Trade Secret License: Everything You Need to Know

A trade secret license is an agreement between a licensor (owner) and a licensee (party who needs the proprietary information) that gives the licensee permission to gain access to information normally regarded as a trade secret. Unlike licensing in other forms of intellectual property, the focus is on the sharing of the information rather than the actual uses. In these arrangements, the licensor does not give up ownership of the information. Licensing a trade secret is a way for the licensor to monetize this particular form of intellectual property.

Components of a Trade Secret License

Though the content may vary some, every trade secret license should include some basic elements. If any of these are left out, the value of the intellectual property can be reduced and disagreements between the parties can result. This list is not exhaustive, and most licensing agreements contain additional sections on liability and other topics.

License terms: The trade secret should be described but not entirely disclosed.
Qualifications and/or restrictions: The license should spell out if the license is exclusive, non-exclusive, or sole and if it is restricted to a particular field, geographic area, or type of product.
Maintenance of secrecy: The trade secret license will require the licensee, and possibly the licensor, to keep the secrecy of the intellectual property.
Payment terms: Consideration for a trade secret license usually takes the form of royalties, a payment stream, or a lump sum payment. The compensation may be calculated through a formula that combines these. The terms of compensation are negotiated on the front end and included in the licensing document.
Audit rights: The licensor should request the right to inspect records in case there is some question about whether the licensee is complying with the terms. This section should also cover who pays for the audit if it reveals some errors or wrongdoing, and how many audits per year can be called for without disrupting the licensee's operations.
Termination: This section should describe how each party can exit the agreement, under what conditions, and what compensation would be due.
Governing law: This identifies under what intellectual property laws the contract will be interpreted and enforced. Usually, the licensor makes this decision as the owner of the trade secret.
Survival clause: This requires the maintenance of the secrecy of the information even after the agreement terminates if it is still a trade secret at that time.
Notice provisions: Important notices to the licensor should match the licensee's obligation to warn the licensor's counsel in the event that the trade secret is accidentally disclosed.
Assignment clause: The parties agree on how many other parties can receive access to the trade secret from the licensor. This section also describes whether affiliates of the licensee can have access to the information.

Forms of Compensation

Royalties are usually a percentage of the profit that the licensee generates using the trade secret. However, royalties may also be calculated based on how much money the licensee saves by using the secret information or how much revenues increase after implementation of the trade secret. That makes it easier for the parties to see how much the licensee benefited from the possession of the trade secret. If royalties are based on factors that vary, like the licensee's costs, sales, or revenue, then the licensor should seek the right to conduct an audit and require regular reports from the licensee. This gives the licensor more confidence that they will be paid accurately. The licensee will carefully and correctly calculate the royalties when they know an audit is likely.
Payment streams are equal payments of a fixed amount made to the licensor by the licensee over a period of time. For the licensee, this is easier to manage than royalty calculations, and it doesn't require an audit to make sure the payment amount is correct. Spreading payments over time favors licensees that don't have a lot of cash on hand. The fixed end date for the payments helps the licensee calculate the cost of the license accurately.
Lump sum payments are generally not favorable to the licensee. A risk always exists that the licensee may not earn enough from the trade secret to recoup the lump sum payment. However, if there is value in being the first to receive the trade secret from the licensor, then the licensee may be more likely to agree to an up-front lump sum. Also, the licensee can sometimes benefit by making a single payment rather than committing to ongoing compensation.

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