Nova Chemicals, Inc. v. Sekisui Plastics Co., Ltd., 2009 WL 2634762 (3d Cir. 2009)

There was an interesting decision from the Third Circuit last week (Jordan, Nygaard, Fuentes writing) that addressed what types of provisions in a trade secret licensing agreement are binding after the trade secret is no longer confidential. To briefly review, if you enter an agreement to license a copyright or patent and the term in the intellectual property right expires, you’re no longer obligated to continue to make royalty payments. The licensing agreement would terminate with the expiration of the exclusive rights in the underlying patent or copyright. See, e.g., Brulotte v. Thys Co., 379 U.S. 29 (1964) (finding that the obligation to pay  royalties in return for the use of a patented device may not extend beyond the life of the patent.)

Things aren’t as simple in the context of trade secret, which has a potentially indefinite term. The landmark case in this area is Warner-Lambert Pharm. Co. v. John J. Reynolds, Inc., 178 F.Supp. 655, 665-66 (S.D.N.Y.1959), aff’d 280 F.2d 197 (2d Cir.1960) (per curiam) (adopting District Court opinion), where a company licensed the secret formula for Listerine for seventy-five years. After the formula was disclosed to the public, the licensor refused to make additional payments for the former trade secret. The S.D.N.Y. held that the licensor was still obligated to pay for the license, finding that “one who acquires a secret formula or a trade secret through a valid and binding contract … [may not] escape from an obligation to which he bound himself simply because the secret is discovered by a third party or by the general public.”

In Nova Chemicals, inc. v. Sekisui Plastics, Inc., a company agreed to license proprietary technology to produce a Styrofoam product. The propreitary technology was protected by patent and trade secret, both of which expired during the course of the agreement; the patent via term, the trade secret via disclosure.

The licensing agreement between the two parties stated that the licensor couldn’t market the Styrofoam products derived from the trade secret in Asia. The Licensor brought suit seeking a declaratory judgment that it could market in the region.

The Third Circuit found that, unlike in Warner-Lambert and Aronson v. Quick Point Pencil Co, the “language of the License Agreement, and its surrounding circumstances” showed that the parties didn’t intend the Asia provision “to survive the expiration of Sekisui’s intellectual property.” The Court instead read the provision as a limitation on the scope of the license, and not as bargained for consideration for disclosure.  As such, the Court found that NOVA chemicals could market products that incorporated the disclosed trade secret in Asia.

In both Aronson and Warner-Lambert, the courts focused on aspects of the agreements that evinced an intent to create ongoing obligations after the life of the relevant intellectual property. In Aronson, the parties understood that the relevant trade secrets would be destroyed as soon as the product was manufactured. 440 U.S. at 259. Nevertheless, the parties explicitly agreed to ongoing royalty payments even if a pending patent application failed. Id. Further, the parties clearly delineated the consideration applicable to the patent-license portion of the agreement and the trade-secret license portion of the agreement. Id. In Warner-Lambert, Warner-Lambert agreed
to ongoing royalty payments as long as it continued to manufacture Listerine, instead of setting a fixed end date or otherwise limiting its obligation to continue paying. 178 F.Supp. at 660. In both cases, the Court found that the licensor agreed to disclose secret information to a manufacturer in exchange for ongoing consideration.

Here, in contrast, nothing in the License Agreement suggests that the parties intended any ongoing obligations with respect to trade secrets after the 1995 termination of NOVA’s obligation to maintain the secrecy of Sekisui’s technical information. While Sekisui argues that it only agreed to disclose its trade secrets and to train NOVA personnel in exchange for NOVA’s ongoing promise to stay out of Asia (in addition to lump sum and royalty payments), the terms of the License Agreement belie this argument. The Asia exception appears as a limitation on the scope of NOVA’s rights under Sekisui’s intellectual property, rather than as an independent restriction or as consideration for trade secret disclosures.FN13

Further, Sekisui disclosed its trade secrets during the option period. If NOVA had chosen not to exercise its option to acquire a ten-year license to manufacture Piocelan products, Sekisui’s trade secrets would have been protected for only five years after NOVA rejected the license. In this circumstance, the Asia exception never would have come into force at all; NOVA would have been undisputably free to make use of Sekisui’s trade secrets after five years and to market Piocelan products anywhere in the world as soon as Sekisui’s patents expired. Thus, if it was intended as consideration at all, the Asia exception could only have been consideration for a license under Sekisui’s patent rights and to use Sekisui’s trade secrets during the period they remained protected, rather than for the initial disclosure of those trade secrets.

*10 Finally, none of the extrinsic evidence supplied by the parties suggests that they intended the Asia exception to be a stand-alone provision, or any terms of the License Agreement to survive the expiration of Sekisui’s patent rights and NOVA’s secrecy obligations with respect to the trade secrets.