TRADE SECRET LICENSING

A trade secret license can help extract value from a trade secret, a valuable form of intellectual
property asset. However, omitting a key ingredient from a trade secret license can result in the
ultimate loss of the value of the asset, disagreements between the licensor and licensee and lost
opportunities. Some key ingredients are summarized here in three broad categories — license
terms, payment terms and general terms.
The license terms should describe the trade secret that is the source of the license. Unlike other
intellectual property licenses this should be done without disclosing the entire trade secret itself.
The nature of the trade secret license is the right for the licensee to receive the trade secret rather
than the on-going use of the asset which is the right granted in other intellectual property licenses.
There may be more to the license than just the trade secret in the case of a hybrid license. That is, a
hybrid license may be comprised of know how (the trade secret) that accompanies a patent license.
A hybrid license may also include an existing trade secret combined with future improvements to
the trade secret that are discovered by the licensor (or that are discovered by the licensee
depending on the agreement).
The license may also be qualified and include restrictions — it may be an exclusive, sole or non-
exclusive license, it may be limited to a field of use and it may have geographical or product
constraints, much like patent licenses.
The license terms need to be accompanied with appropriate obligations for the licensee to maintain
the secrecy of the trade secret. In some cases there may even be specific confidentiality obligations
imposed on the licensor to maintain the secrecy. For example, if the trade secret license is exclusive
and the licensee gets value from knowing the trade secret and from the licensee's competitors not
getting access to the trade secret then the licensee may want to be sure that the licensor is taking
appropriate steps.
A trade secret license needs to be supported by some form of consideration – typically a royalty,
payment stream or lump sum payment (or some combination of these). Each form of fee is suitable
for different circumstances to address a party's risk and return profile. There are an almost infinite
variety of payment methods, so as is the case with negotiating any contract, it is best if each party
has a solid understanding of what it expects to get out of the deal.
Some examples of how payment terms can help a party achieve its goals:

1. A royalty payment that is tied to the licensee's actual cost savings or incremental revenue as
a result of using a trade secret to manufacture a product can help ensure that a licensee's
payment obligations are proportionate to its success (i.e. revenue and expense matching).
By contrast, a licensee may be upside-down on fees if it makes a lump-sum payment based
on incorrectly speculating the value of incorporating the trade secret into its operations.
2. If a trade secret will only confer a short-term first mover advantage on a licensee or if there
is significant risk that the trade secret will be independently developed then a licensor may
be best served by requiring a lump sum payment (i.e. take the money and run). This will not
necessarily be to the detriment of a licensee who may prefer the certainty of a fixed
payment, the non-recurring nature of the payment and potentially favourable accounting
treatment when making this type of payment.
 3. A stream of equal payments (based on a fixed amount rather than a calculation as in the
case of a royalty) can help alleviate the complications in arriving at a suitable royalty
calculation and it eliminates the need to monitor royalty calculations through audits. This
can help a licensee spread its payments out over time which is helpful if it has shallow
pockets, or if it has cleverly negotiated some conditions when the payment stream will end
to try to reduce its overall license fee exposure.
4. Some combination of these (such as a lump sum payment coupled with an on-going royalty)
can help fine-tune each party's relative interests and balance risks and returns.
If the parties use a royalty payment structure that is calculated based on a licensee variable (such as
product revenue or cost, overall revenue (gross or net), units sold, etc.) then the agreement should
include audit rights and royalty reporting obligations. This will give the licensor the peace of mind
that the licensee is incensed to carefully calculate and accurately report its royalty payments. Audit
rights also allow the licensor to investigate suspected abuse or careless calculation by the licensee.
Audit terms have some usual characteristics (such as covering the cost of the licensor's audit if it
reveals material underpayment by the licensee) and restrictions (such as only permitting a
reasonable number of audits per year to avoid disrupting the licensee's operations).
The term of the license agreement should be considered in conjunction with the payment terms. If
the royalties or the payment stream are tied to the length of the agreement then a lengthy or
perpetual license may not best serve a licensee's interests as it may require the licensee to make
payments well beyond the usefulness of the trade secret to the licensee. However, such an
arrangement may ultimately be fair if the licensee will continue to realize an advantage for as long
as the licensee is making products that can only be produced with the knowledge of the trade
secret. The parties should carefully consider termination rights and remedies and how these affect
the term and, by implication, how such rights and remedies affect the license payments.
If the license is hybrid or if it bundles the trade secret license with knowledge transfer services then
the payment allocation for each component of the license should be clear, and licenses and services
should be separated to avoid disputes if a component of the agreement expires or is terminated.
Aside from getting the license and payment terms right there are some general provisions in a trade
secret license agreement worth addressing. As these are sometimes treated as boilerplate terms
the necessary adjustments to make them more suitable for a trade secret license can sometimes be
overlooked:

