Te argument is thatthis pre-assignment o rights is economically efficient as it minimises transac-tion costs and deals with them beore the invention is made thereby reducinghold-ups in the innovation and exploitation o innovation processes. Merges

(1999: 16), or example, argues that any hold-up problems may be solved in thecontext o worker ownership by agreeing on licence ees or intellectual propertyrights in advance, so that excessive ees cannot be extracted.

Obviously enough, this idea o bargaining amongst equals may not accuratelydescribe the capacity or negotiation in all workplaces particularly at thetime an employment contract is signed. Tis is the point at which the employermay be risk averse and offer less, because the worker is an unknown quantity.At the same time, the worker may demand less because getting the job is moreimportant than maximising potential income and benefits.

Te economicapproach, then, may be most applicable to circumstances in-volving experienced, successul innovators being employed by experienced,successul companies that rely on innovation. Tis limited set o circumstances,however, may not be representative o the majority o employment relation-ships. It may not in act cover much o the innovation that takes place in theworkplace. Ultimately, these are empirical questions. We discuss urther belowthe limitations o the economic approach to the allocation o the benefits oworker innovation; beore that, we provide an introduction to the competingperspective theairnessapproach.

4. FairnessApproach

Te airness approach ocuses on the need or employment laws to integrate air


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benefit. Collins (2003) and Riley (2005a) both argue that airness and competi-tiveness necessarily go hand in hand. Riley (2005a: 2), or example, argues or thenecessity o air dealing in employment relationships, which she defines as airtreatment in the economic exchange o work or remuneration and other eco-

nomic benefits. In her view, disputes regarding human capital have an impact onboth the air treatment o individual workers and on competitive labour markets(Riley 2005a: 166167). Collins maintains that a command and control strategyrom employers cannot elicit the necessary levels o cooperation, flexibility andwillingness that are necessary or the innovation process, which relies heavilyon worker knowledge and ideas. Instead, he considers that employers need tocommit to treat the workorce airly and, perhaps, to share in the profits arisingrom better cooperation. In particular, he argues (2003: 115) that employmentlaw can be instrumental in creating rules and institutions that allow employers

to make the credible commitments to treat their workorce airly in return orbetter cooperation. Again, we discuss the airness approach first in terms ohard IP and then know-how.

Hard IP

Riley (2005a) assesses the rameworks around the allocation o IP rights arisingrom worker innovation and criticises, in particular, the role that equity canplay in the allocation o those rights. An example o this is her critique o theabove-mentioned decision o Victoria University. Even though the academic

in question had a contractual entitlement to pursue his own consulting work,ultimately the court determined that he was also still obliged to seek the expressconsent o his employer beore taking any profit-making opportunity or himsel.Riley (2005a: 177) concludes that equity overreaches in avour o employers: thedeault position is always that the employer can claim the property. Te onus ison the employee to obtain consent. She thereore argues (2005a: 26) that equityshould not become the handmaid o oppression.

Some scholars, rom other jurisdictions, also question the airness o employ-ment law principles that apply to worker inventions (see, or example, Bartow

1997). Orkin and Burger (2005: 84) argue that US worker inventors do notreceive air compensation or their inventions, especially i the compensationon offer is only the promise o continuing employment (see also Orkin 1984).4Tey highlight the value o overseas approaches, where workers receive a per-centage o royalties (Germany), or compensation (Japan). Wotherspoon (1993)explores the UK approach, which includes a right to compensation or workerswhere their invention has resulted in outstanding benefit to their employer,and considers that here also the balance is tilted in avour o employers. Tereis an imbalance, resulting in an uphill battle or workers to gain compensation,because the outstanding benefit requirement sets the bar too high, requiringworkers to show that they have revolutionised their employers business (Woth-erspoon 1993: 131).


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terms than as mere independent contracting parties that only come together inthe processes o negotiation. Second, the approach privileges the workers per-sonhood or sense o sel (see, or example, Cherensky 1993). In these respects,thefairnessapproach presents a more complete perspective o the worker, but in

some cases it is at risk o doing so without including an equivalent perspectiveo the employer. Tis imbalance in conceptualisation contributes to a significantlimitation o the approach the termairnessseems to be without precise defi-nition in the literature. Without an adequate understanding o the complexityo the positions o both employers and workers, it is more difficult to assess,and thereore to agree on, the airness o any given allocation o the benefits oworker innovation. It is, in part, the ailure to recognise the potential or multiplemotivations or a given action that suggests that neither the economic nor theairness approach is sufficient to provide an adequate understanding o how legal

incentives to promote (worker) innovation might best be structured.

