Key Takeaways

  • A trade secret agreement protects confidential business information and outlines how that information may be shared, used, and safeguarded by the licensee.
  • Trade secrets include formulas, methods, processes, customer lists, and other proprietary data that give a company a competitive advantage.
  • A robust agreement should define the trade secret, detail confidentiality obligations, address ownership rights, outline remedies for misappropriation, and specify how long secrecy obligations last.
  • NDAs, non-compete clauses, and internal security protocols can complement a trade secret agreement to strengthen legal protection.
  • Careful drafting of license, payment, and general terms—plus consideration of enforcement mechanisms—ensures legal enforceability and minimizes risk.

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.

Legal Standards and Court Interpretations

The legal definition of a trade secret extends beyond a simple list of confidential business practices. Courts often consider a range of factors to determine whether information qualifies as a trade secret under state or federal law. These include the extent to which the information is known outside the business, measures taken to keep it secret, its value to competitors, and the effort or cost required to develop it.Case law shows that information must not only be confidential but also derive independent economic value from its secrecy. Courts also weigh whether reasonable steps—such as NDAs, restricted access, and internal policies—were taken to protect that secrecy. Failure to implement adequate safeguards can undermine trade secret protection even if the information is valuable.

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:

Key Elements of a Trade Secret Agreement

A well-structured trade secret agreement typically includes several fundamental components beyond the basic licensing framework. These provisions ensure clarity and legal enforceability:

  • Detailed Description of Confidential Information: The agreement should clearly identify what constitutes the trade secret—such as formulas, designs, algorithms, or marketing data—without fully disclosing the protected details.
  • Use and Purpose Limitations: Specify how the licensee may use the information and for what purposes. Unauthorized use, even if unintentional, can constitute misappropriation.
  • Non-Disclosure Obligations: A core component is the requirement that the licensee keeps the information confidential, disclosing it only to employees or agents with a legitimate need to know.
  • Security Measures: The agreement should require the licensee to maintain robust security protocols—such as encrypted storage, restricted access, and regular audits—to prevent accidental or intentional disclosure.
  • Return or Destruction of Materials: Upon termination, the licensee must return or destroy all confidential information and certify compliance.

These clauses collectively create a strong legal framework for protecting trade secrets and reducing litigation risk.

License terms

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.

Enforcement and Remedies for Breach

Even with careful drafting, trade secret misappropriation can occur. A comprehensive trade secret agreement should outline available remedies and enforcement mechanisms to address potential breaches. These often include:

  • Injunctive Relief: A court order can immediately stop further use or disclosure of the trade secret.
  • Monetary Damages: The licensor may seek compensation for financial losses caused by unauthorized use or disclosure.
  • Attorneys’ Fees and Costs: Agreements sometimes include fee-shifting clauses that require the breaching party to cover legal expenses.
  • Return of Unjust Enrichment: Courts may require the licensee to return profits obtained from misuse of the trade secret.

Additionally, it is advisable to include dispute resolution clauses, such as arbitration or mediation requirements, to resolve conflicts more efficiently and confidentially.

Payment terms

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.

General terms

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.

Best Practices for Maintaining Trade Secret Protection

A trade secret agreement alone is not enough; ongoing diligence is essential to preserve legal protection. Companies should implement internal policies and complementary agreements to strengthen their position:

  • Non-Disclosure Agreements (NDAs): Use NDAs with all employees, contractors, and business partners who may access sensitive information.
  • Employee Training: Regularly educate staff on confidentiality obligations and best practices for handling trade secrets.
  • Access Controls: Limit trade secret access to essential personnel and maintain logs of who accesses sensitive data.
  • Post-Employment Restrictions: Non-compete or non-solicitation clauses can prevent former employees from exploiting trade secrets after departure.

These steps demonstrate that the company takes “reasonable measures” to protect its information—an essential factor in legal trade secret protection under the Uniform Trade Secrets Act (UTSA).

Frequently Asked Questions

  1. What is a trade secret agreement?
    A trade secret agreement is a legal contract that allows a licensee to use confidential business information under strict terms while ensuring the licensor retains ownership and control.
  2. What information can be protected as a trade secret?
    Any confidential information that provides a competitive advantage—such as formulas, algorithms, customer lists, or manufacturing processes—can qualify if reasonable measures are taken to protect it.
  3. Can trade secret agreements include non-compete clauses?
    Yes. While not mandatory, non-compete clauses can prevent licensees or employees from using trade secrets to compete against the licensor after termination.
  4. What happens if a trade secret is disclosed?
    If disclosure occurs, the licensor can seek injunctive relief, damages, and possibly attorneys’ fees. However, legal remedies may depend on whether adequate precautions were taken to protect the information.
  5. How long does a trade secret agreement last?
    There’s no fixed term; protection lasts as long as the information remains confidential and retains its economic value. Agreements typically require confidentiality obligations to survive termination.

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