1. An arbitration provision that includes an obligation to keep the arbitration confidential can
help keep the trade secret confidential. While the same effect may be attained through
litigation it can require the parties to take extra steps and the outcome may not be as
certain.
2. Both parties benefit from having a single clear governing law in the license to provide
certainty on the interpretation of the contract terms and on enforceability. In many cases a
licensor will insist upon setting the governing law since it is providing the trade secret and
arguably has the most to lose if there is a need to enforce the license agreement.
3. If the parties signed a non-disclosure agreement initially to allow the licensor to share some
details of the trade secret then it is helpful if the entire agreement clause does not
unintentionally extinguish the non-disclosure agreement.
 4. The survival clause should contemplate that even after termination of the license
agreement and any payments the licensee is still not at liberty to disclose the trade secret if
it is still a secret.
5. The notice provisions can be appropriately tailored to ensure that critical notices to the
licensor match the licensee's early warning notification obligations (in the event of an
unintended disclosure of the trade secret) in a way that gets the licensor's counsel's
attention to try to help preserve the confidentiality of the trade secret if there is a chance.
6. The assignment clause can ensure that the licensor can appropriately manage the number
of future parties that receive access to the trade secret. This can also be addressed by
properly defining the licensee parties to determine if the licensee's affiliates can or cannot
obtain access to the trade secret from the licensee.
While this coverage of key terms for a trade secret license is not exhaustive (a discussion on liability
is missing, for example) it reveals opportunities to thoughtfully approach some key terms in a trade
secret license to avoid disputes and to help the parties construct a contractual vehicle that serves
each party's interests.
 ROLE OF IPR IN TECHNOLOGY TRANSFER

In a high paced and high adrenaline competition, technology has been growing at a frenetic pace.
The advancements in the technology space have helped numerous businesses to grow and thrive in
the marketplace. Intellectual property rights play a crucial role in protecting new technologies and
monetizing through licensing revenue streams. Intellectual property can be in the form of patents,
trademarks, industrial designs, copyrights and geographical indications. Intellectual property,
especially patents help in protecting an invention or new technology, thus excluding other to make,
manufacture, and sell without the consent of the inventor for a period of 20 years. There is a need
for stronger intellectual property rights, especially in developing countries to encourage further
innovation and providing return on investment in research and development. Developed countries
have focused on stronger IPR regime to create opportunities for potential inventors to gain a
competitive edge in the marketplace; on the other hand, weak IP enforcement in developing
countries has led to rapid diffusion of knowledge by imitating competitor’s product and making
them dependent on imitators as a source of technology development. Most of the developing
countries need to understand the importance of patents as an effective source of development and
obtaining returns on R&D. However, the impact of stronger IPR regime depends on resources
available for domestic innovation and capacity. On the contrary, a strong IPR enforcement can lead
to monopoly pricing and restricts consumer choices, particularly in developing countries that invest
little in R&D and depend on foreign innovations.

The term technology transfer is defined as a process in which a firm obtains access to a particular
technology developed in another country. An adequate IPR protection can result in significant
impact on technology diffusion and depends on country’s resources for domestic innovation and
development. However, it can also restrict technology diffusion with patents preventing others to
make or sell the proprietary knowledge and allowing the inventor to sell at higher prices. On the
other hand, IPR can encourage technology transfer through a number of formal channels such as
international trade, FDI, joint ventures, and licensing.

