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Protection and Commercialization of Trade Secrets in R&D Collaboration Agreements: Biotechnology Industry

29 March, 2020

Trade Secrets are defined as, information not generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question; having economic value from being a secret and is subject to reasonable steps for secrecy, by the person lawfully in control of the information, based on the World Trade Organizations (WTO) definition. Additionally, The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) clarifies protection of trade secrets under Section 7 (Art 39) as “protection of undisclosed information”. Know-how on the other hand is technical and commercial information and knowledge based on the professional activities of a commercial entity, which is a part of the trade secrets regime.

Since no disclosure is required for claiming secrecy, trade secrets are considered inexpensive for start-ups and universities with its, in principle, unlimited protection term and broader scope of subject matter. However, trade secrets are harder to license, and lawful disclosures are not subject to a legal dispute (such as reverse engineering or independent discovery). It inhibits intra organizational communications and infringement cases require a heavy burden of proof to rights holder.

In case unlawful acquiring of trade secrets, the question whether this is a violation of property rights, is different among jurisdictions. Some national courts extend Intellectual Property Rights (“IPR”) privileges to trade secrets by constitutional guarantee of property, while others exclude or only consider the commercial value of trade secrets.

Legal Protection and Commercialization Methods

Secrecy: The intrinsic value of trade secrets supports capital investment, acquisition and licensing of the potential invention, following a successful R&D collaboration. Trade secrecy may be opted to protect technical know-how which is complementary to patented inventions. Industrial processes may often be best maintained as trade secrets. Given that process inventions are hard to police and that end-product rarely reveals the method used, it may be preferable to preserve secrecy. Most industries may also require know-how beyond inventions. Particular examples of such methods include separation and purification processes, or culturing techniques to grow organisms that produce biotechnology products and substance/formulation methods in pharmaceutical industry. When only end-product is sold in the marketplace, intermediary products may also be better off with a trade secret status.  This also includes discoveries that or not patent-eligible subject matter and inventions which do not meet patentability requirements (novelty, inventive step). However, maintenance of any secret requires factual  protection, as well legal. While legal protection hinders misappropriation and preventing misuse to promote efficient resource allocation; factual protection by collaborating parties in a R&D agreement is also necessary to facilitate concentration on R&D than trade secret maintenance. For a specialist company, a university research center  or spin-off ,focusing on one particular technological area, such as making a specific polymer for use in medical implants, it may be  less risky to keep the method as a trade secret in comparison to the risk of a patent not being granted and disclosed by publication. Therefore it may prevent this company from occupying an area of the market, since the smaller company does not have the ability to manufacture the polymer to meet high demands, and a larger experienced company is free to cheaply manufacture the polymer by the disclosure of the method in a patent application which was never granted and finally lose its place in the market or for research centers, losing future funds.

Unfair Competition: Trade secrets provide their owners with an economic advantage over their competitors as the information is unbeknownst to third parties. Unlawful acquisition of trade secret, to takeover this economic advantage by mala fide third parties or one of the contracting parties, constitutes unfair competition. Unlawful acquisition, which is against the rule of integrity, is subject to compensation under Articles 53-63 of the Turkish Commercial Code Nr: 6102 (“TCC”). Within the scope of the TCC, even directing contracting parties, who have a trust-based contract relationship, to disclose the production and business secrets will constitute unfair competition. In order for such action to constitute unfair competition, the parties of the R&D Collaboration Agreement or the third party in dispute, do not have to be competitive undertakings. Legal enforcement under TCC is particularly important when R&D collaboration between university spin-offs or between universities and private entities occur.

Patents: While a trade secret can subsequently become the content of a patent application, it cannot work the other way around. Equally, filing a patent application may not necessarily mean disclosure of every aspect of the trade secret. Hence, as opposed to a one-or-the-other approach, an integrated strategy could be considered. This dissects the same subject matter into what needs to be disclosed for the purposes of securing strong enforceable patent protection and what from a commercially strategic standpoint is more valuable, and maintainable, as a secret. The cost of maintaining a patent through the payment of renewal fees, and the cost of bringing an infringement action, will also be important contributing factors in whether a patent is applied for, especially for a smaller company.

The parties of the R&D Collaboration Agreement may therefore opt for joint patent or post R&D technology licensing framework. Since most technology licensing agreements in the biotechnology industry are a mix of patent and know-how licenses, trade secret licensing is also a possibility, if one of the contracting parties wish to own the patent and the latter wishes implement or find a third-party implementer for commercialization.

Contractual Trade Secret Protection, Licensing and Limitations in R&D Collaboration

Under the Freedom of Contract principle, the Parties can sign the following Agreements (considered as sui generis Contracts) to define Confidential Information and the will of the trade secret owner to keep his secret confidential. Some jurisdictions (ex: USA) may refer to these agreements as trade secret licenses, if one of the contracting parties is disclosing its internal trade secret for a novel collaborative R&D project.

1) Confidentiality/Non-Disclosure Agreement (“NDA”):

A Non-Disclosure Agreement (“NDA”) is a contract in which parties promise to protect the confidentiality of secret information that is disclosed during employment or in this case a collaborative R&D. The legitimate business purpose for the trade secret owner is its economic value for future commercial purposes. In case of an external or internal researcher or employee, both collaborating parties’ staff in the research center promises to keep the received information confidential. Preventing unauthorized human access to a trade secret is the whole point of an NDA and should be adjusted proportionally, not to contradict with public interest.

