licensing trade secrets: risks and benefits, license and

Licensing Trade Secrets: Risks and Benefits,

License and Payment Terms, Boilerplate

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THURSDAY, AUGUST 26, 2021

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Presenting a live 90-minute webinar with interactive Q&A

John M. Augustyn, Shareholder, Leydig Voit & Mayer, Ltd., Chicago

Justin Krieger, Partner, Kilpatrick Townsend & Stockton LLP, Denver

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John Augustyn, Esq.

John Augustyn successfully represents clients in licensing, litigation, opinions, due diligence, and prosecution. He has extensive experience in the drafting and negotiation of agreements relating to intellectual property, including trade secret licenses. In addition, his litigation experience has involved various agreements and industries. Furthermore, he manages the opinions, due diligence, and patent prosecution for several international corporations. He has authored numerous articles and chapters for books, has appeared on multiple television and radio programs, and has provided seminars for attorneys and clients. Mr. Augustyn was a law school instructor for several years. Prior to attending law school, he worked in management and engineering at Fortune 100 companies.

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Justin Krieger is the managing partner of Kilpatrick Townsend’s Denver office and has more than 20 years of experience handling intellectual property matters including trade secrets and licensing issues. Justin speaks and publishes frequently on trade secret law. Each year since 2016, he has authored and updated a chapter in Licensing Update (Wolters Kluwer) entitled “Trade Secret Licensing: the Changing Landscape and Potential Opportunities in Patenting Trade Secrets.” As a registered patent attorney, Justin also has first chair experience handling dozens of AIA Trials (inter partes review (IPR) and post grant review (PGR)), district court litigation, and patent prosecution, and client counseling. He also is an Adjunct Professor of Law a the University of Denver Sturm College of Law, where he teaches a class on patent office litigation.

Justin Krieger, Esq.

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Licensing Trade SecretsAugust 26, 2021, Strafford Webinar

John Augustyn, Shareholder, Leydig, Voit & Mayer, Ltd.Justin Krieger, Partner, Kilpatrick Townsend

Disclaimer

Any views expressed through this presentation are those of the author and may not reflect the views of Leydig, Voit & Mayer or Kilpatrick Townsend or any of their respective clients. This presentation is for information purposes only and not for the purpose of providing legal advice. Use of any information contained within this presentation does not create an attorney-client relationship. © Leydig, Voit & Mayer, Ltd. © Kilpatrick Townsend. All rights reserved.

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Audience Survey

Please Respond Using the Webinar Platform

Q. How Many Trade Secret Licenses Have YouNegotiated and Written?1. 0

2. 1-5

3. More Than 5


John Augustyn, Shareholder, Leydig, Voit & Mayer, Ltd. Justin Krieger, Partner, Kilpatrick Townsend

John

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Structure of License is Dictated by Objectives of Licensor and Licensee

Reasons to Grant a License1. Money

2. Settle Dispute

3. Expand Markets

4. Second Source

5. Cross License

6. Access to Future Improvements

7. Sale of Business

8. Combination of Above



John

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Reasons to Take a License

1. See items 1-8 above

2. Accommodate Customers



John

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Reasons to Not Grant a License

1. Creates a Competitor

2. Disclose Proprietary Information

3. License Obligations



John

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Reasons to Not Take a License

1. Royalties Reduce Profit

2. License Obligations

3. Disclose Confidential Information



John

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Introductory Clauses

• Introductory paragrapho Identification of parties (principal place of business, legal status)

• Background recitalso Intent of parties (optional)

o “Whereas” clauses



Justin

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Recitals and Definitions• Among the most important parts of the license.• “LICENSED TRADE SECRETS” means Licensor’s

proprietary rights in and to the trade secrets listedon Schedule 1, as protectable under applicabletrade secret law.

• “LICENSED TECHNOLOGY” means unpublishedtechnical information, know-how, trade secrets, anddata in Licensor’s possession as of the Effective Dateof this Agreement, and used by Licensor to produceLicensed Products.



Justin

• “LICENSED PRODUCTS” means any product or component thatincorporates or embodies or is manufactured using any Licensed TradeSecret or the Licensed Technology.• Or, consider defining Licensed Products based on a specific product

description or specification, possibly described in a separateSchedule.

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Know-How vs. Trade Secrets• Know-how may or may not constitute a

trade secret. Carefully consider what know-how will need to be licensed and whether itshould be treated as a trade secret or asconfidential information.



Justin

• One possible Definition:– “KNOW-HOW” means unpatented,

technical information, trade secrets,data, specifications, designs,procedures, studies, processes, ormethods [pertaining to the LicensedPatents] [and] [necessary/useful] in themanufacture, sale, or use of theLicensed Products [that are useful inpracticing the Licensed Patents.].

