The always-fascinating EconTalk podcast had as its guest on January 18 “sneakerhead” Josh Luber of Campless.com, a site dedicated to tracking the secondary market in sneakers. There is a thriving market on Ebay and other sites in sneakers, particularly Nike basketball shoes. Just about every week, Nike releases small production runs of sneaker models to stores like Athlete’s Foot. They are intended to be collectible: maybe unique color combinations, or maybe a new run of a popular older model. People line up outside shoe stores in malls across the country every Saturday morning, trying to get a pair. They almost always resell them, sometimes for many times the already-inflated MSRP. The market is larger than you might think: in 2014, more than 125,000 individual resellers made more than $1.2 billion in profits over and above the retail price of the shoes.
And, of course, every year Nike releases the newest model of Air Jordans, and the same thing happens: hundreds of thousands sell out very quickly for full retail, and many of those also end up in the secondary market, selling for two to five times the retail price.
Listening to the discussion of sneakers made me think about trade secrets, an aspect of intellectual property law I haven’t discussed here before. Idaho’s intellectual property laws include a version of the Uniform Trade Secrets Act, which allows owners of trade secrets some means of protecting them.
What is a trade secret? The Act defines a trade secret as any information which derives independent economic value, actual or potential, from not being generally known, and which is kept secret.
A trade secret can be anything: the recipe for Coca-Cola. The process that allows you to make your products more cheaply than your competitors. Lists of suppliers and customers. Market research and data that allows you to gauge supply and demand.
What does this have to do with sneakers? Luber’s site, Campless.com, is all about the data. Josh Luber is not some kid with a website who likes sneakers. He was a software developer and data analyst on Wall Street who likes sneakers. His website is based on extensive data mining of transactions on Ebay and other auction sites, as well as market intelligence on upcoming releases. EconTalk host Russ Roberts asked the obvious question: why does Nike allow Ebay resellers to capture the value of its shoes? Why not raise the price, or produce more to meet the demand?
Luber’s answer suggests that Nike, in order to maximize profits on sales of basketball shoes, is walking a fine line between creating a sneaker that everybody wants and one that anyone can get. Suppose there are 10,000 people in the market who may be interested in a particular shoe. If Nike produces, say, 9,500 pairs of a shoe, demand will be 10,000. Their scarcity makes them desirable, and every pair will sell for full retail. But, if Nike produces 11,000 pairs, anyone who wants a pair can get it in the stores, and suddenly it’s no big deal to have a pair. Demand will drop, and most of the shoes end up selling for heavily discounted prices.
If Luber is analyzing the data on the resale market, it is a good bet that Nike is too. If so, it may be that these weekly limited releases are trial runs intended to gauge demand for Nike’s big shoe releases. As such, the data it gathers would play a significant part in how Nike maximizes its profits from sale of Air Jordans.
That data gathered by Nike is a trade secret, as are the details of how Nike manipulates and uses the data. Nike cannot stop Luber or anyone else from gathering data, but it could prevent its own employees from disclosing the data Nike has gathered, or from using it if they leave to work for a competitor. To be a protectable trade secret, information must be subject to reasonable efforts to keep it secret. This means different things depending on what the information is. It may mean keeping a cabinet door locked, and it may also mean placing confidentiality clauses and non-disclosure agreements in employment contracts. If you have concerns about whether your efforts to protect your critical information are good enough, give me a call.