International Trade
A stronger IPR regime can make a significant impact in open economies, thus relying more on
foreign patents and reduce domestic patenting. It leads to increase in trade flows and act as a
substitute to the products domestically available, thus leading to less domestic filing and more
foreign patenting. However, diffusion of technology is not successful for countries having imitating
capabilities and innovative capacity. A stronger patent regime encourages foreign patenting in large
markets and is beneficial to foreign firms to grab more market share in open economies.
Developing countries should not enforce stronger IPR as it will result in inhibiting growth and
increase cost of imported goods, whereas developed economies can apply stronger IPR to
encourage firms to produce innovative products domestically instead of relying on imitative
products.

Licensing

As most of the developed countries have adequate resources to spur innovation and growth, FDI
and technology licensing are considered as the most important factors for technology diffusion. A
stronger patent regime not only encourages licensing opportunities to firms in developing countries
but also lead to technology spill overs to local technology companies, thus leading to erosion of
profits. The risk is higher when the developing countries have the requisite innovative capacity to
develop imitative products and tailor the technology to suit local needs, requirements, and
standards. Thus, majority of technology firms embrace license contracts instead of establishing a
local presence. A stronger patent protection helps the company to license their technology and
increase patenting activity in the developing countries. It may also lead to increase exports and
enhance welfare in the developing countries.

Foreign Direct Investment

Majority of the MNCs evaluate the strength of IPR before making investments in the particular
country. Prior to making an investment in the host country, MNCs take into account and evaluate
the adequate legal infrastructure, laws pertaining to the particular technology and how
government agencies treat foreign entities. The level of IPR protection and patent filing activity is
often perceived as a measure of FDI received by the host country in the high-technology sectors.
Thus, there is a positive relation between FDI and IP enforcement. In developing countries, FDI
focuses on distribution activities due to weak IP laws. In addition to this, most of the MNCs conduct
their R&D in weak IP enforcement countries due to low cost researchers in these countries and
then the innovation is integrated with the company’s knowledge and resource abroad to realize the
return on investment. Therefore, low-cost advantage and country’s risk are also the important
factors to be considered in making FDI. Firms should make informed decisions while making
investments such as market size, existing resources and production costs.

To sum up, the strength of IP protection in the country helps in facilitating technology transfer to
firms in developing countries. Weak IP enforcement can lead foreign firms to engage in distribution
activities as compared to developing manufacturing subsidiaries. A stronger patent regime is not
only necessary to encourage technology transfer and foreign investment but it also depends on the
country’s expected growth, resources and innovative capacity and development. However,
developing countries having a certain level of innovation capacity can benefit from technology
diffusion and enhance growth. Majority of the research and development efforts are concentrated
towards developed countries while the developing countries have adopted a different approach,
having a weak IP regime necessary for technology and knowledge diffusion, thus relying on
imitating products. On the contrary, a strong IP enforcement helps in rewarding innovators and
creativity. Also, one of the major reasons for firms investing on R&D efforts, especially for
technology products, is to put pressure on government agencies to strengthen the IPR regime. A
stronger IPR enforcement can attract FDI and increase return on investment. Technology licensing
can help the firm to reduce the cost of production and discourage imitation. Therefore, stronger IPR
regime can enhance the growth of the country depending upon its characteristics. Besides this, it
leads to higher growth in open economies and rapid diffusion of technology and knowledge
through formals channels.
 TRADE SECRET PROTECTION IN INDIA

Trade secrets are a vital part of Intellectual Property rights of a company. These trade
secrets have a direct relationship to the growth of the company. Usually, these refer to
various aspects such as device, instrument, data, design, formula, practice, etc.
depending on the genre of business and are not meant to be disclosed to any third
person. You will understand the importance of protecting trade secrets from here.

Trade secrets are considered to be a part of the Intellectual Property of the company
as it amounts to the company’s growth. Generally, a trade secret is referred to as a
practice, process, formula, design, device, instrument or a collection of data or
information regarding the business which will not be disclosed to the public. The
owner tries to keep it as a secret and confidential as it derives economic value and
advantage among other competitors in the market. Thus, the trade secret is defined as
the secret which is not generally accessible by people and must have a commercial
value as a secret and the owner should take steps to maintain it. For instance, the
popular beverage company Coco Cola’s Coke formula; KFC’s fried chicken that the
company says “secret herbs” is a formula that is maintained as trade secrets.