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Know-How vs. Trade Secrets



Justin

• Additional Considerations:– Consider whether know-how must be disclosed in

writing.– Should know-how be limited to know-how developed

prior to the Effective Date or include updates?– Should trade secrets be licensed separately or with the

know-how.– What about “negative know-how”?

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ADDITIONAL KEY DEFINITIONS

• “Affiliate” or “Licensed Subsidiaries”

• “Effective Date”

• “Field of Use” or “Licensed Uses”

• “Hybrid Products”

• “Net Sales”

• “Territory”

• “Licensed Patents” (if contemplated)



Justin

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Grant Clause

1. Exclusive vs. Nonexclusive

2. Make, Use and/or Sell Products

3. Geographic Scope

4. Licensed Trade Secrets, Term, Licensee, etc. covered indefinitions or other provisions



John

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Sublicensing

• Confidentiality provisions typically preclude sublicensing tradesecrets– Generally no right to sublicense if not specifically permitted in the

written agreement

– Consider expressly prohibiting sublicensing entirely

• If sublicense is contemplated, consider:– Carving out to expressly exclude most sensitive information

– Outlining sublicensee obligations on protecting confidentialinformation

– Limiting to affiliates known at the time of the agreement

– Requiring Licensor’s prior written consent



Justin

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Payments and Royalties1. Lump Sum

2. Time Payments

3. Royalties

A. Royalty Base

i. Product - Net Sales Price (Invoice Price)

ii. Process – Volume of Product or Cycles of Equipment

iii. Given Away – Provide Determination of Value

iv. Avoid – Cost of Product, Net Profit, or Gross Profit

B. Royalty Rate

i. Value to Licensee

ii. Value to Licensor

iii. Industry

iv. Product

4. Minimum Annual Royalty

5. Maximum Royalty



John

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Royalty Reporting

1. Specify Detail of Records to beMaintained and Retention Period

2. Reports by LicenseeA. Time Period for Reports

B. Payment at Time of Report

3. Audit ProcedureA. Audit Frequency, Location and Time

B. Licensor’s Expense Unless Underpayment of X%

C. Confidential Information – Appoint CPA



John



Digression: Hybrid Licenses

• Brulotte v. Thys, 85 S.Ct. 176 (1964)– Thys sold a hop-picking machine to Brulotte, that required Brulotte to enter

into a license that required pre- and post-patent royalty payments. Thepatents expired in 1957.

– Brulotte refused to pay post-patent royalty payments and Thys sued.

– The Court sided with Brulotte, holding that a royalty agreement that extendsbeyond the expiration date of the patent is unlawful per se.

– Thys, by charging the same rate and enforcing the same restrictions in the pre-and post-expiration periods, attempted to artificially extend the patent term.

– Majority held that the patent terms were “[a] monopoly power in the post-expiration period when . . . the patent has entered the public domain.”

A royalty agreement that extends beyond the expiration date of a licensed patent is unlawful per se.

22Justin




• Kimble v. Marvel, 135 S.Ct. 2401 (2015)– Kimble and Marvel negotiated but reached impasse

on license to Spidey-Glove

– Marvel began selling its own “Web Blaster”

– Kimble sued; case settled. Kimble agreed to sellpatent to Marvel for $500K and 3% royalty onfuture sales

– Marvel learned of Brulotte and stopped payingroyalties after expiration of the patent.

– Kimble sued—case went to S.Ct.

– Court affirmed Brulotte (no payments afterexpiration of patent) but recognized numerouswork-arounds.

23Justin




• Kimble v. Marvel, 135 S.Ct. 2401 (2015)– Three approaches for negotiating patent licenses

after Brulotte:

1. Parties may defer payments for pre-expiration use ofa patent into the post-expiration period

2. Tie post-expiration royalties to a non-patent right(Trade Secrets!), which will not expire with thepatent

3. Parties are free to enter into business arrangementsother than royalties that enable parties to share inthe risks and rewards of commercializing a patentedinvention.

Justin

For hybrid licenses, consider stepping down royalty rate at expiration of any licensed patents.

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Third Party Misappropriation/Infringement

• Notice by Licensee

• Licensor right (not obligation) to prosecute misappropriationof TS’s and infringement of any patent rights

• Right of Licensee (not obligation) to prosecutemisappropriation or infringement (in Field/Territory) ifLicensor does not take action within reasonable period

• Allocation of damages award, if action is successful

• Cooperation, including providing witnesses or documents



Justin

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Indemnification

1. Licensor to Defend and Indemnify Licensee relating toTrade Secrets

2. Notice of Claim or Suit

3. Licensor Control Suit and Settlement

4. Limited to Specified Features of Product

5. Limit Licensor’s Liability

6. Limit Adverse Effects on Licensee

7. Choice of Counsel



John

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Improvements in Trade Secrets

1. Each Party Wants Rights to Improvements of the Other

2. Definition of Improvement

3. Scope of License and Royalty Terms

4. Notice of Improvement

5. Avoid Antitrust in US andOther Countries



John

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Most Favored Licensee

1. If Nonexclusive Licensee, then Potential CompetitiveHarm from Later Licensee

2. Need Basis for Comparison

3. Notice to LicenseeA. All Licenses

B. Only More Favorable as Determined by Licensor

4. Licensee has Option to Elect

5. Exclude Settlements of Litigations



John

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Representations and Warranties

• Seek to avoid risks that could create liability greater than thefinancial rewards of the License.