5. A Third Way Practice-Based Approach

In commenting on the economic approach, we noted that it might be best suitedto particular types o employment relationships, but that how the law operates inpractice is in the end an empirical question. As it turns out, this isgenerallytrueo the areas o employment law and IP law with which we are here concerned.At least so ar as the academic literature is concerned, in large part we simplydo not know the extent to which the legal principles have a practical effect on

businesses, and/or on innovation. It has been suggested that the law does nothave a significant impact on whether enterprises decide to invest in innova-tion, and that businesses are more likely to consider profit and/or recognitionwhen deciding whether to invest in innovation. Miller (1974) argues that i thelaw does have an effect, it is at best neutral. According to this view, the law isnot likely to create positive incentives, but it can act as a barrier to innovation.Other research has shown that, even in the area o hard IP, the protections o-ered by the law do not mean that all industries use the patent system to protecttheir knowledge (Levin et al. 1987; Allison and Lemley 2000; Burk and Lemley

2003). Tat is, the available empirical evidence is inconclusive on the questiono whether the existence o IP rights or legal protection has an influence on busi-ness decisions whether or not to innovate (van Caenegem 2002: 17). It is at leastpossible, indeed likely, then, that the norms and practices o individual firmsor particular industries have a more important role in encouraging innovationthan do the ormal legal regimes.

Privileging of Practices

Te practices o individual firms and industries also suggest that neither the

economic nor the airness approach is sufficient in itsel to offer a completeaccount o how the law should allocate the benefits o worker innovation so asbest to promote innovation Both approaches are insufficient because neither is


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limited to account ully or the dynamics in play at the intersection o employ-ment relationships and the processes o innovation.A ramework that ocuseson ownership may, or example, be less relevant where a worker owns a patentbut the company owns the only means o production that makes the patent

valuable. Broadly speaking, the economics approach is limited in that it seesboth employers and workers only as rational, risk-calculating individuals. Teairness approach, on the other hand, ocuses almost exclusively on a perceivedneed or the legal regimes to privilege the interests o the personhood o theworker as that is what is air. A more nuanced understanding would acceptthat aspects o both approaches are relevant.

Our proposed third way approach is one that ocuses on the practicesoworkers and employers.Tis approach is based, substantially, on the literaturethat has arisen out o the work o Michel Foucault. For a practice-based analysis

o the patent system, or example, see Dent (2007). Practice, or these purposes,is understood to cover a wide range o behaviours and attitudes it coversinventive activities (such as using scientific equipment or the development oa new pharmaceutical); repetitive actions (those that are carried out on a dailybasis as a standard part o a job); creative thoughts (the flashes o inspirationthat produce a new approach); and attitudes, perceptions and motivations (thethoughts that prompt actions and reactions to the outside world).5A ocus onpractices immediately allows or differentiation between industries and job de-scriptions as it acknowledges that the practices o each are, to an extent, unique.

Tis approach also sidesteps the binary o owner/non-owner and, thereore,allows a more nuanced understanding o the issue.As we have already suggested, it is arguable that the economic approach is

unlikely to lead to rules shaped in a way that realistically takes into account thewhole spectrum o employment relationships. In this sense, a practice-basedapproach may acilitate thinking about the structure o legal incentives to in-novate which is capable o being more flexible, and so effective. A practice-basedapproach also has the advantage that it draws on the insights o each o the othertwo perspectives. First, in the same way that the airness approach highlights thecomplexity o the workers position, a practice-based approach recognises thecomplexity o the position o the employer. Second, it attributes economic powerand decision-making to bothsides o the relationship. At the same time, however,it does not consider this to be the most important practice in the constitutiono either workers or employers.

A practice-based approach acknowledges the multiple motivations o bothworkers and employers. I patents are taken as an example, there is evidence tosuggest that inventive workers are motivated by all sorts o actors to invent, withmoney being only one o them. Te Productivity Commission (2007: 263) hashighlighted the ollowing actors as being important to some workers: autonomyo research, utilisation o skills, peer group esteem and the ability to add to exist-ing knowledge.In the copyright area, it has been argued that some creators are


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In terms o the motivations o employers, other research indicates a numbero benefits that may prompt a firm to pursue patent protection or an invention.Tese include a desire to protect technology; to create retaliatory power againstcompetitors; to create better possibilities o selling licences; to provide motiva-

tion or employees to invent; to provide a measure o R & D productivity; andto improve the corporate image (Granstrand 1999: 78).6Neither the economicnor the airness approach appears to recognise this range o motivations thatcan underpin the key actions o both workers and employers.

