Role is Less Obvious in Context of Trade Secrets

The role of “design around” in the context of trade secrets is less obvious. The bedrock principle of trade secrets is the notion of secrecy. If your secret has value, and you can keep it secret, then the law will accord it legal protection. However, secrecy does not mean that others cannot try to discover what you have created. Provided that a third party is not subject to an obligation to the contrary, contractual or otherwise, that person is permitted to take all lawful measures to reverse-engineer the product to learn the trade secret. Indeed, a third party might discover the trade secret independently -- and the licensee can do nothing to stop the use of the secret so discovered by the third party.

Ironically, perhaps, the one category of persons that is not able to freely engage in reverse engineering is the licensee of a trade secret. In exchange for disclosure of the trade secret, the licensee foregoes the opportunity to discover the trade secret by means of reverse engineering. It is presumed that the licensee is quite willing to accept this bargain, because the cost of time and money, coupled with the uncertainty that the trade secret is susceptible to independent discovery, is outweighed by the immediate access gained to the valuable creation. (That is not to say that there is no cost to the licensee in entering into the license agreement. It can be expected that a royalty will be paid. As well, the licensee may have to expend certain time and resources to protect the trade secret against disclosure. But these costs are presumed to be worthwhile in exchange for the disclosure.) Under such a scheme, the issue of “design around” would seem to be insignificant.

Upon further consideration, however, the issue is more complex. “Design around” may also be relevant in the case of a trade secret. Consider the situation in which the trade-secret licensee wishes to design a product that does not directly make use of any of the elements of the trade secret. Rather, the licensed trade secret serves as the basis by which the licensee in effect “designs around” the licensed trade secret to make his own separate creation.

This leads to a situation quite different from patents. With respect to patents, any third party may seek to design around the patent, since the patent is a published document. There is effectively nothing that the patent owner can do to prevent the design-around, even if he wishes to do so. By contrast, a trade secret is by definition not generally available to the public. Other than the owner of the trade secret, only the trade-secret licensee has direct access to the confidential information. Moreover, it is unlikely that the owner of the trade secret has an interest in the licensee using the trade secret to effectively design around it.

However, when design-around is involved, which party has the upper hand, the trade secret owner who wishes to prevent the use of the trade secret for purposes of the design-around, or the licensee, who wishes the opposite? The answer is: it depends. A trade-secret license is a form of contract, so that the terms of use by the licensee are fixed in the license. One can imagine a license that states explicitly that the licensee can use the licensed trade secret only for the purposes specified in the license, and that any other use of the trade secret for any purpose is prohibited. Such a clause would seem to foreclose the possibility of design-around by the licensee.

However, the license may be less explicit in this regard. It may grant the licensee a broad right to use the trade secret in the context of the licensee’s activities, without prohibiting the licensee from carrying out activities such as the design-around of the licensed trade secret. In this case, the licensee would seem to be on potentially stronger legal ground should it seek to design around the trade secret.

One can push this scenario further by contemplating a situation in which the license is a mixed patent and trade secret-license. If only a patent is being licensed, the patent owner will not likely be able to prevent design-around of the patent. But if trade secrets are being licensed together with the patent, the result may be different.

The licensor could seek to impose explicit restrictions on the licensee’s ability to use the trade secret for any purposes other than those set out in the license. If such a restriction is upheld, and the licensee makes use of the trade secret to carry out the design-around of the patent, it is possible that the patent owner could seek to challenge the resulting design-around on contractual grounds. Such a challenge by the patent owner to the resulting design-around would lead to an interesting clash between patent principles, favoring design-around, and trade-secret principles that are more ambiguous and subject to the terms of the licensed agreement.