Assignment of trade secrets: selling moonbeams in a jar?

moonbeam jarA recent article on IPKat, Assignment and licence-back of a trade secret: no yawning matter, has prompted IP Draughts to remove the dustsheets from one of his favourite hobbyhorses.  As discussed briefly on this blog here in 2011, IP Draughts is troubled by the very idea of an assignment of know-how.

First, we need to define our terms.  The title of this article, echoing the IPKat article mentioned earlier, refers to trade secrets, while the earlier article on this blog, linked above, referred to know-how.

In English law and, as far as he understands them, US laws, “trade secrets” are generally regarded as the most sensitive items of confidential information, and are distinguished from less important categories of confidential information. It is not always easy to make the distinction.  Nearly a century ago, Lord Parker in the case of Herbert Morris Ltd v Saxelby [1916] 1 AC 688 came up with a rather simplistic test:

“If the information is of such detail that it cannot be carried in one’s head then it is a trade secret, but if it is just some kind of easily remembered general method then it will not qualify as a trade secret.”

faccendaMore recently, in the landmark case of Faccenda Chicken v Fowler [1985] 1 All ER 724, the Court of Appeal declined to give any general definition, but instead came up with some examples of trade secrets (“or their equivalent”), including information about prices, and:

“secret processes of manufacture such as chemical formulae” and

“designs or special methods of construction”

There is not, as far as IP Draughts is aware, any universally-applied, single definition of trade secrets in English law.

Much of the English case law on the meaning of trade secrets has been about employees and their duties not to disclose their employer’s, or former employer’s, commercial information.  In this context, the courts have found it helpful to distinguish between the most sensitive types of information – labelled trade secrets – and other types, sometimes referred to generically as confidential information. Generally, employees have stronger duties to their employer with respect to trade secrets than they have with respect to any other category of confidential information.

By contrast, reported English cases about general business disputes (ie not involving claims against employees) rarely seem to require a discussion of whether there is any distinction between trade secrets and other categories of confidential information.  Perhaps as a consequence of this, English commercial agreements seldom use the term “trade secrets”.  Instead they tend to refer to confidential information and, in the context of licensing, to know-how.

The expression “know-how” tends to be used in reference to technical or commercial information about products or services that is protected under the law of confidence, although other usages are seen.  IP Draughts finds it convenient to refer to the definition that appears in Article 1(1)(i) of the EU Technology Transfer  Block Exemption Regulation, ie:

‘know-how’ means a package of non-patented practical
information, resulting from experience and testing, which
is:
(i) secret, that is to say, not generally known or easily
accessible,
(ii) substantial, that is to say, significant and useful for the
production of the contract products, and
(iii) identified, that is to say, described in a sufficiently
comprehensive manner so as to make it possible to
verify that it fulfils the criteria of secrecy and substantiality;

Items (ii) and (iii) of the above definition are more concerned with competition law issues than commercial definition, in that the European Commission is concerned to avoid anti-competitive restrictions being agreed behind the smoke-screen of a dubious know-how licence.

Out for a stroll...

Supreme Court goes for a wander…

Under English law, in IP Draughts’ view there is no special category of property right called trade secrets or know-how.  The law of confidence may protect a trade secret or know-how.  Separately, recognised types of intellectual property, such as patents or copyrights, may provide protection.  However, confidential information as such is not recognised as property.  As Lord Neuberger, President of the UK Supreme Court, commented in a 2012 case that IP Draughts reported on here:

In my view, the upshot of this summary of the current position as discussed in the cases and the books is that, while the prevailing current view is that confidential information is not strictly property, it is not inappropriate to include it as an aspect of intellectual property.

By contrast, IP Draughts understands that some US state laws recognise trade secrets as a type of property. It seems to be more common for US commercial agreements to refer to trade secrets than is the case in English agreements.

Drawing together the threads of the above discussion, under English law the following propositions can be made:

  1. Where confidential information is viewed as a business asset, it is conventional to refer to it as know-how.  The term “trade secrets” is less frequently encountered, outside the niche area of employee duties.
  2. Know-how and other types of confidential information are not “property” and therefore it is questionable whether “title” in know-how can be transferred from one person to another via an assignment.
  3. Despite this questionable legal status, it is common to see know-how being licensed, as illustrated by the provisions on know-how in current and former EU Technology Transfer Block Exemption Regulations.

