Tuesday, 25 August 2009

If an NDA is Not a Licence, Then What Is It?

I have been doing IP licensing for over 25 years and perhaps the most elusive part of the practice for me is trade secrets. My uncertainty is well-captured by the sub-title of an article by my learned colleague and friend John Hull entitled "Trade Secret Licensing: The Art of the Possible" (Journal of Intellectual Law and Practice, 4 (3) 2009). In the article, the following sub-title appears "Is a Non-disclosure Agreement a Trade Secret"? Hull frames the question as follows: "Broadly speaking, making available one's trade secrets takes one of two commonly adopted forms--non-disclosure agreement (sometimes called a confidential disclosure agreement"

Hull goes on to explain the difference thus:

"A non-disclosure agreement has few of the characteristics of a license. The scope and purpose of disclosure is usually limited. It seems reasonably safe to assert that the intention of most parties to a non-disclosure agreement is not to engage in a licensing transaction."
To further support this claim, Hull brings a form of clause which is frequently found in a non-disclosure agreement as follows:
" No licence is granted to the Recipient hereunder and no licence shall be deemed to have arisen or be implied by virtue of the parties entering into the Agreement."
In truth, it is this clause, in its various forms, which continues to perplex me and I have never really understood it. If a non-disclosure agreement is not a licence, then what is it? Granted, the classic understanding of an IP licence does not easily apply to the grant (read: disclosure) of one's trade secret to a third party. After all, a trade secret is not a negative right, such that a trade secret licence is not the grant by the disclosing party of a right of use, in the absence of which the disclosed party would be in breach. As we all know, it is the negative right aspect of IP rights that constitute the basis for IP licensing.

But if that is true, then the observation should apply in equal measure to both a non-disclosure agreement and to a so-called "real" trade secret licence. Neither is a licence in the classical sense. Few, if any, however, seem willing to stake out such a radical position. In its stead, two possibilities suggest themselves. The first is that both the non-disclosure agreement and the "real" licence are both licences of a sui generis kind. Both rest on the willing disclosure by the trade secret to a third party, even though the terms, scope, purpose, and consideration will likely differ. That seems to me to be the more natural interpretation.

But that appears to be the minority position. More commonly, it seems, a distinction is made, whereby the non-disclosure agreement is deemed not to be a licence, and the contractual provision set out above is intended to give explicit effect to that distinction. However, no effort is made to explain exactly (i) what is the legal nature of the non-disclosure agreement, if it is not a licence, or (ii) what are the implications of this "non-licence" status. After all, the fact that an agreement sets forth a declaration--such as that no licence is created--does not necessarily resolve the issue. It is the relationship between the parties, and not a mere contractual declaration, that is ultimately determinative. And so the question remains: If a non-disclosure agreement is not a licence, then what exactly is it?

NDA- I Found It, But What Is It?


Mark Anderson said...


First of all, you are making a distinction between confidential information and trade secrets. As I understand it, that distinction is relevant in a US context, but is not relevant to UK commercial transactions - we don't have special State laws on trade secrets. (The distinction does have an importance in English employment law, but that is a separate matter.)

My take on this is that disclosure under a CDA, as well as clarifying that the information is confidential (useful under English law and probably under many other countries' laws, to establish equitable or other non-contractual obligations as well as contractual obligations), involves a permission to do something which would otherwise be actionable, eg in equity or for breach of contract. Call that a licence if you wish, although it is not the same as a licence to use intellectual property. Perhaps we have become used to treating know-how as something that can be licensed or assigned in a similar way to patents, but in truth know-how (as confidential information) is not property and cannot technically be licensed or assigned, although one can construct contractual obligations that make the know-how walk and talk like a duck, even if it isn't one.

A further point is that under some countries' laws (particularly civil code countries) it may be important to avoid any implication that the parties have declared an intention to enter into a licence agreement (as might be evidenced by a loosely worded CDA) which they could not then withdraw from unilaterally without good reason. Therefore it is important to clarify that no licence or obligation to grant a licence arises.

In summary a CDA is a contract and a confirmation of equitable obligations. The licence concept is not needed.

Mark Robinson said...

I agree with Mark A.

Under English law, obligations of confidentiality will arise automatically when someone discloses something which is clearly of a confidential nature. Thus, the purpose of an NDA is to formalise those obligations through the vehicle of a contract between the parties.

