Forging collaborations: the power of commercial agreements

Posted: 17/12/2024

Confidential information and trade secrets

Although not strictly intellectual property rights, trade secrets and other confidential information are an important means by which early-stage companies can gain a competitive advantage. Confidential information is protected without further formality by an enforceable equitable duty of confidence, but are more commonly protected by contractual obligations contained in non-disclosure agreements (NDAs). NDAs are an important means by which companies can protect their proprietary information, for example by entering into NDAs prior to discussing new inventions with potential investors. Confidential information often has significant economic value and it is important for early-stage companies to understand how NDAs can be used to protect it, as well as understanding their limitations.

Prior to disclosing confidential information, it is important to consider whether the third party can be trusted to keep the information confidential and whether benefits of disclosure outweigh the risks. NDAs can be difficult to enforce and simply having an NDA in place does not provide complete protection against the misuse of confidential information. Having in place effective measures to keep information confidential can be as, if not more, important in practice.

Key steps to consider include:

ensuring confidential information is only disclosed on a need-to-know basis;
redacting particularly sensitive information;
staggering disclosure to hold back highly sensitive or valuable information to a late stage in the negotiation;
using code names;
restricting access to those directly involved in the relevant project;
applying appropriate and up to date security measures to ensure both the physical and electronic security of confidential information;
ensuring employee contracts contain appropriate confidentiality provisions;
training staff on security issues, including the dangers of working on confidential documents, discussing confidential matters in public places and leaving meta data in documents;
implementing organisation-wide policies and procedures for know-how protection and carrying out regular audits to ensure procedures are appropriate and being complied with; and
having a security breach plan in place to deal promptly and effectively with any breaches.

Having an NDA in place that restricts the third party’s use and disclosure of confidential information is particularly important when disclosing a potentially patentable invention since the right to a patent will be lost if the invention is disclosed other than under an obligation of confidentiality. In addition, for know-how and trade secrets to be protected in law they must be kept confidential. If licensed know-how or trade secrets enter the public domain this is likely to reduce the value of the licensed technology. A licensee is unlikely to be willing to continue paying royalties for the use of technology that is publicly available, and competition law may prevent the licensor from insisting on this.

The main areas that typically get negotiated in NDAs are:

the period of protection;
whether information disclosed orally must be reduced to writing and marked ‘confidential’ in order to be protected;
the governing law and jurisdiction where the other party is based overseas;
the people to whom the recipient can disclose the information;
whether copies can be retained after termination and if so in what form.

IP licensing

Early-stage companies will often need to obtain licences to exploit IP owned by others (for example the university technology to be commercialised by a spin-out). Licensing of the company’s IP can also be an important way for early-stage companies to generate revenue and expand their business. Instead of directly producing and selling its technology, a company may enter into licence agreements with other companies allowing them to use its technology in exchange for licence fees and royalties. Licensing to an established company avoids the need to establish a supply chain and can enable early-stage companies to get to market quicker. Licensing out non-core technologies can also be used as a means to generate revenue to expand a business.

Licensing will mean the company loses some control over its IP. Ensuring the terms of the licence are clearly and accurately set out, with appropriate termination provisions will help protect the company’s position. The first step is clearly to define not only the IP rights that are being licensed but also any limitations on scope to specific activities (eg manufacturing or supply), or a particular field of use or territory. The licence should specify whether it is exclusive (ie only the licensee, and not the licensor or anyone else, can exploit the licensed rights), non-exclusive (the licensee can exploit the licensed rights and the licensor is free to exploit the licensed rights itself and grant licences to other licensees) or sole (the licensee can exploit the licensed rights and the licensor is free to exploit the licensed rights itself but cannot appoint any further licensees). The licence should also specify whether the licensee may sub-license and on what terms. The parties will need to agree on their rights to any improvements to the licensed technology made by either party.

The company will also need to consider how to structure the payment provisions, which might include an upfront fee, milestone payments and royalties. If royalties are payable, it is important clearly to define the basis (eg a percentage of the ‘net sales value’ of the licensed products sold) and include provisions to allow the licensor to audit the licensee’s accounts. You may wish to set a minimum royalty payment, particularly if granting an exclusive licence (where you cannot exploit the licensed rights yourself for the duration of the exclusive licence).

If the licensed rights include registered rights, the licence should provide for who has responsibility for maintaining those rights and paying applicable renewal fees. For exclusive
licences, the licensee is usually required to pay these fees and take action against infringers within the licensed territory.

The licence agreement should clearly specify the term of the licence, set out the circumstances in which the licence can be terminated (eg for non-payment of royalties, material breach, insolvency or change of control) and specify what happens on termination (eg return of licensed know-how and other confidential information, final payments and a sell-off period for licensed products).

Collaboration agreements

Early-stage companies may enter into collaboration agreements with other companies jointly to develop a new technology or product. Having a carefully considered collaboration agreement in place that sets out the intentions of the parties and their key objectives reduces the risk of a dispute later. Collaboration agreements should include details of the joint project (including timescales and project deliverables), processes for reporting and project management, terms relating to how the project will be funded and what each party will contribute, as well as provisions dealing with liability, who will own IP developed in the course of the project and confidentiality obligations. What happens if the project overruns or fails should be carefully considered; for example, consider having the option to terminate if particular milestones are not reached or key contract terms breached. The agreement should also set out what happens on exit with regard to winding down the project and returning confidential information and any shared resources.

This article is an edited summary from Penningtons Manches Cooper’s guide on ‘Navigating the journey of growth: key legal considerations for scaling up’. For a copy of our guide, please click the banner below or get in touch with your usual contact.