Category: IP Licensing

Trade Secret Owners Beware (and Contract Carefully)

A recent Third Circuit court case rattled current thinking as to trade secret owners’ authority to enforce rights in their intellectual property. Fortunately, the case provided a path for trade secret owners to fully preserve their enforcement rights when making available their trade secret technology to their customers.

In short, the court held that those merely possessing a trade secret may be able to sue for misappropriation – that is, enforcement rights are not exclusive to the owner of the trade secret.

Non-Owner Possessors of Trade Secrets May Bring Suit

This case (Advanced Fluid Systems v. Huber (3rd Cir. 2020)) is an appeal of a federal district court case in which Advanced Fluid Systems (“AFS”) sued Kevin Huber and others for unauthorized use of trade secrets related to hydraulic technology. Huber took trade secret information from his employer, AFS, presented it to an AFS competitor, Livingston & Haven (“L&H”), then used the information, himself, in a new business he set up to compete against AFS and L&H. Although AFS brought the trade secret suit, AFS did not own the trade secrets in question. Instead, the trade secrets were owned by a third party that indirectly acquired them from AFS. Huber was an engineer on the AFS team that designed and developed the trade secret technology.

The Third Circuit Court upheld the lower court’s reasoning that a party asserting a misappropriation claim under Pennsylvania’s version of the Uniform Trade Secrets Act (the “UTPA”) must only show lawful possession of the trade secret, not ownership. The proprietary aspect of a trade secret arises from its secrecy, not from the underlying trade secret information, itself. Trade secret ownership is not irrelevant, but it is not the only interest subject to trade secret protection.

What Law Applies?

Texas and Delaware trade secret laws (like Pennsylvania’s, here, but unlike New York’s) are similar to the UTPA. For owners of trade secrets, if you want to limit or bar your trade secret licensee from taking legal action against third parties to enforce rights related to your owned trade secret, you should add appropriate language to your license agreement.

One Technology Agreement + One Separate Non-Disclosure Agreement = One Mess

The current COVID-19/coronavirus crisis has forced many companies to buy or sell new technology under a previously unseen sense of urgency. While this speed is critical – and absolutely understandable – take care to ensure that today’s deal structure does not undo tomorrow’s benefit. This is especially true as to non-disclosure and confidentiality issues.

If your corporate contracting practice involves establishing a non-disclosure agreement (or confidentiality agreement or NDA) with a potential technology customer or supplier, and then later contracting under a different agreement for the actual business you wish to transact with the other party, now is the time to examine whether that practice is achieving its objectives. As recently learned by one technology supplier, in these cases the terms of the NDA may be rendered ineffective by the subsequent technology contract. iSentium v. Bloomberg Finance (S.D.N.Y. 2020).

iSentium, a technology vendor, entered into a pre-transaction NDA with Bloomberg, pursuant to which Bloomberg considered whether it was interested in iSentium’s artificial intelligence technology. The parties later entered into a technology contract covering Bloomberg’s purchase and use of iSentium’s technology. Both the NDA and the commercial contract included confidentiality terms. iSentium later sued Bloomberg for misappropriation of iSentium’s confidential information. The district court dismissed iSentium’s action based on a one-year limitations period stated in the commercial contract, despite that the NDA included no such limitation. In reaching its decision, the court highlighted the merger provision and precedence language in the commercial contract.

Read the Technology Agreement and Non-Disclosure Agreement

It is not uncommon for a company to have a pre-transaction non-disclosure agreement and a separate commercial agreement with a business partner. However, in many cases, the two agreements are not carefully read together and end up including inconsistencies that are not clearly addressed in the later commercial agreement. Sometimes the commercial agreement is wholly silent as to the existence of the NDA. Other times, the commercial agreement incorporates by reference the inconsistent NDA. In still other cases, like in iSentium, the commercial agreement expressly merges the inconsistent separate NDA.

Inconsistencies between the NDA and commercial agreement can reach matters such as, for example, specific confidentiality requirements, governing law, indemnification, limitations of liability, representations and warranties, disclaimers, and dispute resolution. Often, the inconsistencies may arise after having had to negotiate a suboptimal NDA, as discussed in an earlier blog post.