One idea rom the literature taking a airness approach that is useul or apractice-based approach is the notion o the psychological contract. Tis term,originating in organisational theory, encapsulates the implicit and explicit un-derstandings that employees and employers bring to their jobs (Stone 2002: 730;Anderson and Schalk 1998). Tis concept o contract centres on the beliefso the

parties about the promises made and the obligations each owes to the other.In a study o workers belies about the ownership o ideas generated at

work, respondents were varied in their opinions as to who would own any ideas.When asked about a scenario in which an idea was generated at work as part oa project looking or new ideas, 94 per cent o workers thought the employerwould own the idea, 3 per cent thought the worker would and the rest thoughtit would depend on other actors. When asked about a scenario where an ideawas generated at home (but where the project they were working on in theworkplace was ocused on generating new ideas), 12 per cent thought that the

workers would own the ideas, 19 per cent thought the employer would and therest said it would depend on other actors (Hannah 2004: 220). Importantly, onesides view o the (psychological) employment contract will not necessarily be thesame as the other sides. Tis is the case even though each party usually believesthat both sides share the same interpretation, or the same expectations, o thecontract. Further, unlike ormal employment contracts, a psychological contractis not made once but rather it is revised throughout the employees tenure inthe organisation (Robinson and Rousseau 1994: 246). Tis idea, then, fits wellwith the notion o a practice-based approach; though unlike Stones ocus onthe workers perspective (2002: 730731), a practice-based approach would giveweight to the perspectives and practices o both parties in the relationship.

Te notion o the employment relationship is important both sides havetheir own expectations, perceptions and desires. Sometimes, the desires differ;though, in most instances, both parties share a desire to maintain the relation-ship (or, at least a desire to find and maintain an employment relationship).Both parties are also, usually, motivated by a desire or economic security. Anacknowledgement o the existence and importance o the relationship does not,however, presuppose a balanced relationship. In most instances, there will bean imbalance in knowledge, skills, finances and what may loosely be termedpower. An example o this is the manner in which the law can be accessed, andused, by one party against the other. In the case o post-employment restraints,


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by virtue o the presence o the clause, regardless o whether the restraints arelegally enorceable or not.7

A urther consideration that generally avours employers is that restraintclauses are most ofen enorced through interlocutory decisions, without the

benefit o ull argument (Riley 2005a: 179). In other words, employers, with agreater knowledge o the law and access to the courts and employers are morelikely to be able to afford lawyers, whose ees are tax deductible can exploitthese differentials to the detriment o the worker, though either party resortingto the courts usually means the relationship has turned sour.

Control over the Benefits and Value of Innovation

Te notion o control is central to this practice-based assessment o the alloca-tion o the benefits and value o innovation; it also serves as a useul example

o the application o the approach to the worker-employer relationship. Con-trol, like power in a Foucaultian analysis (see, generally, Gordon 1980), is acomplex idea. Te control o the benefits and value o innovation constitutes arelationship between the controller and the innovation. Control constitutes arelationship between the controller and others who want to use the innovation.Control is also important or the relationship between the controller and anyperson whose behaviour, with respect to the innovation, can be directed by thecontroller. Control, thereore, may also be seen in terms o practices as allrelationships are necessarily governed, and expressed, by the practices o those

in the relationship. Te practices exhibited with respect to control, and indeedwith respect to every aspect o the worker-employer relationship, are constrained.Tey are constrained by the experiences o the person (they can only do whatthey know) and by the expectations o the person (they will do what they thinkis part o the psychological contract).

Control includes ownership. A worker may control a patented inventioni they are the patentee. Control also includes the capacity (as opposed to theright) to exploit the invention. An employer may control the invention i thepatentee worker has given the employer a licence to manuacture a product

covered by the patent (irrespective o whether the worker demands paymentor the licence). Control includes the capacity or a worker not to share newlygenerated know-how with their employer (possibly with the goal o resigningand working or the competition or setting up a new firm to exploit the innova-tion). Control also includes the capacity or an employer to renew, or to reuseto renew, an employment contract based on the actions o the worker (and theemployer) with respect to any innovation.

In each o these circumstances, control is productive it allows the control-ling party to act in a way that would not be possible without that control. Teobvious example is where the employer owns a patent; i the employer were notthe patentee, they would be limited in their capacity to manuacture a productcovered by the patent. Further, control by workers o the benefits o innovation


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positive and negative effects or employers and the industry. Te skills, expertiseand know-how o workers can drive innovation in individual enterprises, butits diffusion and movement throughout an industry can lead to higher levelso innovation in an industry. Workers intimate knowledge o an employers

business, its processes and its customers is an invaluable asset that can lead tohigher levels o efficiency and innovation within the enterprise. But it can alsotransorm ormer workers into a competitive threat i they choose to changeemployers or to start their own business.

