For many small and mid-sized technology companies trade secrets provide a true engine for growth. Proprietary processes, software logic, formulas, internal systems, and business methods are valuable assets, and often determine whether your company can compete, scale and attract strategic partners as you grow. Licensing trade secrets can be an effective way to generate new revenue, enter new markets, or accelerate growth. At the same time, a misguided negotiation or incomplete license can expose your company’s valuable assets to substantial and permanent risk, including termination of the trade secret. Once confidential information is disclosed or misused, it may never again be legally protected as a trade secret. For this reason, licensing trade secrets is not simply a legal transaction, but a strategic business decision that must be approached with the same level of care as a major investment or acquisition.
Understanding the Basics of Trade Secret Licensing
This blog explains the basics of trade secret licensing, when such licensing makes strategic business sense, how to structure these types of agreements, and how your company can avoid the most common and costly mistakes that can arise during negotiations of the license, the term of the license, and after the license has expired and the parties have gone their separate ways.
What’s a Trade Secret?
Under state and federal law, a trade secret is any formula, pattern, process, method or compilation of information that provides a business with a competitive edge because it is not generally known or easily discoverable by others. The information must be confidential, have independent economic value, and be subject to reasonable efforts to maintain secrecy. Unlike patents and copyrights, there is no statutorily defined duration for trade secret protection, which may continue forever if the information is not publicly available and kept secret. Think of the Coca-Cola formula, which has been secret since 1886. Trade secrets are protected under federal law by the Economic Espionage Act, as amended by the Defend Trade Secrets Act (“DTSA”). Most states have adopted a version of the Uniform Trade Secrets Act (“UTSA”). In California, the CUTSA is generally considered more protective of trade secret information than DTSA because it defines protected information more broadly, covering a wider range of business information beyond just technical or scientific data, and allows for broader standing to sue.
Trade Secret Licensing is a Strategic Business Decision
Before entering into a trade secret license your company (licensor) and your potential customer (licensee) should each evaluate your licensing strategies, whether a license or other contract is the most appropriate vehicle to accomplish those strategies, the suitability of your customer as a licensee, and the nature and anticipated duration of the competitive advantage that may be provided by the licensed trade secrets.
First and foremost, each party to a trade secret license must consider its business objectives in entering into the deal and how the particular license fits into its overall business strategy. A trade secret license allows another party to use your company’s confidential information under carefully prescribed conditions. Ownership of the IP remains with your company. The licensee gets access and the right to use the information in carefully prescribed ways stated in the license.
Before entering into a license of your company’s trade secrets, you should conduct due diligence to determine if the prospective licensee is a suitable partner. Consider the prospective licensee’s financial status, its ability to commercialize the licensed IP, and how commercialization may impact your IP’s value and business. In trade secret licensing it’s important for the licensor to evaluate the licensee’s (1) reputation in the industry, particularly for trustworthiness, (2) ability to enforce security measures to protect the trade secrets, and (3) risk of misusing the licensed technology or developing competing technology during or after the term of the license. If the licensee is located in a foreign country, you should consider whether the license will be enforceable in that country.
Before licensing, your company should step back and evaluate the business risks associated with licensing. At a minimum, ask yourself three questions:
- Would loss of the trade secret information materially damage your core business if it were disclosed, reverse engineered, or independently recreated?
- Can the value created by licensing the trade secrets realistically outweigh the risk of losing exclusivity and possibly ownership?
- Does your company have the operational, technical, and legal controls in place to monitor use and enforce license restrictions?
If the answer to any of these questions is no, licensing may not be the right strategy.
It’s also important for the licensee to evaluate your company as a prospective licensor. The licensee will want to consider your company’s financial status and ability to provide support, training, and know-how to help it successfully use the information and commercialize the technology. Depending on the type of competitive advantage the licensee hopes to derive from using your IP, it will want to consider your ability to preserve the secrecy of the licensed trade secrets during the term of the license.
When Licensing Makes Sense and When It Fails
Licensing is most effective when your company wants to expand its business without building infrastructure, entering a new market alone, or taking on new operational risk. A trade secrets gives your company leverage because it’s not only valued by you, it’ valued by others as well. A manufacturer may seek to license its proprietary production methods when it wants to generate revenue from its innovation without directly handling the costs, risks, and logistics of mass production or when it needs to expand into new markets rapidly. A technology company may want to license its algorithms, internal platforms, or data models when it wants to monetize its trade secrets, enter new markets without incurring significant overhead costs, establish industry standards or generate revenue from non-core assets. A service business may want to license its operational systems or pricing methodologies to scale its business quickly without significant capital investment, enter new geographic markets or monetize its unique trade secrets. Valuable trade secrets give each of these businesses the leverage to do so. Licensing is also common in joint ventures, supply chain relationships, and collaborative research agreements, where controlled sharing of the intellectual property (IP) is essential for the commercial relationship to function well and the parties thrive financially.