The protection of trade secrets is one of the important aspects in any country as it
helps in Foreign Direct Investment too. Foreign investors ensure their trade secrets are
well maintained before they make any investment in the country. The protection of this
trade secret is challenging for the Indian Government as there is no proper legislation
for the protection of trade secrets and hence India follows the old common law
principles.

Common law principles

Yes, trade secrets can be protected in India. The trade secrets protection is approached
on the basis of equity principle, breach of confidence and contractual obligations.

1. If the owner has revealed the trade secret to another independent person for the
purpose to run the business in his absence, that person is not allowed to take
advantage of it and involve in unfair trade practices. Thus, the employees who
have access to trade secrets should be educated for the protection of trade
secrets on the basis of equity principle
2. The other person may be a business partner or in a key position, who knows the
trade secret should also maintain it as a secret as the owner had full confidence and
revealed the trade secrets; he is obliged to maintain it. Thus the protection of the trade
secret is not restricted to the owner alone but also the other person who knows it. If
any person makes an attempt to breach that confidence, an injunction will be sent by
the court.

3. The employer should enter into a non-disclosure agreement or NDA with the person
who knows the business secret so that he will be under contractual obligations not to
reveal them.

Also, the Indian court tries to protect the trade secret through the law of contracts. So
the company usually enters into a contract with its employees stating that they are not
supposed to reveal the trade secrets during the course of employment or even after
their termination. In case of the absence of trade secrets in the contracts, an injunction
will be issued on the basis of equity rule by the courts

The various legislations that involve the protection of business secrets are as
follows: 

1. If the data containing the details of the clients used in the literary work, if the
person lets others use his work but has not revealed the facts then the other
person uses the same concept and idea, it leads to copyright infringement. On
the other hand, where the person to whom the trade secrets are shared starts a
business and gives competition to the real owner, it amounts to copyright
infringement. In this entire scenario, the trade secrets are revealed; the court will
punish them under the Copyrights Act, 1957 with the imprisonment for a
minimum of 6 months to three months.

2. If a person intentionally loots the trade secret by tampering the computer languages,
code, security or programme, then the court may punish them under Information
Technology Act, 2000 with imprisonment up to 3 years or with the fine of five lakh
rupees or both.
3. Any data which contain the trade secret is moved to others by way of dishonesty or
fraudulent behaviour of the employee. It amounts to the criminal breach of trust and
will be punished under IPC for not more than seven years or fine or both.

The following documents should be signed for protecting the trade secrets

 Non-competition agreement and employee confidentiality agreement

 Applicability of post-employment agreement
 Non-disclosure agreement
 Authorised disclosure by the Board of directors of the company
 Termination of agreement and statement
 Invention assignment agreement and its applicability
 Injunction relief agreement

Well, trade secrets have to be safeguarded in India according to the Intellectual

Property law practiced in the country. The Indian court protects trade secrets via the
law of contracts. There are a few set of documents associated with the protection of
trade secrets. You should have these agreements intact and adhere to the law.
 DUTY OF CONFIDENTIALITY

Introduction: There is no copyright on ideas or information; hence, sharing any confidential

information and preserving such information presents complex issues, especially at the time of
breach of confidence.

Often, without taking adequate safeguards, companies and individuals share technical know-how,
trade secrets, drawings, designs and concepts etc. In case of individuals or employees, generally the
information is shared through emails or oral communication. In this background, the article
discusses some of the issues concerning confidentiality on the basis of the rulings of the courts in
India (Court(s)): requisites of trade secrets and classifying information as confidential; breach of
confidence and remedies; and measures to preserve trade secrets and confidential information.

Confidential Information and Trade Secrets: For information to be classified as confidential, the

Courts have adopted and applied the test laid down in the English judgment in the case of Saltman
Engineering Co. Ltd Vs Campbell Engineering. As per the Saltman's judgment for an idea or
information to be confidential, it should meet the following requirements:

 The idea or information should be something which is not in public domain or is public
knowledge.
 From the idea or information, it should be clear that the maker of the confidential
information has used his brain (implying the creative process) and thus produced a result
(being the idea or information) which can only be produced by somebody who goes through
the same process.