So, what is an assignment of know-how, and should documents of this name be used?  As this 2011 article on IP Draughts comments, what should definitely not be done is to take a patent assignment and do a “search and replace” of the word “patent” with the word “know-how”. Instead, if a know-how assignment is required, IP Draughts recommends that thought be given to the different components of the transaction, as discussed in the last-linked article.  In some situations, it may be appropriate to include some or all of the following wording in the assignment.  In other situations, different wording may be required – eg to impose obligations on individuals as well as the assigning institution.

To the extent that the Assigned Property includes any know-how protected under the laws governing confidential information, references to the assignment of such know-how include the following obligations on the Institution:

(a)          The Institution shall transfer to the Company such rights as it may have in law to prevent the unauthorized use or disclosure of such know-how;

(b)          to the extent that such rights cannot be or are not transferred by virtue of the provisions of Clause [ ], the Institution shall agree to be joined in any action (whether as claimant or otherwise) brought by the Company or its assignee against any third party that is alleged to infringe such rights, subject to the Company effectively indemnifying it against any damages, costs and expenses incurred in relation to any such action;

(c)          the Institution shall neither use nor disclose any such know-how without the prior written consent of the Company, but these obligations of non-use and non-disclosure shall cease upon the know-how becoming publicly known (other than as a result of breach of this clause by the Institution);

(d)      the Institution warrants that it is not aware of any disclosure of such know-how to any third party before the date of this Assignment, except under written obligations of confidentiality;

(e)    if required to do so by the Company, the Institution shall make such acknowledgements to third parties as the Company may reasonably require, stating that the Company owns all such know-how and that the Institution does not retain any ownership rights in such know-how; and

(f)     the Institution shall: (i) inform the Company of all technical information concerning the Assigned Property; (ii) supply the Company with any documents or drawings relevant to the Assigned Property; and (iii) license the Company to use such documents, information and drawings.

4 Comments

Filed under Contract drafting, Intellectual Property

4 responses to “Assignment of trade secrets: selling moonbeams in a jar?

  1. Thanks, Francis. As for status of other types of IP, who can tell? S 90 CDPA mysteriously refers to copyright being assignable as personal OR moveable property, while TMA refers to personal property (or moveable incorporeal property in Scotland). My sense is that it is safe to assume rules on personal property apply unless overridden by IP statutes, but less safe to assume sub-set of rules for choses in action apply.

  2. The term “trade secret” in US law is now largely covered by one of our uniform state laws, the Uniform Trade Secrets Act, which effectively obliterates the distinction between a trade secret, know-how, and any other confidential information by defining a trade secret functionally as anything that gains value by virtue of being kept secret. There are enormous issues that this broad statement elides or sweeps under the rug, including the extent to which a non-disclosure agreement can supersede them with clearer definitions; but that’s for another day.

    There may still be leftover practices, such as conveying know-how as part of a business sale, and in that connection the reality of the situation is that the buyer would have a call on personnel of the seller (assuming those personnel weren’t also transferred) to disclose or consult on the “tricks of the trade” that constitute the know-how, if they are not already reduced to writing.

    I fully agree with you that when one is drafting a business sale agreement that includes a “transfer” (well, how can it be a transfer? you can’t agree to forget something) of know-how, language has to be created that reflects the true situation, namely that one is just transferring what we used to call a chose in action to prevent third parties (including employees) from disclosing the secret info.

    • Ah, choses in action… UK IP law decided to steer away from them a few decades ago, eg section 30(1) of the Patents Act 1977 provides: “Any patent or application for a patent is personal property (without being a thing in action)…” Note also the avoidance of Norman French.

      As ever, wise comments, Vance. Thanks for your contributions.

      • I’ve never really understood why the 1977 Act decided to invent a third class of personal property alongside things in possession and things in action. The 1988 Copyright Act did not do so (so presumably copyrights are things in action?).

        I agree with you that English law does not recognise an independent form of property known as “trade secrets”. The term “trade secret” has, as far as I know, only one solid common law meaning and that is a class of confidential information so secret that an employee may be required to keep it confidential notwithstanding the end of their employment and the doctrine of restraint of trade as you describe in Faccenda Chicken. That is as far as I know the only really distinctive use of the term.

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