Licensing is an important means of commercializing Intellectual Property (IP) and enables rights owners to expand cost-efficiently into new markets, territories and products. However, it also carries the danger of losing control over valuable business assets. Confidential Disclosure Agreements (CDAs) provide a means of reducing that risk, so they need to be considered as an option from the earliest negotiation stage.
Given their legal significance, questions often arise about how IP licenses and CDAs are employed in practice. This makes it all the more pivotal to understand the tensions that can arise between licenses and CDAs and where pitfalls can develop.
Ties that bind
Licenses are agreements whereby one party (the licensor) grants another (the licensee) permission to use certain IP rights in return for a payment (often known as a royalty). Licenses typically cover registered IP rights such as patents, trademarks or designs, but they can also include unregistered copyrights or trade secrets. Licenses can be exclusive or non-exclusive and typically include terms relating to the agreement's duration, scope, obligations and restrictions.
An IP license grants another party the use of an IP asset otherwise held exclusively by the right holder. As such, the licensor must scrutinize exactly what is being shared and with whom.
By contrast, CDAs are a means of facilitating and controlling access to proprietary confidential information. They frequently appear in research partnerships or other contexts where the owner of the information (the discloser) needs to share it with another party (the recipient). Often, CDAs are used where the recipient needs to be able to evaluate non-public information before going ahead with a deal.
Complementary or conflicting?
As will be apparent from these brief definitions, licenses and CDAs can interact reciprocally. On the one hand, signing a CDA with a potential business partner works toward securing a licensing agreement – or negotiating more favorable terms. On the other, fulfilling a license agreement might require sharing confidential information in a subsequent CDA.
Nevertheless, it is critical be mindful of those influences that could obstruct the negotiation of either agreement or disrupt its fulfillment.
Before making an agreement
Even when standard-essential patents (SEPs) are concerned, the information transferred or withheld when licensing can be a source of contention. Take the example of InterDigital vs. Xiaomi in India. Though based in the United States and China, respectively, the telecommunications companies found themselves at odds before the Delhi High Court over the infringement of 3G and 4G patents. Xiaomi claimed it needed to know the identity of InterDigital's licensees in order to determine fair, reasonable and non-discriminatory (FRAND) terms for royalties. InterDigital refused, seeing the information as commercially sensitive. A courtroom jostle between jurisdictions saw InterDigital come out on top in 2021.
In this case, it is unlikely that the competitors would have agreed to a CDA as InterDigital risked losing market ground to Xiaomi by revealing the details of its business agreements. That being said, a level of openness is required to ascertain FRAND terms for SEPs; otherwise, licensees become vulnerable to anti-competitive behavior and exploitation.
Coming to blows after coming to terms
At the opposite end of a business partnership, a CDA is not necessarily voided by the termination of a licensing agreement; in fact, its relevance arguably increases. A licensee can instantly become a direct competitor once cooperation ceases, but the relevant technical information remains in their hands. An airtight CDA is mandatory to prevent data from being passed on or injuriously exploited. The example of Symbiont Nutrition vs. BJM Feed Ingredients highlights the potential continuance of legal obligations, including fiducial duties, even after licensing stops.
A CDA is not a substitute nor a guarantor of trust. Even if the letter of such an agreement is not breached, the other party could take advantage of disclosed information without following through on negotiations.
In light of the commercial fallout that can occur with hasty, unfulfilled or breached agreements, it is essential to exercise good judgment. However, certain stumbling blocks can appear when using either or both a license and CDA. Spotting them well in advance is the trick to avoiding an expensive collision.
Five key challenges
1. Tipping one's hand
The first obstacle relates to timing. As mentioned, a CDA will commonly be offered, if at all, during the negotiations leading up to a license agreement. This can assure the recipient or licensee of the discloser's or licensor's intentions, clarify the involved IP rights and provide relevant information, such as existing relationships with third parties.
Just the same, the discloser should take care not to release too much too early. An unscrupulous recipient could use the information in a CDA to develop a rival product or undermine the discloser's business by creating a workaround.
2. Balance of sharing
A second challenge is the nature of what is being revealed and how much data is appropriate and necessary. If the CDA discloses too much confidential information, it could reduce the chances of a license being signed as the recipient may decide it does not need one. Yet, if the owner discloses too little, the recipient may not be comfortable entering into a license.
To address both of these challenges, it might be preferable to share information gradually as the relationship develops so that the most valuable data is kept safe until trust is established.
3. Undermining novelty
Third is the type of information that is involved. It is essential to recognize that disclosing technical data to another party in a CDA could jeopardize any future or pending patent application by rendering it invalid due to lack of novelty. Similarly, divulging the essential features of a new design could destroy the same prerequisite of a registered design application. CDAs should be reviewed by the relevant teams (legal, R&D) to ensure they do not include information covering planned IP right applications – or if they do, sufficient precautions are put in place.
4. Defining the audience
This brings us to a fourth point: Who will have access to the intelligence on both a personal and corporate level? A CDA must stipulate who the information is being shared with, including any subsidiaries or associated companies of the recipient. If needed, it should also set out any exclusions. For example, if data is being shared with an individual, they should not be able to pass it on to another party, such as a competitor of the discloser or the general public.
Far from stifling communication, a well-executed CDA facilitates candid talks on crucial topics and promotes confidence among all those party to it.
In some fields, such as telecoms, it is customary to have very detailed lists of the people who can view sensitive information relating to pricing or prior commercial relationships, and these may be the subject of talks between the discloser and the recipient. There may also be several levels of confidentiality – with people at different levels subject to stricter obligations. One could expect only top executives and internal / external counsel to be apprised of the most sensitive data or even its existence.
The risk of being ambiguous about who can access material is not just that secrecy be compromised but also that the recipient may gain an unfair advantage in future licensing discussions or disputes.
5. "TOP SECRET"
Fifth, it is imperative to mark clearly what confidential information is included in a CDA or licensing agreement and to emphasize that the recipient / licensee should take all reasonable steps to keep it secure. Once confidential information is disclosed, it is almost impossible to remedy the damage done. Even if litigation for trade secret theft or unfair competition is started, it may be hard to win and may only draw more attention to the problem.
Reducing risks
In light of the hazards and negotiatory faux pas, it is vital that care is taken when drafting and discussing CDAs in the context of IP licensing. Ideally, the process will be tailored to the specific needs of the parties involved rather than applying a general one-size-fits-all template.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.