It is important to emphasise that the allocation o control over innovation isundamentally different rom the allocation o monetary rewards or the innova-tion. Money whether in the orm o cash bonus, or shares in the firm is notas productive with respect to a workers career, or with respect to the enhance-ment o the industry. Te impact that worker share ownership may have on the

control o the innovation will depend on the size o the firm and the percentageo shares given to the worker. It has been argued, however, that in some senseworkers, regardless o share-holdings, can be seen to own the firm that employsthem (Njoya 2004). I this ownership sense orms part o a workers belies, thenthe issue o control o an innovation that arose in the workplace would take ona different perspective.

Control, unlike cash, may also be shared between workers, or between work-ers and employers. Shared control may be used to strengthen the worker-em-ployer relationship as an ongoing process o discussions about the use o the

innovation. Denial o control, i it goes against the expectations in the psycho-logical contract, is more likely to damage the relationship to the detriment o theworkers commitment to the work, and the firms profitability. Te importance ocontrol, however, does not make it a simple process to divine how any benefitsarising rom worker innovation should be allocated.

Application of Practice-Based Approach to Allocation of Benefits

Te application o this third way to the allocation o benefits that arise romworker innovation is not clear cut. Te approach is ounded on both an ac-

knowledgement o the diversity o roles, workplaces and industry sectors inthe economy, and o the importance o the worker-employer relationship. Tismultiplicity o actors means that there must be an acceptance that there is notlikely to be a single allocatory principle equally applicable and equally beneficialacross the whole economy. In other words, there are difficulties to be had inapplying the practice-based approach in a normative manner.8Tis does notmean, however, that the approach has little value.

By allowing or a wider range o actions and motivations to be included, itwould equally value the expectations o the employer and the worker. Acknowl-edgement o an expectation does not require its acceptance as binding (or evenpersuasive) with respect to allocation o benefits. An employer, or example, mayhave an expectation o a workers loyalty as part o a contract o employment,


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is usually not an ongoing relationship between workers (as generators o in-novation) and share-holders, there is less o an imperative to draw on investorsexpectations. Te argument or the practice approach reflects, and also reinorcesthe impression that large empirical questions are involved in the debate about

the effect o employment law and IP law as incentives to worker innovation.Under our concept o the practice approach, it seems that the likely range o

matters that could be included in an assessment o the appropriate allocationo benefits is so broad that it would be difficult to carry out that assessmentwithoutempirical research.9For example, important issues being probed in theproject investigating the role o restraint o trade clauses (see Endnote 1) includeattitudes o workers and employers at the commencement o employment, andat the end o the contract; the extent to which either side sees the salary/wagespaid as sufficient consideration or post-employment restrictions; the degree to

which the attitudes o parties involved change across industries and whether thesize o the employing enterprise affects expectations; and the extent to whicheither party seeks legal advice with respect to any restraint clauses. Te lastmatter is o particular importance the degree to which the obligations oworkers and the preerences o employers are inormed by specific legal advicewill provide insight into the impact the law, now, has on actual contracts. Andthe other questions will offer inormation as to the extent to which parties eellimited by the drafed clauses. Without a clear understanding o the role o thelaw (either statute or case law) on the behaviour the practices o workers

and employers, it is impossible to be confident o the effect that any change tothe might law might have.O course, it is too soon to say what the outcome o this empirical work will

be. It is possible that such work will lead to the view that industry-wide standardsor the scope o restraint clauses may be appropriate. Tis approach is alreadytaken, to some extent, in the regulation o occupational health and saety, whereindustry-wide (and specific) standards play a key role. It could also indicate thatfirm-specific, or position-specific, models should be adopted (with the modelsinormed by more widely applicable guidelines).

