December 17, 2018

Trade Secrets and Non-Disclosure Agreements

Holland & Knight Trade Secrets Blog
Steven D. Gordon

The owner of a trade secret must take reasonable measures to keep the information secret in order to claim protection under the federal Defend Trade Secrets Act (DTSA) or state trade secrets acts. Yet, in order to conduct business, the owner of a trade secret sometimes must share the information with employees or other parties with whom it does, or would like to do, business (a franchisee, a joint venture partner, a potential buyer, etc.). A common method for preserving trade secrets in such a situation is for the trade secret owner and the other party to enter into a Non-Disclosure Agreement (NDA) of some type.

If the NDA contains a time limit on its non-disclosure obligation, then the expiration of that time limit may jeopardize the trade secrets covered by the NDA. Two courts have concluded that the expiration of the non-disclosure obligation demonstrates that the trade secret owner is no longer taking reasonable measures to preserve the secrecy of the information. See Silicon Image, Inc. v. Analogk Semiconductor, Inc., No. 07-cv-00635 JCS, 2008 WL 166950, at *16-17 (N.D. Cal. Jan. 17, 2008); D.B. Riley, Inc. v. AB Engineering Corp., 977 F.Supp 84, 91 (D. Mass 1997). Some courts have reasoned that the NDA supplants any implied duty of confidentiality that may otherwise have existed. See, e.g., Marketel Intern., Inc. v., Inc., 36 F. App'x 423, 425 (Fed. Cir. 2002). Thus, in that case, when the NDA expired, no implied duty of confidentiality existed.

On the other hand, two recent decisions by federal courts in California have noted that the expiration of an NDA does not necessarily bar a claim under the DTSA or a state trade secrets act for an alleged misappropriation that occurred thereafter. Instead, the expiration of the NDA is simply one fact the jury may consider to determine whether or not the owner adequately protected its trade secrets at the time of the alleged misappropriation. Alta Devices, Inc. v. LG Electronics, Inc., No. 18-CV-00404-LHK, 2018 WL 5045429, at *7 (N.D. Cal. Oct. 17, 2018); BladeRoom Grp. Ltd. v. Facebook, Inc., No. 5:15-cv-01370-EJD, 2018 WL 1569703, at *7 (N.D. Cal. Mar. 30, 2018).

There are some scenarios where a trade secret owner may still be adequately protected even if the NDA expires. One example would be where the plaintiff receives other assurances regarding the defendants' intentions to maintain confidentiality of the information despite the expiration of the NDA. On-Line Technologies v. Perkin Elmer Corp., 141 F.Supp.2d 246, 256 (D. Conn. 2001). Another example might be where a third party who did not obtain the trade secret pursuant to the NDA engages in misappropriation and attempts to raise the expiration of the NDA as a defense.

In sum, the expiration of a NDA may arguably bring an end to the trade secret status of any information covered by it. Because trade secrets can potentially last forever, a NDA covering trade secrets generally should impose non-disclosure or non-use obligations that continue indefinitely (and require the return of the trade secret information upon the termination of the NDA). If the NDA also covers information that is simply confidential but does not rise to the level of a trade secret, it may be necessary to impose time limits on any restrictions regarding the confidential data in order for the agreement to be enforceable. In this event, the NDA should spell out an indefinite obligation regarding trade secrets and a time-limited obligation regarding confidential information.

In situations where a trade secret actually has a limited “shelf life,” then it may make sense for the owner to agree to a commensurate time limit in a NDA protecting that information. But if the impetus for placing a time limit in the NDA is something else – such as industry norms, market pressure, or convenience – then the owner must decide whether the gain to be achieved through the NDA outweighs the potential loss of trade secret protection upon the expiration of the NDA. In all cases where a party wants to protect its trade secrets, specific thought should be given to the terms, applicability, and scope of the NDA, and form NDAs should not necessarily be relied upon.   

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