Assignment and licence-back of a trade secret: no yawning matter

For those who like to live on the edge of IP, you cannot beat an assignment and licence-back of a trade secret. This is so both because of the peculiarities of both. First, consider trade secrets. With no registration, no international arrangements, no single accepted definition and the challenge of trying getting one’s arms around a right that is by definition secret, trade secrets stand separate and apart from all other IP rights.

Most importantly for our purposes, while trade secrets are nominally about secrecy, in matter of practice they are often more about how to control disclosure. Unless the only person using the trade secret is its creator, which is seldom the case, any use of a secret will invariably involve its disclosure to more (sometimes many more) than one person. This means that disclosees must be carefully vetted. If a trade secret is disclosed in an unauthorized manner by a person to whom disclosure has been made, there may not be any quantity of judicial award that is of a sufficient magnitude to compensate for the fact that the trade secret smoke is out of the bottle. It is the challenge of this dialectic between secrecy and disclosure that confers upon trade secrets their unique, almost idiosyncratic IP character, both legally and in practice.

There is also a special, almost idiosyncratic aspect to the assignment and licence-back of an IP right Generally speaking, in such an arrangement, a party purports to assign certain IP rights to a third party and immediately thereafter receives a licence back from the new owner to use the assigned IP right. This kind of arrangement appears usually to be driven by tax concerns or by an interest in consolidating the IP in a single entity. However, putting tax and corporate considerations to one side, in most situations where an assignment and licence-back is entered into, there is no real change in the nature of the use by the parties with respect to the relevant intellectual property right. This is because the erstwhile owner continues to use the IP right as a licensee, usually more or less in the same manner as it did prior to the assignment. To a degree, as a practical matter, “the more things change, the more things stay the same.”

Traditionally, the legal challenge of an assignment and licence-back arrangement is most acute where a trade mark is involved. This is especially so in those jurisdictions, such as the United States, which still require that goodwill in the mark be transferred from the assignor to the assignee, on the one hand, and whether the assignee/licensor has put sufficient quality control provisions into place for the use of the mark by the licensee, on the other. The law in such circumstances has come to recognize the validity of such arrangements where the assignor can continue to use the trade marks as a licensee, provided that the requirements of transfer of goodwill and quality control are met.

But what about the assignment and licence-back of a trade secret? As noted above, the essence of both an assignment and a licence is the fact that the owner of the trade secret has agreed to disclose it to a third party. That seems self-evident, as neither the assignee nor the licensee will agree to the transaction unless the trade secret has been disclosed to it. But it is not self-evident that such disclosure needs to take place in the assignment and licence-back situation. Consider the assignment and licence-back of confidential manufacturing technology, where the assignor/licensee resides in one country, but the assignee/licensor is found in another. The arrangement has been fashioned for tax or corporate considerations, whereby the assignee/licensor does not engage in any manufacturing activity. In fact, there is no actual disclosure of the trade secrets from the assignor to the assignee. Both before and after the transaction, the trade secret remains wholly within the care of the assignor/licensee, who continues to make use of the confidential manufacturing technology as if the transaction had never occurred.

And so the question: since there has been no disclosure of the trade secret to the assignee, can the transaction be challenged as a sham? For instance, if there are tax benefits associated with the transaction, can the arrangement later be rejected for tax purposes? Or consider a situation in which the assignor securitizes all of its IP rights, including the trade secrets that are the subject of the transaction, and the secured party later seeks to realize on these trade secrets assets. Will the secured party be able to enforce its security interest in the trade secrets against the assignor/licensee, which was not a party to the security agreement, since it is only the assignor/licensee that has “possession” of the asset. This Kat is not aware of any decisions regarding these questions; he would be delighted if any Kat readers might be able to shed some light.