Trade Secret License Agreements: Everything You Need to Know
Trade secret license agreements provide for the secure transfer of rights in a secret process or formula, invention or confidential information between parties.4 min read
Updated November 23, 2020:
Trade secret license agreements provide for the secure transfer of rights in a secret process or formula, invention, or confidential information between parties. They grant the licensee permission to use some or all of the information that comprises a trade secret, but the licensor retains complete ownership rights to the secret.
Definition of a Trade Secret
A trade secret is a valuable form of intellectual property that is used when an owner seeks protection that is provided by other forms of property rights, such as those bestowed by a patent but does not want the components of the property made public. In most cases, a trade secret provides the owner with a competitive advantage over other companies or individuals.
Although often referred to as a patent, because, as is often the case with a patent, they protect a process, trade secrets are not a patent, and thus a trade secret agreement does differ from a [patent license agreement] (https://www.upcounsel.com/patent-license-agreement-checklist). A trade secret differs from a patent in that:
- Protection is not derived from filing an application, as in the case of other intellectual property.
- No disclosure is required that can become public information.
- There is nothing necessarily unique that would warrant patent protection.
- The information contained in a trade secret contains nothing that could be considered proprietary.
What makes a trade secret valuable is a know-how possessed by its owner. If the ingredients or process should become public knowledge, their worth to the owner would disappear.
Protection for trade secrets is derived from the Uniform Trade Secrets Act (UTSA), which is legislation created by the Uniform Law Commission and adopted by 47 states and the District of Columbia. This legislation offers a definition of what constitutes a trade secret, the three essential elements to a trade secret claim, and the two instances where obtaining a trade secret enjoyed by another is illegal. In most cases, the misappropriation of a trade secret is not a crime but considered a form of unfair competition, and remedies differ by state.
Categories in a Trade Secret License Agreement
A company or individual entering into a trade secret license agreement risks disclosing the essence of their intellectual property, but the risk is often outweighed by the opportunity to realize profits in the form of payment received upon the signing and/or royalty payments received throughout the duration of the agreement.
Since a trade secret license agreement, like any license agreement, can transfer whatever is negotiated between two parties, the licensor can provide the licensee with the entire contents of a trade secret or omit key ingredients or steps in the process. However, if it is understood by the licensee that they have agreed to receive the entire contents of the trade secret and the licensor fails to do so, the value of the asset is greatly diminished, the licensee may seek a legal remedy, and/or both sides will have lost opportunities to generate income.
Regardless of whether a license agreement is exclusive or non-exclusive, they have the same three components:
This includes a description of the trade secret; although unlike licenses pertaining to other intellectual property, it is not required that the entire trade secret be disclosed.
This protects the secrecy of the property from becoming public knowledge. In some cases, the license may be considered a ‘hybrid license’, in which rights to property, say a patent, accompanies the trade secret license agreement. The terms must include the obligation of the licensee to maintain the secrecy of the property.
A license agreement is not a license agreement unless there is some kind of compensation being provided by the licensee in return for the right to have access to the trade secret. Consideration is generally in the form of royalties that are paid throughout the duration of the license. In some cases, there’s a lump sum payment made by the licensee.
Because payment methods and amounts can vary depending upon the circumstances of the transfer, it is usually a good idea to consult an experienced attorney before entering into any trade secret license agreement.
In addition to the license and payment terms, which often are the basis for negotiation in a trade secret license agreement, there are terms often considered boilerplate, but important nonetheless.
These include: a provision for arbitration; a clearly defined governing law that can be used in cases of enforceability and the interpretation of contract terms; language that does not diminish any previous non-disclosure pacts signed by the parties; a survival clause that maintains the secrecy of the property after termination of the license; and notification provisions that compel the licensor to immediately contact the licensee should an unintended disclosure of the trade secret occur.
While trade secrets have not traditionally had the standing of other intellectual property, such as patents, trademarks, and copyrights, in the minds of the general public, they are nonetheless important to a large number of businesses. Today, trade secrets cover roughly 90% of new technology and are included in over 80% of technology licensing agreements.
To learn more about trade secret license agreements, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.