Key Takeaways

  • A secret license agreement allows limited use of confidential business information while preserving ownership and secrecy.
  • Trade secret licenses must include terms regarding exclusivity, payment, and confidentiality obligations.
  • Maintaining secrecy before, during, and after the agreement is critical to avoid legal disputes or loss of rights.
  • Licensees may be subject to audits and must follow precise usage guidelines.
  • Including indemnification, liability caps, and dispute resolution provisions can mitigate legal risk.
  • Sublicensing, monitoring, and termination procedures should be clearly defined in the agreement.
  • Licensing trade secrets allows licensors to monetize IP without public disclosure but requires vigilant protection mechanisms.
  • Legal counsel can help ensure enforceability and reduce the risk of misappropriation.

A trade secret license is an agreement between a licensor (owner) and a licensee (party who needs the proprietary information) that gives the licensee permission to gain access to information normally regarded as a trade secret. Unlike licensing in other forms of intellectual property, the focus is on the sharing of the information rather than the actual uses. In these arrangements, the licensor does not give up ownership of the information. Licensing a trade secret is a way for the licensor to monetize this particular form of intellectual property.

Components of a Trade Secret License

Though the content may vary some, every trade secret license should include some basic elements. If any of these are left out, the value of the intellectual property can be reduced and disagreements between the parties can result. This list is not exhaustive, and most licensing agreements contain additional sections on liability and other topics.

  • License terms: The trade secret should be described but not entirely disclosed.
  • Qualifications and/or restrictions: The license should spell out if the license is exclusive, non-exclusive, or sole and if it is restricted to a particular field, geographic area, or type of product.
  • Maintenance of secrecy: The trade secret license will require the licensee, and possibly the licensor, to keep the secrecy of the intellectual property.
  • Payment terms: Consideration for a trade secret license usually takes the form of royalties, a payment stream, or a lump sum payment. The compensation may be calculated through a formula that combines these. The terms of compensation are negotiated on the front end and included in the licensing document.
  • Audit rights: The licensor should request the right to inspect records in case there is some question about whether the licensee is complying with the terms. This section should also cover who pays for the audit if it reveals some errors or wrongdoing, and how many audits per year can be called for without disrupting the licensee's operations.
  • Termination: This section should describe how each party can exit the agreement, under what conditions, and what compensation would be due.
  • Governing law: This identifies under what intellectual property laws the contract will be interpreted and enforced. Usually, the licensor makes this decision as the owner of the trade secret.
  • Survival clause: This requires the maintenance of the secrecy of the information even after the agreement terminates if it is still a trade secret at that time.
  • Notice provisions: Important notices to the licensor should match the licensee's obligation to warn the licensor's counsel in the event that the trade secret is accidentally disclosed.
  • Assignment clause: The parties agree on how many other parties can receive access to the trade secret from the licensor. This section also describes whether affiliates of the licensee can have access to the information.

Best Practices for Drafting a Secret License

To maximize the effectiveness of a trade secret license and preserve enforceability, consider the following best practices:

  • Clearly Define the Trade Secret: Without revealing the actual secret, describe it precisely enough to establish its scope.
  • Include Strong Confidentiality Obligations: Require the licensee to protect the information using at least the same degree of care it uses for its own trade secrets.
  • Limit Use and Access: Specify who can access the secret and for what purpose. Restrict the number of users and their locations, if possible.
  • Prohibit Reverse Engineering: Include explicit language that bars the licensee from analyzing or replicating the information.
  • Sublicensing and Assignment Control: State whether sublicensing is allowed and under what conditions, if any.
  • Audit and Inspection Rights: Grant the licensor regular audit rights to verify compliance.
  • Survival of Obligations: Ensure confidentiality duties survive termination for as long as the information remains a trade secret.

Incorporating these terms enhances the defensibility and clarity of the agreement.

Risks and Challenges of Licensing Trade Secrets

While licensing a trade secret can unlock significant economic value, it also introduces several risks. The most pressing concern is maintaining the confidentiality of the licensed information throughout the negotiation, performance, and post-termination phases of the agreement. A single lapse in oversight can compromise the trade secret's protected status.