Thus, on the fulfilment of the aforesaid requirements, any idea or information will qualify as
confidential, for Courts, in a case of breach of confidence. The idea or information can be a
confidential document, a formula, a plan, a sketch, or anything which is similar to such examples.

While dealing with trade secrets, a similar test applies. Recently, in the case of Trivitron Healthcare
Pvt. Ltd. Vs. Shivram Iyer & Ors (2018 (1) CTC 430), the Madras High Court observed that a trade
secret has an element of uniqueness or exclusivity with sufficiently developed technical intricacies,
not in the realm of public knowledge. A trade secret may be based on a single factor or on an idea,
or combination of many factors or ideas, and thus a trade secret cannot be defined or restricted to
a set of activities or ideas. It was further observed that a trade secret can exist independent of and
without protection available under the Copyright Act, Trade Mark Act, Designs Act and Patent Act.
In other words, a set of activities, ideas or information, not in public knowledge, which are unique
and exclusive to a business, developed for the purpose of the business, will qualify as a trade
secret.

Breach of Confidence and Spring-Board: The Courts have recognised the confidential information
and ideas as a form of property. In Zee Telefilms Ltd. and Anr. Vs Sundial Communication Pvt Ltd.
(2003 (5) BomCR 404) the Bombay High Court expounded that the law of breach of confidence is
different from the law of copyright. The law of breach of confidence is a breach of trust or
confidence – "is a broader right" than the proprietary right of copyright. In other words, the
Bombay High Court has held that the right to maintain the secrecy of confidential information or an
idea is a wider spectrum of rights, which may also include intellectual property rights, recognized by
the statues.

Accordingly, on breach of confidence, the Court would entertain an application of the aggrieved
party, for an injunction (that is restraint against further diffusion of information in the public
domain or use by the recipient) and damages (that is compensation for the loss caused to the
owner/maker due to such a breach). Such an action would be entertained by the Courts, based on
the principles of equity; that is to say on the principles of fairness, in case the information or idea
was shared by the maker/owner in confidence, orally or by written communication, without
execution of a formal contract. Whereas, in a situation where there is formal contract then a
common-law action for breach of contract would lie before the Courts.

To constitute a breach, it has to be established that the unauthorized use of confidential

information or an idea provided a spring-board because of which the infringer obtained an unfair
advantage over its competitors or against the maker/owner of the confidential information or idea.
In Zee telefilms' case, the Bombay High Court reiterated the principles set out in CMI Centre for
Medical Innovation GMBH and Anr. Vs Phytopharm PLC (1999) FSR 235, as to what the
maker/owner, in a breach of confidence action must address:

 The information or idea relied on by the infringer, in order to obtain an unfair advantage,
must be clearly identified;
 The information or idea was handed over to the infringer, in the circumstance of
confidence;
 The information or idea can be classified as confidential; and
 The information or idea was used, or threatened to be used without authorization.

On the breach of confidence, the owner/maker of the confidential information can approach the
Court, by way of a suit. Alternatively, in case the information or idea is transferred through a
contract containing an arbitration clause, then the maker/owner can approach the Court by way of
an interim application for an injunction under Section 9 of the Arbitration & Conciliation Act, 1996.
Notably, the obligation of confidentiality also extends to the person who has received the
information under bonafide believes without notice.

A word of caution: Currently, the law in India concerning the breach of confidence and protection
of confidential information and ideas is based on the rulings of the Courts. Therefore, it is necessary
to take note of the position of law set out above while dealing with the confidential information or
ideas.

Broadly speaking, while dealing with employees and individuals following points will aid in
maintenance of secrecy of the confidential information or ideas:

 In all communications with employees, expressly mention the information as "Confidential"

if such information is being shared.
 Execution of Non-Disclosure agreement is also an effective measure.
 Password protecting the servers and other similar IT measures, may also aid in the
maintenance of secrecy.

Whilst executing a contract such as technical know-how agreements or exclusive manufacturing

agreements the points may be kept in mind: 

 The confidentiality obligation should expressly specify the information or trade secret as
"secret" or "confidential". Therefore, one should avoid the use of general clauses classifying
all the information transferred under the agreement as "secret" or "confidential".
 The contract should set out the effect of disclosure of information or the trade secret by the
recipient on the validity of the contract, including termination, and liability to compensate
for the damages so caused.