Exclusive technology licence agreements, particularly those for pharmaceuticals, commonly include trade secrets and confidential information within the relevant definition of the licensed IP. This is because it is often necessary for the exclusive licensee to have the confidential information in order to fully exploit the technology, particularly where that information concerns manufacturing know-how and other methodologies used for developing, testing, or analysing the products being produced under the licence.
The recent Supreme Court of New South Wales decision of Painaway Australia Pty Ltd v JAKL Group & Ors [NSWSC 205 2011] reinforces the importance of how to properly license and assign exclusive rights to use trade secrets and confidential information. Painaway was granted an exclusive licence to use trade marks and confidential formulas to make, market, distribute and sell pharmaceutical products. The enforceability of the licence was challenged but ultimately upheld, despite some of the corporate parties to the licence agreement having not been incorporated at the time the licence agreement was signed by the other parties. In essence, the Supreme Court was required to consider whether Painaway could assign its rights to use both the Painaway trade marks and the confidential information, including the formulas, to third parties.
It was observed that unlike the trade marks, which were personal property, trade secrets and confidential information are not proprietary in nature and therefore not assignable as such. However, it was found that Painaway was entitled under the terms of the licence agreement to assign and/or sub-license its exclusive contractual rights granted in respect of confidential information to a third party without the consent of the licensor. It was also held that any assignment or sub-licence of the exclusive rights granted under the licence agreement could not materially affect the integrity of the licensed IP rights and confidential information, meaning that the licensor was obliged to keep the formulas confidential.
Licensors are often subject to assistance provisions or good faith obligations to provide necessary assistance to licensees under technology licence agreements to ensure the licensee can exploit the technology. In Painaway, the licensor was found to be subject to an implied obligation not to hinder Painaway, and under a positive obligation to facilitate Painaway's dealings with its exclusive rights under the licence.
Practitioners need to be aware that assigning trade secrets and confidential information involves the imposition and assignment of contractual obligations in relation to use and disclosure of the relevant information, as confidential information is not a form of property under Australian law.
Lessons for terminating licences
Before terminating a licence, the terminating party needs to work through the full range of possible outcomes that could arise from the termination. Post-termination outcomes may include dealing with the prospect that the licensor may assign rights to the licensee's competitors in certain territories, or that the use or disclosure of the technology by sub-licensees may breach the terms of the licence.
In Elecon Australia Pty Limited v PIV Drives GmbH [FCAFC 56 2010], the Full Federal Court was asked to consider whether a licensee continued to have exclusive rights to use know-how and manufacturing secrets for making modular gear units and drives after the licensee had terminated the licence. During the term of the know-how licence, the licensor assigned the intangible and movable assets, including the relevant know-how, to a related entity, PIV Drives, which was an Italian competitor of the licensee.
After terminating the licence, the licensee's Australian subsidiary Elecon Australia sought to argue that the language used in the termination clause gave it a continuing right to make and sell the gears and drives without restriction using the technical information that had already been transferred by the licensor. As a result of this belief, the licensee successfully tendered through Elecon for a contract to supply a joint venture with conveyor drives that would incorporate gears and drives made using the know-how. One of the unsuccessful tenderers raised the issue that the licensee did not have the right to sell the modular gears in Australia.
The Full Federal Court rejected the licensee's arguments on how the termination clause should be interpreted and considered that the parties were hardly likely to have agreed that, upon the licensee's breach, it was to get a perpetual licence without any obligation to pay royalties on articles made after termination. This was described as an "outlandish outcome" and clear words leading to such a result were not found in the language of the termination clause.
Another issue was whether upon termination of the know-how licence, the licensee's rights to use the confidential information were also terminated. The licensee attempted to argue that the assignment of the rights attaching to confidential information by the licensor to PIV Drives destroyed the benefit of the exclusive licence under the know-how licence. This argument was rejected. The transfer of confidential information by the licensor to its assignee was subject to the licensee's exclusive rights under the know-how licence. These exclusive rights endured for as long as the know-how licence remained in place. Consequently, the licensee was found to have breached its confidentiality obligations under the know-how licence and orders were made restraining the licensee from any further breaches of confidence.
Practitioners should ensure that post termination rights are clearly stipulated in these types of agreements. It is not uncommon for licensees to insist on post termination rights in the form of a non-exclusive licence to complete the manufacture and sale of products for which orders have been placed or materials purchased. It is also desirable to include restrictions on assignments of rights, for example, a right for the licensor to withhold consent to a request for a proposed assignment or sub-licence where the assignee or sub-licensee is a competitor of the licensor.
The springboard doctrine
Two recent Federal Court decisions highlight the burden and difficulties involved in succeeding in actions for breach of confidence. RLA Polymers Pty Ltd v Nexus Adhesives Pty Ltd [FCA 423 2011] concerned proceedings instigated by RLA against its former employees for breaches of confidence. The former employees were alleged to have made improper use of their knowledge of RLA's trade secrets and confidential information concerning two formulations for floor adhesives as a springboard to develop two competing products. The former employees argued that they had independently developed the competing adhesives with an outside consultant, and denied that the confidential information was capable of protection at law. RLA was ultimately successful in its breach of confidence action in relation to one of the Nexus products.
