Trade Secret Licensing

Protection of confidential proprietary information is crucial for any company’s survival. Confidential information and trade secret protect two similar spheres of information. Their difference lies in their scope. In order to get trade secret protection, there needs to be “reasonable efforts,” on part of the trade secret owner to protect and maintain confidential information with in a limited number of authorized individuals. Trade Secret also need to derive independent economic value to be subject of protection. Whereas confidential information need not subject of independent economic value that is either actual or potential. Confidential information also covers broader area of information that may or may not be subject to trade secret protection. State contract law is the only choice of protection for confidential information that is not a trade secret. To avoid unintended disclosure or misappropriation of trade secrets, every company try to maintain a pre-determined policy and definition for Non-Disclosure Agreement, confidential information, business purpose of the agreement, duration of the agreement, non-compete clauses etc.

Non-Disclosure Agreements (N.D.A.)

To prevent misappropriation of trade secrets by parties to the contract, organizations use non-disclosure agreements. N.D.A. ‘s can be one-way or two-way. For a two-way N.D.A., it is a promise on the part of party signing on to the agreement to not disclose any information that is acquired without prior approval of the other party. N.D.A.’s can be used to manage trade secrets and other confidentiality agreements. In N.D.A., there will be mutual obligations to do or not to do something. Duration of the N.D.A. is also critical, such as whether it is perpetual.

Survival of non-disclosure obligations: Survival depends on the term or duration of license stated in the non-disclosure agreement. They usually last a few years after the expiration of the duration of the license. It is intended to protect the trade secret owner.

Confidential information for trade secret licenses

Trade secret license “confidential information” clause should be defined in such a manner that is not overly broad. Overly broad license containing confidential information clause cover areas that are outside the statutory protection for trade secrets (UTSA adopted states, federal DTSA, and other state statutes). Confidential information that can be exploited economically along with reasonable effort determines the bounds of a trade secret.

Section 7 of National Labor Relations Act (NLRA)

As per section 7 of NLRA, employees have a right to discuss their terms of the employment with other co-workers or union representatives (if there is a union). The drafting of confidential information in the trade secret license and generally any employment agreement need to be stay clear from terms and conditions of the employment. As per guidelines released by NLRB, mixing the terms and requirements of confidentiality with the terms of employment is not advised.

Common terms in a trade secret license

Business purpose: It is intended to limit the disclosure of confidential information to the stated purpose of the agreement.   

Duration clause: Trade secret duration can run for perpetuity or forever. The trade secret license should have an end date. It is in the best interest of licensee to not agree to a license to pay royalty, even after the trade secret became subject of public domain. The licensee can affirmatively agree to not disclose the trade secret to any other party.

Confidential information: We have discussed this term above in this page.

Other Relevant term for confidentiality clause of trade secret license

Non-solicit clause: The employer who shares the trade secret with the employee such as customer list etc want to ensure that the employee would not compete or solicit employees, customers, and suppliers of the employer for a period of time. This period of time must be reasonable otherwise courts will not allow to enforce that clause. Upon breach of the agreement, equitable remedies are available to the employer against current or ex-employee who disclosed confidential information for trade secret purposes. However, this clause should not be overly restrictive that it poses a severe restriction on livelihood of the employee. It should be limited to a particular geographical location of the employer, same business application etc.

International trade secret license agreement issues

International trade secret agreements pose unique problems involving Export Authorization Regulation (EAR) requirements. Whether something is subject to Export Administration Regulations (EAR) depend on various factors such as “dual usage [military and commercial],” nature of the goods, software or technology; recipient of trade secrets are Non-U.S. persons or corporations registered overseas etc. Part § 734 of EAR. Because compliance with export control regulations is a necessity and “failure to comply may result in loss of export privileges, trade secret licenses must effectively anticipate the uses of the trade secret in a foreign country by non-U.S. business entities.”  Part § 732 of EAR.

The other factors listed below affect the application of EAR controls: “(i) the nature of the item at issue and its classification under the EAR; (ii) the ultimate destination of any applicable shipment; and (iii) the end use or end user of the product and the
possible licensing requirements.” Part § 732 of EAR. If the US business entities want to export or share trade secret information that is subject to EAR, to foreign entities or persons, they should get an “export license,” from the Bureau of Industry and Security (BIS) which administer EAR.