Central to the expansion o this empirical work is the understanding thatinnovation is commonplace. Te Productivity Commission reports that over athird o businesses innovate (2007: 707). Te ordinariness o innovation meansthat the know-how and any patents or copyrighted material produced are, or themost part, not going to make anyone rich. Moreover, those that are o great valuerisk being litigated to the ullest extent possible such as in the case o UWAv Gray([2009] FCAFC 116). Tat does not mean that regulation in this spacedoes not matter: the appropriate awarding o the control o innovation goes tothe daily existence (and practices) o employers and workers as sel-interestedand sel-reflexive entities unctioning in the broader economy. Te acknowl-edgement o the ordinariness o innovation, instead, highlights the importanceo everyday norms and practices in constraining actions, and de-emphasises


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6. Conclusion

It is ofen said that innovation is central to the health o individual firms and othe economy as a whole. Te role that workers play in the generation o innova-tion is similarly uncontroversial. Te manner in which the benefits o worker-

generated innovation are allocated is, however, a matter o some debate. o date,the discussion has ocused on two distinct approaches what may be termed theeconomicand thefairnessperspectives. Te ormer may be seen as a justificationor the current regime, while the latter has ocused on the perceived needs oworkers (in large part in opposition to the employers). In this article we haveargued that these two approaches are both incomplete. Te option presented intheir place, thepractice-basedapproach, would allow or ocus on the specificso a particular industry, technology type, or workplace. Tis flexibility means,however, that blanket statements on how the benefits o worker innovation

should be allocated are not available. Empirical research is necessary in order toprovide statements on the allocation o benefits that are relevant to the industry/workplace the subject o the research. Research o this nature is at the heart ourther stages o the larger project o which this article is a part.

Notes

Tis research orms part o a larger project unded by an Australian Research1.Council Discovery Grant DP0987637. Te authors would like to thank ChrisArup and John Howe or the eedback on earlier drafs o this piece, as well

as the anonymous reerees.See, or example, the2. Copyright Act 1968, s 35(3), and the Designs Act 2003,s 13(1)(b). For a recent decision relating to the allocation o copyright in anemployment context, see EdSonic v Cassidy[2010] FCA 1008.Te recent decision in3. University o Western Australia v Gray[2009] FCAFC116 shows the currency, and many o the complexities, o this issue.It may be noted that US workers may be in a better situation than Australian4.workers as they can lay claim to the patents over their inventions (subjectto a royalty-ree licence in avour o the employer) as long as they are not

hired to invent, even i they have used the employers resources to developthe invention. For a discussion o the relevant US deault principles (Merges1999: 57).Toughts may be understood to be actions, or practices, internal to an indi-5.vidual (Foucault 1983: 208).Other reasons that have been cited include to obtain financing and boost6.market valuation; to use as signalling mechanisms; and to deter others romsuing (Lemley and Shapiro 2005: 81).It is certainly true that some employment contracts contain so-called cascad-7.

ing restraint clauses. Tese clauses contain, in essence, a variety o progres-sively less weak restraints. Tey are designed in the knowledge not only that l i h h ll h i h i i


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be considered valid by a court. Such a clause was considered in the decisionoAustralian Insurance Holdings v Chan[2010] FCA 781.Tis is not unique or the approaches described in this article. Fairness is8.problematic as airness itsel is not defined (and perhaps not useully defin-

able in this context save or the prescription to respect workers more);and or a critique o the normative aspirations o the psychological contract,see Fisk (2002). Te economics approach does not need to engage, in thismanner, as it is, substantially, a justification o the status quo.Fisk (2002: 784) also said o Stones work on the psychological contract, the9.prospects or the success o her work in achieving our shared version o amore just and equitable employment relationship cannot be adequately as-sessed without empirical work work that no one has yet done.

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Author Details

Dr. Chris Dent is a Senior Research Fellow with the Intellectual PropertyResearch Institute o Australia at the Melbourne Law School. Teocus o hiswork is a critical, empirical and historical examination o the patent system.His research also covers other areas o intellectual property such as copyrightand trade marks. Dr Dent has previously worked or the Law Reorm Com-mission o Western Australia and the Victorian Law Reorm Commission. Hecan be contacted at [email protected] .

Associate Professor Colin Fenwick is a member o the Centre or Employ-ment and Labour Relations Law at Melbourne Law School. He was ormerlyCentre Director, and also ormerly a joint Editor o theAustralian Journal oLabour Law. At present he is on leave, working as a labour law specialist orthe ILO. His research interests are primarily in comparative and internationallabour law. Te views expressed here do not represent the opinions or posi-

tion o the ILO .Kirsten Newitt is a labour lawyer who works or Ergon Associates, a London-based consultancy that specialises in labour standards in the context o develop-ment and ethical trade. In this role, Kirsten has produced research and policyadvice or a range o clients, including the European Commission, ILO andthe European Bank or Reconstruction and Development. Her research prin-cipally ocuses on the relationship between decent work, social dialogue andinternational development policy. Prior to working at Ergon, she worked onemployment and OHS policy or government agencies in Australia and Fiji .


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