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Friday, 5 November 2010

Diamonds Are Forever, But Are Trade Secrets?

Once again, let's talk about trade secret licensing, this time about the provision in a trade secret licence that sets out the duration for which the licensee undertakes to maintain the secrecy of the contents that have been disclosed. In particular, I sometimes encounter a provision whereby the licensee undertakes to keep the proprietary information in confidence for a fixed period of time, rather than for so long as the trade secret is not generally disclosed, without specifying any time limit.

I have always found this provision a bit puzzling. The reason lies in my understanding of the nature of trade secret protection. The fundamental characteristic of trade secrets is secrecy (Mark Lemley well stated this "so obvious that we forget it" point in his 2008 article, The Surprising Virtues of Treating Trade Secrets as IP Rights). If so, what would appear to follow is that the paramount interest of the proprietor of the trade secret is that it take all necessary steps to ensure that the trade secret is not disclosed, unless the proprietor chooses to do so.

In the licensing situation, unless the licensee is a rogue, it is presumed that the licensee has a similar interest in maintaining the secrecy of the proprietary contents. As such, the licensee will undertake not to take any action that might lead to the unauthorized disclosure of the trade secret, the occurrence of which redound to the presumed detriment of both parties. Woe to the licensee that either by design or negligence breaches this undertaking.

That is all well and good--until we encounter a provision in the license that goes something like this: " The licensee undertakes to maintain the confidentiality of the Trade Secrets for a period of five years from the execution date of this Agreement." At first blush, such a provision seems to be at odds with the bedrock foundation of trade secrets. If secrecy is the sine qua non of the right, then why would the licensor-proprietor agree in advance that its trade secret may lawfully be disclosed by the licensee as of a date certain in the future, irrespective of any consideration of (i) prior independent creation by the licensor; (ii) independent creation by a third party or (iii) disclosure through no fault of the licensee? Isn't this a prouncement of the premature death of the trade secret right?

After all, I cannot think of reasonable circumstances in which a patent, copyright or
trade mark licensor would knowingly grant the licensee the right to perform an act that would have the effect of impairing, perhaps fatally so, the licensed IP right. I have never encountered a provision that states that, after five years, a trade mark licensee is permitted to use the trade mark in any manner, whether or not such promiscuous use might ultimately lead to a cancellation claim for non-use or a claim that the mark has become generic and non-distinctive. And yet, with respect to a trade secret, it is not that unusual to enounter a provision that states that the proprietor agrees to the potential impairment, down the durational line, of the very right that it is licensing. It makes this Kat to want to ululate with bewilderment. What is going on here?

I have heard several explanations for the persistence of this provision in trade secret agreements, including the following:

1. The licensee has superior bargaining power and it is prepared to take it upon itself the obligation of confidentiality, and all that entails for the operation of the licensee, only for a fixed period of time.

2. The trade secret has commercial value only if this particular licensee succeeds in extracting value from it. If the licensee succeeds, it will likely have no incentive to allow the trade secret to be disclosed. If not, the trade secret has no continuing commercial value and its subsequent disclosure has no practical significance.

3. The technology under licence is so fast-changing that confidentiality will be of no consequence by the end of the period of duration specified in the licence. What the licensee is primarily obtaining is the potential for first mover advantage. The provision capping the time period for confidentiality provides the licensee with contractual peace of mind.

4. The technology under licence is less dynamic than in (3), but it is sufficiently so that, by the end of the time period specified in the licence, it will be impractical as an evidentiary matter to try and determine whether the licensee has "breached" its undertaking. The provision fixing the time period is designed to ease the evidentiary burden of both parties in advance.

I am certain that there must be other reasons, depending upon the circumstances and readers are invited to share their thoughts.

Underlying all of this is the transitory nature of the trade secret right. Trade secrets can remain confidential and hence continue to be valuable for scores of years, or they can evaporate in a moment. A trade secret licence can seek to bind the licensee to maintain the confidentiality of the trade secret for an indefinite period, provided that secrecy is preserved, or the proprietor can willingly agree that the period of secrecy will be limited in time. All of this makes getting one's professional arms around trade secrets so very, very challenging.

2 comments:

Anonymous said...

Time limits are common in general (not specifically for trade secrets) confidentiality / non-disclosure agreements nowadays. I argue against them for exactly the reasons Neil states, but it seems to be accepted they are "standard". I suspect they are creeping into trade secret agreements without the drafters thinking the issues through properly.

Meldrew said...

Other reasons could include:-

- that staff turnover is so fast these days that in five years time there will be no one employed by either party who has any knowledge of which information was considered secret and which not;

- that any perpetual right of secrecy could impose a perpetual obligation on the recipient, and that monitoring perpetually for adherence to that obligation would be onerous on the recipient;

- that a perpetual restriction on freedom to operate might run up against competition law problems.

Having said that, what do readers think of clauses that require the return of all materials embodying the trade secret after the licence expires? Until the technology of brainwashing is perfected, are such clauses effective?

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