Trade Secret Licensing: The "Listerine" Formula Case

R. Mark Halligan, Esq.

Copyright 1998 R. Mark Halligan, Esq.

 

Trade secrets, unlike patents, can be licensed forever. The licensee can be obligated to continue paying royalties for the trade secrets license even if the information (subject to the trade secret license) has entered the public domain.

This fundamental principle of trade secrets law was illustrated in the famous "Listerine" formula case. Warner-Lambert Pharmaceutical Co. v. John J. Reynolds, Inc., 178 F.Supp. 655 (S.D.N.Y. 1959), aff'd 280 F.2d 197 (2nd Cir. 1960).

In the early 1880s, Dr. J. J. Lawrence devised a formula for an antiseptic liquid compound which was given the name "Listerine." In 1881, J. W. Lambert signed a document that read as follows:

 

  • Know all men by these presents, that for and in consideration of the fact, that Dr. J. J. Lawrence of the city of St Louis Mo has furnished me with the formula of a medicine called Listerine to be manufactured by me, that I Jordan W Lambert, also of the city St Louis Mo, hereby agree for myself, my heirs, executors and assigns to pay monthly to the said Dr. J. J. Lawrence his heirs, executors or assigns, the sum of twenty dollars for each and every gross of said Listerine hereafter sold by myself, my heirs, executors or assigns. In testimony whereof, I hereunto set my hand and seal, Done at St Louis Mo. this the 20th day of April, 1881 Jordan W Lambert (Seal).
    •

    Id. at p. 658.

    Thereafter, Dr. Lawrence agreed to reduce the royalty to six dollars per gross and, on January 2, 1885, Lambert assigned his rights to Listerine to the Lambert Pharmaceutical Company.

    For some 75 years, Plaintiff (Warner-Lambert Pharmaceutical Company) and its predecessors made periodic payments based on the quantity of Listerine manufactured or sold. By 1956, the payments totalled more than $22 million.

    In 1956, Warner-Lambert filed a declaratory judgment action to terminate the royalty payments because the "Listerine" formula was no longer a trade secret. The evidence revealed that there had been public disclosure of the Listerine formula by publication in the Journal of the American Medical Association at least as early as 1931.

    The court held that the fact that the LISTERINE formula was no longer a trade secret was no bar to paying licensing fees:

     

  • Here, however, there is no such public policy. The parties are free to contract with respect to a secret formula or trade secret in any manner which they determine for their own best interests. A secret formula or trade secret may remain secret indefinitely. It may be discovered by someone else almost immediately after the agreement is entered into. Whoever discovers it for him,self by legitimate means is entitled to its use. See, e.g. Rabor v. Hoffman, 118 N.Y. 30, 23 N.E. 12.

    But that does not mean that one who acquires a secret formula or a trade secret through a valid and binding contract is then enabled to escape from an obligation to which he bound himself simply because the secret is discovered by a third party or by the general public. I see no reason why the court should imply such a term or condition in a contract providing on its face that payment shall be coextensive with use. To do so here would be to rewrite the contract for the parties without any indication that they intended such a result.

    •

    Id. at p. 665.

     

    Possession of trade secret information, under a license, provides the licensee with a "head start" advantage in the marketplace: 

  • At the very least plaintiff's predecessors, through the acquisition of the Lawrence formula under this contract, obtained a head start in the field of liquid antiseptics which as proved of incalculable value through the years.
    •

    Id. at p. 666. (Emphasis added). In fact, as the District Court in Warner-Lambert observed:

  • The case at bar illustrates what may occur in such cases. As the undisputed facts show, the acquisition of the Lawrence formula was the base on which plaintiff's predecessors built up a very large and successful business in the antiseptic or germicide field. Even now, twenty-five or more years after it is claimed that the trade secret was disclosed to the public, plaintiff retains more than 50% of the national market in these products.
    •

    Id. at p. 666.

    The Listerine case illustrates the benefits of trade secret licensing. Even if a trade secret subsequently enters the public domain, royalty payments under trade secret licensing agreements can continue indefinitely.

    R. Mark Halligan, Esq.
    312.526.1559         Email / Blackberry