September 2, 2021

Relying on NDAs in Trade Secret Cases: Can Information be Confidential but not a Trade Secret?

Holland & Knight Trade Secrets Blog
Seth J. Welner
Trade Secrets Blog

A Georgia jury recently found that a software contractor breached a non-disclosure/confidentiality agreement (NDA) entered in connection with a software project but did not misappropriate trade secrets. The plaintiff prevailed by pursuing alternative liability theories, which was important because the jury found that the protected information did not meet the statutory definition of a "trade secret."

In SIS, LLC v. Stoneridge Holdings, Inc., et al., Case No. 1:17-cv-01816, the plaintiff, SIS LLC (General Contractor) alleged that it spent years and significant resources to obtain a contract with APi Construction Company (Customer) to lead the analytics and implementation phases (phase 2) of a new software system. The General Contractor initiated discussions with the defendant, Stoneridge Holdings Inc. (Subcontractor), to assist with the project, analytics and training. When discussions progressed, Plaintiff and Defendant negotiated and executed an NDA.

The NDA prevented the improper use and/or disclosure of certain confidential information of the General Contractor, including "lists of and information about . . . customers, potential customers, and associated statistical and financial information; . . . sales, marketing, business and strategic plans; and other significant and valuable business information that would otherwise be considered to be 'trade secrets' under applicable law." Both before and after the execution of the NDA, the Subcontractor attended meetings and trainings with the Customer.

Ultimately, the relationship between the General Contractor and the Subcontractor deteriorated, and the Subcontractor was no longer involved in the project. Months later, the Customer ended its relationship with the General Contractor before the phase 1 work was completed. The Customer then directly contracted with the Subcontractor to complete both the phase 1 and phase 2 work.

The General Contractor sued the Subcontractor for trade secret misappropriation and breach of the NDA, arguing that the Subcontractor used trade secrets and confidential information to secure the Customer's work, and that its trade secrets include confidential information regarding the Customer and the project, General Contractor's capabilities, particularized software implementation strategies and techniques, and the subject work order. The Subcontractor challenged that any of that information was protectable and pointed to its own extensive experience.

To assert a claim under the Georgia Trade Secret Act, a plaintiff must prove that 1) it had a trade secret and 2) the opposing party misappropriated the trade secret. See, e.g. O.C.G.A. 10-1-761 (2010). A trade secret is defined as 1) information not commonly known by or available to the public, 2) which derives economic value from not being generally known to or ascertainable by proper means by others who can obtain economic value from the information and 3) that was subject to reasonable efforts to maintain its secrecy. Id. Finally, a defendant misappropriates a trade secret when it discloses or uses another's trade secret without consent, while knowing that it had a duty to maintain its secrecy.

In finding for the General Contractor on the claim that the NDA was breached but that Subcontractor did not misappropriate trade secrets, the jury seemed to distinguish trade secret information from confidential information. Thus, the jury apparently determined that the General Contractor did not provide the Subcontractor with information that fell under Georgia's definition of a "trade secret" but that the Subcontractor nevertheless misused information that qualified as "confidential" under the NDA.

With more and more businesses asserting trade secret protection over materials that may not possess the typical characteristics of a trade secret (e.g., a soft drink recipe, software code or "secret sauce"), courts are frequently tasked with distinguishing between materials that are merely proprietary or confidential to a business and those that are truly trade secrets with an independent economic value.

Plaintiffs bringing a trade secret claim should be cognizant of the distinctions between "trade secret" and "confidential information," and consider claims under both theories if appropriate. Businesses that use subcontractors or consultants should also consider other contractual provisions like non-circumvention clauses or non-solicitation provisions, which may provide additional protections.

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