It’s important to keep in mind that trade secret licenses fail most often when risk is underestimated. Consider a California based software company that licenses its proprietary onboarding system to a strategic partner. The agreement contains basic confidentiality language, but no access controls, audit rights, or monitoring obligations. Two years later, the licensee is acquired by a competitor, and similar functionality soon appears in the acquirer’s platform. At that point, even if misappropriation can be proven, the trade secret may already be compromised and perhaps lost entirely. This is not a rare scenario. It is a predictable result of a poorly structured license.
Structuring the License to Protect Value
Creating a trade secret license involves pre-license negotiations, obligations during the term of the contract, and post-termination obligations. In almost all negotiations, the parties should enter into a non-disclosure agreement. As licensor, you should ensure the NDA limits the prospective licensee’s access and use of confidential information solely to evaluating the possible license. To avoid future claims of misappropriation if a deal is not struck, the licensee wants to ensure the NDA excludes its independent development of similar trade secret technology and any information it may receive from third parties that it has no obligation to keep secret.
Courts routinely reject trade secret claims when the owner cannot clearly define what information is entitled to protection. The license must identify the specific trade secret information that is confidential, valuable, and not generally known. It must then strictly limit how that information may be used. This includes defining the trade secrets being licensed, the business purpose, geographic scope, industry or field-of-use restrictions, duration, and whether sub-licensing is permitted. These limitations help preserve the value of your trade secrets by preventing the licensee from using the trade secrets beyond the agreed scope of use, and by doing so expanding the uses and competing directly with your company. Confidentiality and security obligations must be specific and detailed. Trade secret value depends entirely on secrecy. Many modern agreements align with the National Institute of Standards and Technology Cybersecurity Framework, which was updated in 2024 to reflect current data governance and access risks. The license must confirm your company retains ownership of the trade secrets and define who owns any improvements or derivations created during the license. Without clear language, a licensee may claim rights to enhancements that incorporate your confidential information and you may have no legal recourse.
After the license terminates, you should ensure the licensee returns or destroys all materials containing your company’s confidential information, including originals and hard and electronic copies. The licensee has an on-going obligation to maintain the confidentiality of the trade secrets until the licensed technology and information lose trade secret status through no fault of the licensee or for a specified number of years after termination. Courts typically will not find post-expiration obligations to protect licensed trade secrets if the license does not expressly state that confidentiality obligations survive termination.
Enforcement, Monitoring, and Exit Planning
Preventing the unauthorized use or disclosure of the licensed trade secrets by the licensee or third parties is crucial to both parties’ interests in preserving the value of the licensed trade secret rights. Because money damages cannot restore trade secrecy once it is lost, injunctive relief may be crucial to your company’s ability to preserve its trade secrets in the event of a breach. To that end, a trade secret license should require the licensee to immediately inform you of a breach, cooperate in all enforcement actions, and if necessary file a civil action for misappropriation and immediately seek a restraining order from the court. Federal courts may issue injunctions under the Defend Trade Secrets Act to prevent actual or threatened misappropriation. Under certain circumstances, California state courts can do the same. To enhance enforcement, a trade secret license should include detailed audit rights, notice obligations, termination provisions, and post-termination protections. The license should also address what happens if the licensee is acquired, becomes insolvent, or changes ownership. Effective enforcement of a trade secret license is not periodic or one-time event. It’s continuous. It requires on-going oversight of the licensee to ensure the protections you negotiated in the contract are actually being followed and enforced.
Strategic Takeaways for Your Company
Licensing trade secrets can unlock new and additional value of your company’s IP, but it also exposes your company to potentially significant risks. The strongest agreements are detailed contracts that are built around your company’s IP and business objectives, not around generic contract language. If your company depends on confidential systems, data, or processes, trade secret licensing should be approached as a strategic growth decision, not just a legal one.
About Finkel Law Group
Finkel Law Group, P.C., with offices in San Francisco, Oakland, and Washington D.C., has almost 30 years of experience helping clients protect, license and monetize their intellectual property, including trade secrets and confidential business assets. Our attorneys regularly assist startups, established companies, and investors with trade secret licensing, technology transactions, and risk management strategies. When you need intelligent, insightful, conscientious, and cost-effective legal counsel to help your company structure and enforce trade secret licensing agreements, please contact us at (415) 252-9600, (510) 344-6601, (771) 202-8801, or info@finkellawgroup.com to speak with one of our attorneys about your matter.
