In many countries, ‘trade secrets’ (e.g. know-how) have a special legal status.
‘Trade secrets’. Trade secrets relate to confidential information that is not generally known or reasonably ascertainable, and by which a company can obtain an economic advantage over competitors or customers. This economic advantage must derive particularly from the fact that the trade secret is not publicly known, and not merely from the value of the information itself. Other than the term trade secret suggests, the legal concept is fairly broad. It includes formulas, practices, processes, designs, instruments, patterns, and compilations of information.
Protection: non-disclosure agreements. In order for a trade secret to enjoy legal protection, the owner must make reasonable efforts to maintain its secrecy. Such efforts include adoption of common technological security measures, non-compete arrangements in employment contracts, and non-disclosure agreements (NDA’s) with (potential) business partners and suppliers.
NDA scope. Two key elements of a standard NDA are: (a) a prohibition to disclose any part of the received confidential information to third parties, and (b) restrictions on the scope of use of the confidential information (i.e. use only for the specified authorised ‘Purpose’ of the NDA and sharing only amongst employees and affiliated companies on a need-to-know basis). Usually a penalty (liquidated damages) clause in case of a breach of confidentiality is not included. However, in some industries such clauses can be found. See also sections 1.3(a) and 4.7.
Trade secrets vs. patents. To obtain patent protection, a significant amount of information about the process or product must be submitted with the patent application and this information will become publicly accessible. After expiration of the patent, anybody can use the method or product. The temporary monopoly on the underlying invention is considered to be a trade-off for disclosing the information to the public. Obviously, this is not the case with trade secrets.
Licensing trade secrets. In the context of a know-how licence (also called ‘technology licence’) the licensor can impose or agree on obligations other than those strictly necessary to protect the secrecy, such as the following:
- the licensee can be prohibited to re-engineer or decompile the trade secrets (e.g if the trade secrets involve software);
- the licensee can be prohibited to analyse its composition (e.g. if the trade secret is a chemical substance, the disclosing party may seek tests of the substance’s properties, but wishes to prevent that the precise composition is discovered through analysis);
- the payment of a royalty for using the technology, even after the underlying patent has expired;
- sharing of know-how and experience in using or applying the know-how, or access to the licensee’s network or customer base;
- exclusive ownership by the licensor of derivative works (and modifications or improvements to the initial technology) that result from communications between the licensor and licensee;
- a right to audit (verification) in order to ascertain compliance with the licence terms;
- an obligation to notify the licensor in case of any identified infringements by others;
- an agreement that disclosure by the licensor blocks the licensee from using the disclosed confidential information for other purposes than those explicitly agreed.
Trade secrets and technology licences. In the framework of patent and know-how licence agreements, the licensed patent expires after 20 years and the licensed know-how continues. Note that any royalties payable after the licensed patent expires should probably be adjusted to only cover compensation for the know-how provided by the licensor. Nevertheless, one may wonder whether continuation of the licence agreement for the sole purpose of using the know-how related to the (expired) patented invention is even desirable at all after the patent expired (when probably all competitors developed the know-how).