Joint Ventures & COVID-19: How to Protect Trade Secrets when Partnering with Competitors to Meet PPE and Ventilator Demand

8 minute read | April.14.2020

COVID-19 has presented countless challenges, among them, the extraordinary need—and conversely, extreme shortages—of basic protective gear, ventilators, and personal protective equipment (“PPEs”) for healthcare professionals and essential businesses.  With these challenges come a myriad of opportunities for companies to develop, engineer, and deploy novel ways to address the shortage.  Possible solutions have included the federal government ordering, under the Defense Production Act, manufacturers to prioritize the manufacturing of essential medical products. As a result of high demand and a compelling need, manufacturers are stepping outside their established businesses and joining with new partners to quickly manufacture necessary products.

When entering into joint ventures (“JV”), these companies may be required to share or otherwise make available potentially sensitive, proprietary, confidential, or trade secret information with a competitor, who under normal circumstances, would not be privy to this information.  Sharing confidential information increases the risk of misappropriation.

Here, we offer some best practices for parties contemplating JVs with competitors during the pandemic to mitigate against trade secret misappropriation.  While these practices are important for any JV, they are particularly salient now as the rapidly evolving nature of the COVID-19 crisis has led JVs to form more quickly than they might under normal circumstances.

To claim trade secret protections, the owner must demonstrate they took reasonable steps to protect the trades secrets.  See, e.g., Defend Trade Secrets Act (see 18 U.S.C. § 1839(3)(A)).  As further discussed below, the parties should include strong confidentiality protections, identify what information is a trade secret or confidential and who owns the information, and carefully monitor the JV.

Identification of Trade Secret Information with Sufficient Particularity.  Careful identification of each party’s trade secrets gives the parties the opportunity to define the scope of protection before the venture begins, rather than requiring subsequent litigation regarding what constitutes the trade secret information.  Sufficient particularity should be consistent with any applicable legal standards required for the identification of trade secrets in litigation—e.g., California’s Code of Civil Procedure, Section 2019.210.  Proper identification serves to give notice and prevent the plaintiff from broadly claiming that “everything” is a trade secret.

Establishing Scope and Duration of the JV.  Because a JV agreement may limit the use of confidential information to further the purpose of the venture, the agreement typically will narrowly define the scope of the venture to avoid a gradual and unnoticed shift in objective over time.  However, JVs created to manufacture COVID-19 medical equipment likely will have evolving targets.  For example, a JV that initially focuses on one type of equipment, may shift to focus on another PPE to meet evolving demands.

Thus, defining the scope of the venture in the initial partnership agreement may prove challenging and if these JVs find the objectives shifting due to the demands of COVID-19, the companies should take care to amend the JV agreement so that the scope and duration provisions accurately reflect the new focus.  This ensures that the confidentiality or non-disclosure provisions remain enforceable even with the venture’s modified purpose.  Legal should work closely with the business teams so that the appropriate shifts in scope can be memorialized.

Addressing Access to Trade Secret and Confidential Information.  Each additional individual who obtains access to trade secret and confidential information creates an increased risk of disclosure.    Parties to a JV should define or identify which teams or individuals from their respective entities will have access to the confidential information.

Outside of a JV agreement, the parties also should consider the manner in which trade secret and confidential information will be shared.  For example, the parties may decide to set up a secure SharePoint, DropBox, Box, or other shared site for specific information and limit access to personnel critical to the JV.  Logging access to the shared site is crucial for tracking who, when, where, and how frequently information was accessed.  Once the JV ends, the parties should eliminate access to the shared websites immediately.  The parties should utilize technology and automate processes as much as possible so that human error is minimized (e.g., cutting off an employee’s access to the shared repositories as soon as they leave the company or no longer conduct JV work).

Other Key Contractual Provisions to Include in JV Agreements.  In addition to having strong non-disclosure or confidentiality provisions, the parties to the JV may want to include some of these key provisions to further clarify the rights and obligations.