• Typical provisionso Licensor’s ownership of the IP, and power to grant the license

o Validity/enforceability of Licensed Patents

o Infringement of third party patents by Licensed Products

o Accuracy/sufficiency of Licensed Technology, Licensed Products, ortechnical assistance provided under the license

o Product liability with regard to the Licensed Products



Justin

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Example Of Licensor DisclaimerTHE LICENSOR TECHNOLOGY, LICENSED PRODUCT(S) AND ALL MATERIALS AND INFORMATION PROVIDED UNDER THIS AGREEMENT ARE PROVIDED ON AN “AS IS” BASIS AND LICENSOR MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT THERETO; LICENSOR SHALL NOT BE LIABLE TO LICENSEE WITH RESPECT TO: ANY CLAIM ARISING FROM LICENSEE’S USE OF THE LICENSOR TECHNOLOGY, LICENSED PRODUCT(S), OR ANY INFORMATION PROVIDED UNDER THIS AGREEMENT OR FROM THE MANUFACTURE, USE OR SALE OF LICENSED PRODUCT(S).



Justin

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Residuals Clause

• What happens to trade secrets after the agreement hasexpired?

• Are the trade secrets easily remembered?

• Consider:– Including a time or scope limitation on any residuals

– Excluding certain types of information (e.g., most sensitive tradesecrets)

– Limiting residuals to personal use



Justin

Practice Tip: carefully consider and address residuals clause issues head-on during negotiations

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Protective Safeguards

The License May Specify:

A. Employees1. Limit Distribution and Compartmentalize (need to know)

2. Mark “Confidential”

3. Employee Confidentiality Agreements

4. Educating and Reminding Employees

5. Yearly Affirmations of Policies

6. Exit Interviews

7. Disable Access (passes, computers, etc.)

8. Save Hard Drive

9. Letter to New Employer

10. Check Ex-Employee Activities



John

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Protective Safeguards (continued)

B. IT and Facility1. IT Protections Including Cybersecurity

2. Locked Computers

3. Separate Files with Password

4. Fence, Security Entrance, Security

C. Other Provisions1. Level of Disclosure to Vendors,

Customers, Visitors, etc.

2. Monitoring and Auditing Licensee

3. Provide Immediate Notice ofPossible Disclosure



John

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Term

1. Forever

2. Specific Time Period

3. Specific Event

4. Hybrid License with A Patent



John

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Termination

1. Breach

2. Licensee Terminate Without Cause

3. Effects of TerminationA. Royalties and Reporting

B. Disposition of Products

C. Sublicenses

D. Return of Trade Secrets and Audit

E. Rights to Improvements Trade Secrets



John

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Consequences of Trade Secret Disclosure

1. License Continues As-Is

2. License Sets Forth New Terms

3. License Is Terminated per License

4. Terms May Depend upon Type ofDisclosureA. By Licensee Willfully

B. By Licensee Negligently

C. Independently Developed ByThird Party

D. By Licensor

5. Damages and Other Remedies



John

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Assignment of License

1. Licensee Cannot Assign LicenseA. Except with Sale of Business

B. Without Approval of Licensor

2. If Hybrid License, License Travels with Assignment ofPatent



John

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Confidentiality

1. Entire Agreement

2. Allow Parties to Make a Specified Statement toCustomers, Press, Etc. Concerning the License

3. Allow Exceptions for Subpoenas, Government Requests,Outside Accounting Firm



John

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Choice of Law

1. Choose a State Which has a Connection With the Partiesor the License

2. Choose Carefully if a Foreign Country is Specified in theChoice of Law



John

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Miscellaneous

• Choice of Venue

• Arbitration

• Force Majeure

• Severability

• Amendments

• Integration

• Execution



John

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Government Approval

1. Contingent Upon Government Approval, such as, FDA,Export Control, Department of Defense, etc.

2. If Party is a Non-US Entity, Contingent Upon Approval inRequired Countries



John

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Releases

1. Settlement of Infringement Lawsuit or Dispute

2. All Causes of Action Between Parties Prior to SpecifiedDate

3. All Causes of Action Between Parties Involving Productand/or Trade Secrets



John

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Thank you!

Any questions, please contact:

John AugustynLeydig, Voit & Mayer, Ltd.

[email protected]

Justin KriegerKilpatrick Townsend & Stockton, LLP

[email protected]

licensing trade secrets: risks and benefits, license and

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