NDA’s may also function as a trade secret license with a permission-granting purpose. This does not necessarily mean that NDA’s are licenses as such but depended on the contractual clauses. As in the case of other licenses, trade secret licenses can also be drafted as exclusive or non-exclusive. However, the licensors must bear in mind that increase the risk of unauthorized or accidental disclosure. Therefore, a balance of desire for market penetration through cooperative non-exclusive license agreements against the costs associated with protecting the trade secret from disclosure is necessary in every R&D Project.

For factual protection: Trade secrets and confidential information, according to the NDA, may be specified as “confidential” during the exchange of documents. This method may create the possibility to protect not only the secrets that emerged during the signing of the contract, but also the trade secrets that occurred during the R&D progress. In addition, an additional confidentiality clause must be added in order to determine the procedures to be applied for the protection of confidential information and guarantees to return the documents containing confidential information to its owner when the contract is terminated. It is also beneficial for the parties to include additional information outside the scope of confidentiality in the NDA.

2) Post-Contractual Non-Compete Agreement (“NCA”):

 NCA aims to limit parties to compete with a business/university spin-off, after termination of employment or completion of an R&D. This agreement is relevant for researchers and employees contributing to the collaborative R&D under employment contracts or by other means. A proportional NCA, may not be more than 2 years and -if necessary- payment for compensation for the time of non-compete may be provided. Additionally, the Turkish Code of Obligations sets the proportionality level of a NCA under Art 444/2, stating that: “If the service agreement  provides the worker with the opportunity to obtain information about the customer environment, the production secrets or the work done by the employer, and if the use of this information causes a serious harm to the employer….”  The NCA will be valid. All types of information may be considered confidential by the parties in the NCA, unless it causes the economic downfall of the employee/researcher (tying agreement).

3) Post- Contractual Non-Solicitation Agreement:

This Agreement limits individuals and organizations from soliciting employees; researchers; business opportunities; technical know-how form another company or organization. Lenient rules apply, as courts assume less danger to public interest. The courts may not be tolerant to former employee or other to use trade secrets to advantage of others.

Additional Considerations in Trade Secret Licensing

“Black-box” agreements, which prohibits to technically and physically investigate (via reverse engineering or other means) the product by the other contracting party is a necessary contract, if the trade secret owner is in doubt that the trade secret can easily be disclosed. In such cases, the product or a part of the product will be with a mechanical security to protect against reverse engineering of the trade secret. If an invention is expected from the R&D, offering joint ownership of a patent application or defining which project end-products will be owned as patented inventions by the parties in the R&D collaboration agreements may also be useful, if the contracting parties cannot agree on the black-box agreement.

If other part or its staff leaks confidential information or intents to do so, addressing a clause regarding court order for an “injunction” directing protection of the information is necessary for quick action to be taken. This also includes retention of rights to prevent direct transfer of the confidential information by the other party, hence the research is being initiated in one of the party’s facilities. Retention of rights for transfer and exclusive licensing may also be drafted, if the investing party believes that the other party may not be able to implement further use of the end-product for commercialization or by similar means.,

As an important side note over concerns on Anti-Competition Law, since Communique on Block Exemption for Research and Development Agreements (Communique No: 2016/5) entered into effect on 16 March 2016, confidential business information and undisclosed information are excluded from the scope of prohibition for using technical information and R&D results independently from the other contracting party.

External Risks and Conclusion

Companies, technology transfer offices of universities and university spin-offs rely more on their core competences and reduce depth of their production/service. In today’s R&D world, collaboration is necessary for multidisciplinary of inter-organizational level to achieve crown jewel inventions. To reduce the shortcomings of unwanted disclosure, universities and companies should only disclose the necessary information to the other party and separate the facilities of the collaborative research from regular research groups (especially if other party’s employees/researchers are present). Moreover, systematic survey and documentation of the trade secret disclosures, and proper data management within the cyberspace are essential, should be any future disputes arise from the R&D collaboration agreement.

Consideration of the pros and cons of keeping proprietary information secret versus seeking registered IP protection is also a balance between cost and opportunity for research centers. Trade secrets may not always be eligible for strong or any patent protection. Proper knowledge and understanding of the commercial, technological and regulatory landscape of the related industry is required in order to develop a strong IP strategy following R&D collaboration. Collaborations with strong partners by disclosing trade secrets may be beneficial for some owners of the secret, while improperly prepared R&D Collaboration Agreements may cause more damage than benefit to the owner in post R&D progress.

Author:  Sinan Erkan

Bibliography:

Gomulkiewicz R w, Nguyen X-T and Conway D, Licensing Intellectual Property: law and application, Aspen Publishers (Second Edition 2011)

Sulu M ,Ticari Sırların Korunması, , On İki Levha Yayıncılık (2017)

Tollen D W , The Tech Contracts Handbook Cloud Computing Agreements, Software Licenses, and Other IT Contracts for Lawyers and Businesspeople, American Bar Association (Second Edition 2015)

van Overwalle G, “Uncorking Trade Secrets: sparking an interaction between trade secrecy and open biotechnology” in Rochelle C. Dreyfuss and Katherine J. Strandburg’s (eds)  The Law and  Theory of Trade Secrecy A Handbook of Contemporary Research, Edward Elgar Publishing (2011)

Wall L and Banks K, 'Patents and Secrets in the Chemical Industry' (2017) 269 Managing Intell Prop.

 

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