  • Residual clause - allows the company to use and disclose information retained in the unaided memory of its personnel who have had access to or worked with third-party confidential information.
  • Feedback clause - states that any suggestions, comments, ideas, or know-how, provided to one of the JV parties related to its products, services or technology is considered feedback and may be used for any purpose with no obligation to provide compensation for its use.
  • Independent development clause - requires each company to acknowledge that one company may currently or in the future develop technology similar, identical to, or competitive with technology disclosed by the other company, and nothing in the NDA will be construed to prevent such activities.
  • No impairment clause – states that each party understands that the other party may currently or in the future be developing software, products, technology and/or information internally, or receiving software, products, technology and/or information from other parties that may be similar to the other party’s confidential information, and that nothing in the agreement will impair a party’s right to acquire, license, develop for itself, or have others develop for it, similar software or technology performing the same or similar functions as the software and technology contemplated by the agreement, provided that it does not breach its confidentiality obligations under the agreement.
  • Limitation of liability clause – if the circumstances warrant it, this clause would place a clear cap on any potential damages claim.

Addressing Ownership, Protection and Use of Information that Results from the Joint Development.  A key issue that emerges from JVs is the question of who owns the jointly developed intellectual property.  Failure to define ownership in the agreement can lead to subsequent litigation.  The companies can choose to address ownership in several ways. For example:

  • The JV can be the owner of the information during the life of the venture. This requires the agreement to address what happens with ownership after the dissolution of the venture.
  • The parties to the venture can own the information with each party having an unrestricted right to use the information, or the parties can assess different licensing schemes for the technology depending on each party’s contributions and preference.
  • The parties to the venture can own the information, but be subject to restrictive covenants (e., covenants that limit the ability to disclose the information).
  • The agreement can designate one company as the owner of any jointly developed information, with the company obligated to pay for its ownership.

The agreement also should address what happens following termination of the venture.  For example, the parties may decide to continue to use independently the jointly developed information.  Do they have the right to monetize the information through licensing to third parties?  What ability will each party have to enforce these rights?

Protecting From Claims of Misappropriation After the JV Ends.  Although the shortage of PPEs and ventilators seem unending now, eventually the COVID-19 crisis will come under control and the demand will diminish.  At that point, these specifically created JVs will terminate.  Thus, defining procedures to implement post-venture to protect each party from misappropriation claims is just as important as defining obligations during the venture.  One practice to incorporate into the agreement is the use of a “clean room” (i.e., completely separating the teams working on the project).  Variations of clean rooms include:

  • Complete separation of teams – The most conservative clean room approach is to completely wall off the teams for the entire duration of the JV. Incorporating a complete clean room practice would entirely wall off the team working on manufacturing PPEs or ventilators for the entire duration of production.  Completely walling off teams should include restricting access to documents on a team-by-team basis, physically separating the teams in the office, and having internal team members certify both before and after the project that they understand they are not to share information outside their teams.  Completely walling off the teams requires more internal resources, but the complete separation limits exposure to claims of misappropriation.
  • Partial separation of teams – If complete separation is not feasible given the business or resource constraints, the company can still limit exposure to misappropriation claims.  For example, JV parties could ensure physical separation of internal teams from the collaborative team.  Additionally, parties could watermark their material prior to exchange for clear identification of who the information belongs to and to limit its dissemination.  Or, the company can give separate devices to the employees working with personnel from the other company and then collect and wipe the devices at the end of the project.  Following the venture’s conclusion, each employee who worked on the JV must return or destroy all confidential information provided by the other company and certify that they have reviewed the requirements of the non-disclosure or confidentiality provision.  Finally, the agreement will need to address how to ensure compliance provisions limiting use of confidential information shared for the purpose of the venture—e.g., will the agreement give the parties the right to demand a forensic audit to ensure that the company is not maintaining access to trade secret information.