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 Research, Technology, Innovation
Technology Opportunities
Licencing Opportunities
Licensing Agreements: Do's and Don'ts
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 7) Licensing Agreements: Do's and Don'ts - Confidentiality of Trade SecretsDreadful Drafter looks at his President's next note which says "Interco gets source code so it can provide support".Dreadful Drafter recognizes that the source code is the version of the Licensed Software understandable by computer programmers. It contains all the program's trade secrets including the algorithms, concepts and underlying ideas, none of which are likely protected by copyright. The best available protection (apart from patent protection) is secrecy, and here Devco is about to show all to Interco. Devco needs to keep control over these secrets. 7.1 Definition of Trade Secret Dreadful Drafter realizes he has to define what material is subject to the confidentiality and restricted use provisions. He writes: "Confidential Information" means the information described on Schedule A". Dreadful Drafter has taken the easy way out - he has left the definition for another person to draw; hopefully, he expects someone who understands the technology to develop the proper wording. Unfortunately, one of the following events is likely to occur: (a) Schedule A will not be prepared at all and the agreement will be uncertain at best and entirely unenforceable at worst; (b) Schedule A will contain "puffery"; i.e., statements as to quality that could be construed as enforceable express representations; (c) Schedule A will be so well prepared and so detailed that it will reveal the trade secrets themselves (but no one will be advised to take measures to maintain in confidence the confidentiality agreement that now reveals all). ****TACTIC: KNOW YOUR TECHNOLOGY. 7.2 Possible Definition There is no Canadian statutory definition of a trade secret. However, the style of the definition in the Uniform Trade Secrets Act proposed in 1986 by the Alberta Institute of Law Research and Reform may provide some guidance for Dreadful Drafter as he endeavors to draw a definition of Confidential Information. It suggested the following definition: "trade secret" means information including but not limited to a formula, pattern, compilation, programme, method, technique, or process, or information contained or embodied in a product device or mechanism which (i) is, or may be used in a trade or business, (ii) is not generally known in that trade or business, (iii) has economic value from not being generally known, and (iv) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy." ****TACTIC: CONSIDER ADOPTING A WELL-KNOWN DEFINITION. 7.3 Categories of Trade Secrets In deciding on the scope of the definition of "confidential information", Dreadful Drafter may want to decide what kind of secrets (perhaps in addition to the source code) he wants to protect. According to the Alberta Institute of Law Research and Reform: "there are potentially four categories of trade secrets: specific product secrets (such as a chemical formula); technological secrets (that is, knowledge of some process or know-how that nobody else has yet developed); strategic business information (secret marketing information or customer lists); and specialized compilations of information that, in sum, are not publicly (sic) known and have unique value on that account". ****TACTIC: TAILOR THE DEFINITION FOR THE CIRCUMSTANCES. 7.4 Participation In the end there is no alternative but for the drafter to become familiar, even in a layman's fashion, with the technology that is to be kept secret so, at a minimum, he can intelligently review Schedule A to make sure it is appropriate. ****TACTIC: PARTICIPATE IN THE DRAFTING OF THE DEFINITION. 7.5 What is to be Kept Confidential To assist the parties to know what information is subject to the confidentiality obligations and which information can be freely used, Dreadful Drafter writes: These confidentiality obligations shall apply only to information marked "CONFIDENTIAL". Dreadful Drafter realizes that one of the standards the courts look for when determining if information constitutes a protectable trade secret is the care the disclosing party takes to prevent unauthorized disclosure. Professor David Vaver reviewed the Canadian jurisprudence and found that the Courts looked to the following factors when determining whether or not information is a trade secret: "(1) the extent to which the information is known outside the business; (2) the extent to which it is known by employees and others involved in the business; (3) the extent of measures taken to guard the secrecy of the information; (4) the value of the information to the holder of the secret, and to his competitors; (5) the amount of effort or money expended in developing the information; (6) the ease or difficulty with which the information can be properly acquired or duplicated by others; (7) whether the holder of the secret and the taker treat the information as secret; and (8) custom in the industry concerning this specific type of information". But is it appropriate to give protection only to information that is marked "CONFIDENTIAL". Consider the following: (a) disclosures made orally. Some agreements require that confidentiality must be claimed within a specified time after a disclosure period. Is this a reasonable expectation in practice? (b) electronic transmission, where a confidentiality notice may not be apparent; (c) disclosures where all information is routinely marked "CONFIDENTIAL" - an abusive abundance of caution. Marking information "CONFIDENTIAL" should not make information secret which is otherwise in the public domain. ****TACTIC: BEWARE OF PUBLIC DOMAIN INFORMATION IN A CONFIDENTIAL CLOAK. 7.6 Contract vs. Trust Dreadful Drafter decides to establish a standard of care and writes "Interco shall hold all the Confidential Information in trust for Devco". The use of the word "trust" illustrates the clash between the law of trusts and the law of contracts. Under trust law, the trustee holds the property for the beneficiary and may not use the property for his own benefit except as expressly permitted by the trust. A trustee is expected to act for the benefit of the other party at the expense of his own interest. Generally speaking, such a requirement does not fit the model of North American business reality. If the trustee breaches his fiduciary duty a court will likely order him to restore the beneficiaries to the position in which they would have been had the duty not been breached. There is trust law that indicates that this would require the payment of restorative amounts no matter how remote or unforeseeable they may be. In contrast, in normal contract law, the awarded damages usually must be foreseeable and closely connected with the breach. Thus, the use of the word "trust" increases the duties of Interco so that Interco is essentially a guarantor against unauthorized disclosure and, on a breach of the trust, exposes Interco to almost unlimited liability. It is rare that a licensee would be prepared to accept that level of responsibility and exposure to liability. ****TACTIC: CONSIDER THE APPROPRIATE REMEDIES: CONTRACT VS TRUST. 