Trade Secret Licensing Arrangements Require Vigilance

A technology license agreement can link competitors in unexpected, and, from the standpoint of technology protection, potentially dangerous ways. Whether your company licenses its technology to a direct competitor, licenses to a supplier who may integrate back into your industry, or licenses to a company who may decides to expand its market, a written agreement should define the trade secrets and critically, should protect them for so long as they have value. A recently decided dispute between plastics manufacturers illustrates the point.

Industrial concern NOVA Chemical took a license on a Styrofoam-type manufacturing process, Piocelan, from Japanese plastics company Sekisui. After extensive negotiation and the exchange of multiple drafts, the two companies hammered out a licensing agreement for the Piocelan process. Except for an Asian markets carve-out, the agreement gave NOVA an exclusive right to use the process and provided for NOVA to Sekisui’s secret technical information and certain patent rights for time periods that NOVA would elect.

When, in 2002, NOVA rolled out a competing product in Asia, Sekisui cried foul. NOVA filed suit to clarify that the agreement had been terminated and that it was entitled not only to sell in Asia, but to use any information that Sekisui had disclosed to it under the agreement. Sekisui argued that the actual term of the license was perpetual, because its subject matter concerned trade secrets, which have no fixed life. The agreement, however, contained no restriction on use of the supposedly secret information beyond the term of the license.

Alert readers will see the red flag waving – as did the trial court. Despite Sekisui’s claims that disclosure would harm it, the court saw no intent to extend the term of the agreement past either five or ten years, and saw no provision in the agreement requiring NOVA to keep the information secret past the term. How, wondered the Court, could Sekisui claim trade secret protection when it did not restrict the use of the Piocelan information in any manner after ten years?

Under NOVA’s reading of the Agreement, with which a trial court and now the court of appeals have agreed, NOVA was obligated not to disclose the Sekisui information only for the length of the license, either a five- or ten-year period, depending on what license term NOVA chose. Sekisui lost out, and NOVA can sell the product anywhere in the world, and use as much of the information provided to it under the expired license as it may wish.

The lesson? In negotiating technology license arrangements, assume the worst case scenario: direct competition by your contract partner. With this forethought, Sekisui’s result should absolutely have been avoided. The law of trade secrets is commercially practical, recognizing the need for such licensing arrangements. Simply because a license expires, the underlying trade secrets do not necessarily expire as well. But in order for the trade secret owner to maintain ownership, with the licensee obtaining rights only to temporary use, and for the trade secrets to survive, appropriate drafting is necessary. A specific commitment to maintain the trade secrets in confidence, enforceable through injunctive relief, must form part of the consideration. It must also be spelled out in the agreement’s terms.


--Andrew Flake

Andrew B. Flake is a partner in the Litigation Group at Arnall Golden Gregory LLP (andrew.flake@agg.com). Our firm serves the business needs of growing public and private companies, helping clients turn legal challenges into business opportunities. We don't just tell you if something is possible, we show you how to make it happen. Please visit our website for more information, www.agg.com.