Negotiation of Trade Secret License

Trade secrets include formulas, unpatented inventions, techniques and all other undisclosed intellectual property not protected in other ways which are essential to the operation of the business. Precautions must be taken to maintain the secrecy of its trade secrets. Once publicly disclosed, the value of your trade secrets can become zero.

Negotiating and closing a license deal, from inception through formal licensing agreement, is a complex and challenging task.

Upon an expression of interest and a desire for more detailed information of the trade secret by the licensee, a confidentiality agreement, or non-disclosure agreement, is usually signed. Under the agreement, the licensor should reciprocally obtain from the licensee about its financial health, technical capabilities, and marketing expertise.

Acquiring equally sensitive information from licensee would be a hostage to disclose secret invention because no one can guarantee that the receiving party will use confidential information properly and avoid damaging the disclosing party.

Therefore, trade secrets can be protected only through the vigilance of its owner and the formation of commercial relationship between parties.

The confidentiality agreement assures that information disclosed by the parties will not become “public”, both literally and within the meaning of patent law, for a stated term of years or forever.

The receiving party may also be required to comply with any other reasonable security measures requested in writing by the disclosing party, such as returning documents, devices, prototypes software, etc., to the disclosing party within a certain period of time without having retained copies of them.

There are generally three situation where a receiving party will not be bound by its prior agreement to keep trade secrets or trade secret confidential: the information is, or later becomes, public knowledge other than by breach of the agreement; the information is already in the possession of the receiving party prior to its receipt from the disclosing party; and the information is independently received by the receiving party from a third party who has no duty of non-disclosure.

When negotiations break down after confidential information has already been disclosed, litigation is often resulted.

Firstly, the licensor must prove that his information is sufficiently secret, in the sense of not being duplicable without considerable time, effort or expense, to constitute an “actionable trade secret”

Also a trade secret may exist in the combination of a number of elements of information, even if each discrete element may be found in the public domain.

Secondly, the licensor must prove that his information is misappropriated.

“A misappropriation of trade secrets occurs when a person acquires or discovers a trade secret by improper means or disclosures or uses a trade secret in breach of a duty of confidentiality imposed on him by the nature of his relationship with the owner of trade secret or reposed in him by the owner in disclosing the information, and the owner of the trade secret is damaged by his improper acquisition, disclosure or use.” (American Antenna Corp. v. Amperex Elec. Corp.(1989))

“The user of another’s trade secret is liable even if he uses it with modifications or improvements upon it effected by his own efforts, so long as the substance of the process used by the actor is derived from the other’s secret” (In re Innovative Constr. Sys. Inc.(1986))