Key risks include:

  • Loss of Secrecy: Unauthorized disclosure or reverse engineering by the licensee or its affiliates may expose the trade secret.
  • Litigation Exposure: Disputes over use, scope, or breach of confidentiality may lead to costly legal action.
  • Monitoring Difficulties: Ensuring compliance with secrecy and usage terms often requires active auditing and enforcement mechanisms.
  • Cross-Border Issues: When licensing internationally, differing trade secret laws can complicate enforcement.

Careful drafting and proactive oversight are essential to mitigate these risks.

Forms of Compensation

  • Royalties are usually a percentage of the profit that the licensee generates using the trade secret. However, royalties may also be calculated based on how much money the licensee saves by using the secret information or how much revenues increase after implementation of the trade secret. That makes it easier for the parties to see how much the licensee benefited from the possession of the trade secret. If royalties are based on factors that vary, like the licensee's costs, sales, or revenue, then the licensor should seek the right to conduct an audit and require regular reports from the licensee. This gives the licensor more confidence that they will be paid accurately. The licensee will carefully and correctly calculate the royalties when they know an audit is likely.
  • Payment streams are equal payments of a fixed amount made to the licensor by the licensee over a period of time. For the licensee, this is easier to manage than royalty calculations, and it doesn't require an audit to make sure the payment amount is correct. Spreading payments over time favors licensees that don't have a lot of cash on hand. The fixed end date for the payments helps the licensee calculate the cost of the license accurately.
  • Lump sum payments are generally not favorable to the licensee. A risk always exists that the licensee may not earn enough from the trade secret to recoup the lump sum payment. However, if there is value in being the first to receive the trade secret from the licensor, then the licensee may be more likely to agree to an up-front lump sum. Also, the licensee can sometimes benefit by making a single payment rather than committing to ongoing compensation.

When to Use a Trade Secret License Instead of a Patent

Licensing a trade secret instead of seeking patent protection may be advantageous in certain situations:

  • Long-Term Competitive Advantage: If the information could remain secret longer than a 20-year patent term, a trade secret may offer extended value.
  • No Disclosure Requirement: Unlike patents, trade secrets do not require public disclosure, preserving competitive edge.
  • Cost Efficiency: Trade secret protection avoids the expense and time of patent prosecution.
  • Broad Applicability: Trade secrets can include know-how, formulas, processes, or data that may not qualify for patent protection.

However, trade secret licenses require stringent controls to prevent inadvertent disclosure or misuse.

Additional Licensing Terms to Consider

Beyond payment structures, trade secret licenses often include several other clauses that address legal and operational risks:

  • Indemnification: Requires the licensee to compensate the licensor for any damages arising from misuse or unauthorized disclosure.
  • Limitation of Liability: Caps the potential liability of each party in the event of a dispute, often excluding intentional misconduct.
  • Dispute Resolution: Establishes the method (e.g., arbitration or litigation) and jurisdiction for resolving disputes.
  • Choice of Law: Specifies which state or country's law governs the agreement.
  • Boilerplate Clauses: Includes provisions on notice, severability, force majeure, and integration to prevent ambiguity.

These terms ensure the license is legally sound and provide mechanisms for enforcement.

Frequently Asked Questions

1. What is a secret license? A secret license refers to a licensing agreement involving confidential business information or trade secrets, allowing limited use while preserving secrecy and ownership.

2. Can trade secrets be licensed internationally? Yes, but international licensing introduces additional complexity due to differing legal standards for trade secret protection across countries.

3. How do you protect a trade secret during licensing? Use NDAs, limit access, audit licensees, and include strict confidentiality clauses to maintain secrecy throughout the licensing term.

4. What happens if the licensee breaches confidentiality? The licensor can pursue legal remedies such as injunctive relief, monetary damages, or termination of the license.

5. Why choose trade secret licensing over patenting? Trade secret licensing avoids public disclosure and can offer longer protection if secrecy is maintained, especially for information that doesn't qualify for a patent.

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