7.7 What is Fair Devco knows that, even though it has taken all reasonable measures, there is still the possibility of disclosure of its confidential information occurring at its own offices. Should the obligations for retaining the information as confidential be any higher for Interco than they are for Devco? When the goal is to produce a "win-win" agreement, does the licensing drafter have the right to propose a clause that is patently wrong? ****TACTIC: IN SHORT-FUSE NEGOTIATIONS, DESIGN THE FIRST DRAFT TO PRODUCE A "WIN-WIN" RESULT. 7.8 The Word "Ensure" Intending to be fairer to the Licensee in his next draft of the confidentiality clause, Dreadful Drafter writes "Licensee shall ensure that the confidential information shall not be disclosed". He may not have lessened the duty of care. "Ensure" is defined to mean "to warrant; to guarantee ...to secure, make safe ... to insure". Some drafters use the word "ensure" as if it were equivalent to "endeavor" or "take reasonable measures". The dictionary definition seems to result in a very high duty of care, almost to the point that there will be absolute liability. Commonplace usage and the dictionary definition seem to be contradictory. Perhaps the drafter should use a more precise word. ****TACTIC: USE "ENSURE" ONLY WHEN YOU MEAN "GUARANTEE" OR "INSURE"; BETTER YET, DON'T USE IT AT ALL. 7.9 Precautions to be Taken Dreadful Drafter tries again. He writes "Licensee shall take the same precautions to hold the confidential information in confidence as it takes for its own trade secrets" Consider Devco's reaction when it learns that Interco has lost its trade secrets as a result of its normal (but now proven inadequate) protective measures. To avoid this embarrassment, Dreadful Drafter could select an objective standard combined perhaps with Interco's standards if they are known to be high. For example, "Licensee shall take all reasonable measures available to it, and in any event not less than those used to protect its own secrets to keep the confidential information in the strictest confidence". ****TACTIC: SECRECY OBLIGATIONS SHOULD INCLUDE OBJECTIVE STANDARDS. 7.10 Steps to be Taken In a case of highly sensitive information or in the case of a licensee in a foreign jurisdiction which may not have generally adopted standards of secrecy, you might want to set out the reasonable steps Devco requires of Interco. For example, Dreadful Drafter could provide that the reasonable steps shall be: (a) physical security of areas where access may be gained to the Confidential Information; (b) security measures for electronic storage and transmission of data including or derived from any Confidential Information; (c) controls on access to any computer facility and tape or disk library where any Confidential Information may be stored; (d) visitor control; (e) controls over photocopying Confidential Information; (f) document and computer network control systems which limit access to the Confidential Information to employees and agents who have a need to know, which control system provides for a secured method of protection of sensitive data; and (g) confidentiality agreements with the Licensee's employees, agents or invitees who are permitted access to Confidential Information. ****TACTIC: CONSIDER STATING WHAT SECRECY MEASURES ARE REQUIRED. 7.11 Duration of Secrecy Obligations Dreadful Drafter has not stated how long Interco must maintain the secrecy. Interco will be concerned about the costs of maintaining secrecy and the risk of inadvertent disclosure particularly after an extended period of time. Frequently, drafters pick a figure such as "five years" or "twenty-one years" without much justification. It would be preferable to pick a time period more in line with the anticipated economic life of the trade secrets, or at the minimum, the time it would have taken for Interco to independently develop the technology itself. Dreadful Drafter has not relieved Licensee's obligations of confidentiality for any portion of the confidential information which enters the public domain. In Canada, it might be permissible to require continued confidentiality even if the secret has been disclosed. This may not be the case in the European Community. For example, grounds for objection under Article 85(1) of the Treaty establishing the European Economic Community will not arise from a covenant requiring a distributor "not to reveal manufacturing processes or other know-how of a secret character, or confidential information given by the other party during the negotiation and performance of the agreements, as long as the know-how or information in question has not become public knowledge". ****TACTIC: ESTABLISH AND JUSTIFY THE DURATION OF SECRECY OBLIGATIONS. 7.12 Limited Liability The Licensee may want to restrict its liability if it has taken all reasonable steps to protect the confidential information but through some inadvertence there has been a disclosure without some clause limiting the Licensee's obligations, it could be exposed to a claim for significant economic damages. ****TACTIC: CONSIDER LIMITING LICENSEE'S LIABILITY FOR INADVERTENT DISCLOSURE. 7.13 Permitted Use As with many confidentiality agreements, Dreadful Drafter has discussed the obligations of secrecy but has not discussed what uses of the confidential information are permitted as well as what uses are restricted. As with any license of technology, the agreement should contemplate what uses are appropriate, such as: (a) evaluation of the technology for inclusion in the recipient's product line; (b) permitted modifications of the technology; (c) disclosure to employees/contractors who have a need to know; (d) disclosures required by a governmental body or court order; and (e) disclosures to professional advisors. ****TACTIC: SPECIFY PERMITTED USES.
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| Created: 2003-02-13 Updated: 2004-03-18 |
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