Some of the measures used by RLA to protect the formulations were useful in proving that the information was in fact confidential, for example:
- The formulations were not patented and had not been disclosed on the public register;
- The formulations were only disclosed to production staff to the extent necessary for those staff to make discrete quantities for individual customer orders;
- The formulations were stored in an electronic database, subject to password restriction and accessible only to senior RLA staff;
- RLA had a policy of retrieving confidential information from departing employees;
- RLA prevented the publication of details of the formulations in material safety data sheets (MSDS);
- 95% of the content of the non-hazardous components of the PE265 and Roberts 656 were described as a trade secret in the MSDS; and
- RLA had actively pursued litigation against others to prevent the disclosure and misuse of its confidential information.
The number, type and amount of polymers in the RLA products were found to be a trade secret and not part of an employee's stock of knowledge or know-how that could legitimately be drawn on when working for a new employer. RLA then needed to prove that the former employees used the confidential information as a springboard to bring their own products to the market more quickly than they otherwise could have. The Federal Court confirmed that the fundamental principle of the springboard doctrine is that a recipient of confidential information should not be allowed to use it as a springboard into a better position than would have been available from the use of publicly available information and the recipient's own skill and ingenuity.
Although not a straightforward replica, the former employees were found to have only been able to achieve what they did with the Nexus product in the space of five months by using parts of the confidential information. The springboard advantage obtained was assessed as seven months, and an account of the profits derived from the sale of the Nexus product was ordered to be taken for a period of five and a half months from its release for commercial distribution and sale. This was considered a sufficient remedy to adequately compensate RLA for its damages.
Pitfalls of not using confidentiality agreements
The cost of having a confidentiality agreement prepared is insignificant compared with the cost of bringing legal proceedings to enforce an alleged breach of confidence. Another recent Federal Court decision highlights the difficulties that can be involved in attempting to enforce an alleged breach of confidence. Abrahams v Biggs [FCA 1475 2011] very clearly demonstrates the perils of not using confidentiality agreements and later attempting to rely on notes of oral conversations or recollections of conversations and not coming to the court with meticulously clean hands when claiming equitable relief in a breach of confidence action.
In Abrahams, the applicant failed to establish the elements of a breach of confidence on numerous grounds. What the applicant described as his "Teflon idea" was found to have been communicated to the respondent through a casual aside by the applicant on the way to a meeting. The applicant had not informed the respondent at the time of disclosing the idea that it was imparted in confidence. In any event, the "Teflon idea" itself did not qualify as confidential information. It was found to have been generally known to those in the relevant industry – those who deal with bed bugs on a regular basis – and the applicant was not found to have developed the idea though his own work or effort.
The Federal Court also found factual inaccuracies in the applicant's evidence and rejected notes upon which the applicant sought to rely to prove meetings and details of discussions, as having no evidentiary value whatsoever. A well drafted confidentiality agreement may have assisted the applicant in this case.
Andrea Allan is a lawyer and trade mark attorney at Watermark. Andrea holds a bachelor of arts, bachelor of laws, master of laws and is also a registered trade mark attorney.
She has over 12 years experience as a lawyer and has assisted Australian companies, organisations, individuals and government agencies with IP issues across a range of sectors.
Andrea’s contentious practice has involved managing and instructing in Federal Court proceedings in design infringement, trade mark and copyright infringement, passing off and trade practices matters.
Her non-contentious practice includes advising on, negotiating and drafting technology licences, assignments, non-disclosure agreements and other commercialisation contracts.
Andrea is a member of the Intellectual Property Society of Australia and New Zealand and the Licensing Executives Society of Australia and New Zealand. She joined Watermark Intellectual Property Lawyers and Watermark Patent and Trade Mark Attorneys in 2011.
Sean McGuire is a lawyer and registered trade mark attorney at Watermark. Sean holds a bachelor of science, a bachelor of laws (honours), a postgraduate diploma in legal practice, skills and ethics and is undertaking a master of IP law at the University of Melbourne. Before joining Watermark, he began his career at a boutique commercial law firm in Melbourne where he worked predominately within the trade marks group.
His practice has encompassed a broad range of IP rights, including contentious and transactional matters with a focus on brand strategy and commercialisation. His non-contentious practice includes negotiating and preparing agreements on the disclosure of confidential information, evaluation of technology, research contracts, licensing and commercialisation of IP rights, joint ventures and franchising.
Sean also advises on trade marks, copyright, designs, competition law and domain names, including enforcement of rights in the Federal Court of Australia, World Intellectual Property Organization and other dispute resolution procedures. He works with Australian and international clients across many industries which include mining, chemical, pharmaceutical, fashion, entertainment, food and beverage and fast moving consumer goods.
Sean joined Watermark in 2009.