The inconsistencies frequently create ambiguities or vagueness that can impair or deny a party’s ability to enforce the deal or the rights it thought it had. They also can require significant expense and executive and management time to address, and they can unnecessarily occupy the energy and efforts of internal Legal resources to resolve.

Make Sure the Technology Agreement and Non-Disclosure Agreement are Consistent

There are several ways to address the problems created by inconsistencies between a separate technology agreement and non-disclosure agreement. A few include:

  • Don’t be silent. Include in the technology agreement language explicitly stating that all inconsistencies, ambiguities, and conflicts between it and the NDA will be resolved in favor of the technology agreement – whether or not the NDA is integrated into or merged with the technology agreement. Identify silence on a matter in the NDA as a conflict.
  • Set a clear path. Specifically provide in the technology agreement which confidential information is controlled by the terms and conditions of the technology agreement and call out which confidential information is governed by the NDA.
  • Terminate the NDA. Ensure that the technology agreement addresses, in all respects, the relevant confidentiality and other terms, and then include language in the technology agreement that terminates the NDA’s prospective effect.
  • Apply all terms. State in the technology agreement that its applicable terms (including, for example, limitations of liability, governing law, and dispute resolution) apply to the NDA and the exchange of confidential information under the NDA, despite anything different in the NDA.

This is not an exhaustive list of options. Which (and whether any) alternative works for you may depend on any number of factors or considerations.

Most importantly, to avoid a situation where (1) you have an NDA and a separate, later technology agreement covering the same subject matter, but (2) you might not be able to enforce the agreement you want to enforce due to conflicting or inconsistent terms, carefully read the two agreements and clearly and unequivocally state the resolution of the conflict or inconsistency in the later technology agreement.

License Restrictions: Covenants or Conditions?

The focus of the First Circuit Court’s opinion in Photographic Illustrators v. Orgill (1st Cir. 2020) was whether a sublicense may be granted by implication and whether, under the facts of the case, the sublicensor (Osram Sylvania, Inc.) actually granted an implied license to the sublicensee (Orgill, Inc.). However, the foundation of the case hinged on whether the sublicensable license granted to Sylvania by the principal licensor (Photographic Illustrators (“PIC”)) was subject to a covenant or a condition.

In the applicable license agreement, PIC expressly granted Sylvania a sublicensable license to use certain PIC photographs to market Sylvania’s lightbulbs. A separate agreement provision required Sylvania to include an attribution notice when publishing the licensed photos. Sylvania granted Orgill, one of its distributors, the right to use certain PIC photos, but Orgill did not include the requisite notice when publishing the photographs. Critically, if the notice requirement was a condition, Sylvania’s grant of the license to Orgill exceeded the scope of PIC’s license to Sylvania, and Sylvania would be exposed to copyright infringement claims for its grant to Orgill. On the other hand, if the notice requirement was a covenant, Sylvania’s grant to Orgill would be a breach of contract, instead of copyright infringement. This covenant-versus-condition issue applies beyond copyright licenses and includes software licenses, technology agreements, and countless other contracts under which use rights are granted.

Whether a contractual use limitation or requirement is a covenant or a condition is important for several reasons:

  • If the limitation or requirement is a condition applicable to rights granted in respect of copyrights, trade secrets, or other intellectual property, failing to satisfy the condition potentially gives rise to an infringement or misappropriation claim, the damages for which often exceed the damages available for breach of a contract covenant.
  • If the limitation or requirement is a condition, the contract’s termination provisions may not provide an express right to cure the failure, thus likely giving the licensor greater termination rights than if the limitation or requirement is a contract covenant.
  • Contractual limitations of licensee liability frequently exclude licensee violations of the license grant, more so than licensee breaches of contract covenants.
  • Especially when the licensed material includes third-party intellectual property, licensors often require licensees to contractually indemnify the licensors for violations of the license grant. Less frequently do licensors extend these indemnification obligations to breaches of contract covenants.

Whether you are a licensor or licensee under a particular contract, be sure to consider if license conditions, or covenants, are in your best interest.