This has two main benefits. First, it avoids the possibility of the recipient mistakenly believing that the disclosed information is not confidential. Secondly, it enables the parties to define more precisely than might occur under common law, how and for what purposes the information may be used by the recipient.

As Mark A says, the concept of a licence is not needed in the context of an NDA. Having said that, if the confidential information is also subject to IP rights then, by definition, the NDA is granting a limited licence under that IP. It would, therefore, be wrong to say that the NDA does not grant a licence in respect of any relevant IP.

I have not seen a 'no licence' provision in the form set out in your posting without a qualification along the lines of 'other than as expressly provided in this agreement'.

Anonymous said...

Not sure that an NDA can contain legally-enforceable obligations other than not disclosing the confidential information. If the parties use a NDA to limit the use of the information by the receiving party, I fail to see how the disclosing party can effectively prevent the receiving party to make other uses of the information, absent any IP right on that information. Here is probably the point on which the use of license language into NDAs is misleading as to the actual rights a disclosing party effectively have.

Mark Anderson said...

In response to Anonymous, the NDA may expressly prohibit other use, therefore the injunction would be for breach of contract.

In addition, there may be an injunction to restrain use of confidential information, depending on national confidentiality laws.

I don't see the problem that Anonymous raises. Perhaps it is an issue in the jurisdiction in which he/she is based?

Anonymous said...

I'm based in France, but my practice is international.
Of course that NDAs can contain such limitations, and I am also including such.
My point is about the effective enforceability of limitations going beyond the obligation of keeping the information confidential. As emphasized in this post, a mere confidential information does not have negative rights attached, nor it is really a property. Any rights attached to it are related to its confidential nature.
Therefore, in my view (but maybe indeed that certain jurisdictions have rules specifically providing additional negative rights to confidential information), the only legally-enforceable right of an NDA is the breach of contract through disclosure of the confidential information. Any other limitations of use could only be enforced if a negative IP right is attached to the information.
In the same vein, we also put limitations related to title on the confidential information (" the confidential information remains the exclusive property of the disclosing party"), and end-of-use limitations ("the receiving party undertakes to stop using the confidential information x years after effective date"). I am not convinced that such limitations are really enforceable (except maybe in those jurisdictions providing specific negative rights to confidential information), if the confidential information is maintained confidential by the receiving party.
Does that make sense, or am I completely out of the subject of this post ?

Mark Anderson said...

Under English law, the basic requirements for an actionable breach of confidence, according to the leading case of Coco v Clark, are:
1. The information must have "the necessary quality of confidence"
2. [not relevant to my point]
3. There must be unauthorised use or disclosure to the detriment of the defendant.

In other words, use of confidential information, without disclosure, can be the basis of legal action. That action might include an injunction to restrain further use.

As for non-use after termination of eg a licence agreement, that will raise competition law issues, but if these can be navigated, the contractual obligation should be enforceable.

I agree that saying that a party "owns" confidential information strictly doesn't make much sense, under English law, but it may be a convenient shorthand for something like "X will treat the information as Y's confidential information".

Prakash Pandya said...

Hi, I am from India. I am not practising IP licencing for long time (now just for couple of years). This is my understanding.
Know-how is not considered as the same thing as confidential information. It is also considered different from secret.
If I got discussions right, confidentiality clause is not same as IP licensing. Hence, while respect view of Mr. Neil, I do not agree to it.
I agree with Anonymous writer from France. General equitable jurisdiction to grant relief against actual or threatened abuse of confidential information, not involving any tort or breach of contract or some wider fiduciary duty, is now accepted. See Attorney-General v Observor [1990] 1 AC 109; also Michael Health v. Subhash (1995) PTC 300 and Saltman v. Campbell [1948] 65 RPC 203.
Extending argument of Mr. Neil, considering NDA as having few characteristics of IP and hence NDA equated with IP licencing may not be true. One need to analyse Confidence (for true sense of NDA) and confidentiality as against IP. If both were same, licencing of IP and NDA could be treated the same. However no one does licensing of IP by NDA, though NDA could be one of the clauses/separate agreement in IP licensing.
In Salman Engg. case (supra), it was observed that a contract may or may not contain confidentiality clause and still in both situations, obligation is on party receiving confidential information, to maintain information confidential.