Non-Disclosure Agreements and Trade Secrets: 12 Points to Consider
When businesses share their trade secrets or confidential information with employees or third parties (a franchisee, a joint venture partner, a potential buyer, etc.), they rely on trade secret law and on non-disclosure agreements (NDAs) for protection. How do NDAs affect potential trade secret claims and vice versa? What issues should businesses consider in drafting NDAs? Here are a dozen points to consider.
- An NDA cannot expand what constitutes a trade secret because "a trade secret is defined by law … not by contract." Capricorn Mgmt. Systems, Inc. v. Gov. Emps. Ins. Co., 2019 WL 5694256, at *17 (E.D.N.Y. 2019). Nonetheless, an NDA may provide broader protection than trade secret laws because it can cover proprietary and non-public information that does not meet the definition of a trade secret. "Trade secrets are defined by statute, but terms such as confidential and proprietary information are defined by the contract. Thus, a defendant may breach a contract for disclosing confidential information that does not constitute a trade secret." Albert's Organics, Inc. v. Holzman, 445 F.Supp.3d 463, 476 (N.D. Cal. 2020). Accordingly, an NDA should state that it covers confidential and proprietary information as well as trade secrets to ensure the broadest protection of the information at issue.
- There are three basic approaches to defining the information covered by an NDA: 1) providing a general description, usually a list of categories of covered information, 2) providing a specific description of the information and 3) marking or designating each item covered. Using a general description provides broad and flexible coverage but, in the event of a dispute, may engender debate about whether particular information is covered, making enforcement more difficult. Specific descriptions eliminate such debate, but they are inflexible and require amendment of the NDA if a different type of confidential information is to be disclosed between the parties. Using a marking protocol is both highly specific and completely flexible in terms of covering all sorts of information, but it is the most burdensome approach in practice.
- Courts have upheld NDAs that utilize a general description of covered information and employ broad language in describing it. For example, one federal court recently upheld NDAs that covered "any and all financial, technical, commercial or other information concerning" the company's "business and affairs." The court reasoned that these broad terms were limited by exclusions for information that the recipients learned before the disclosures or information that "was or becomes generally available to the public." The court also noted that these NDAs were between sophisticated business entities. PeopleFlo Manufacturing, Inc. v. Sundyne, LLC, 2021 WL 3129264, at *8 (N.D. Ill. 2021).
- Courts take a dimmer view of broad language in an NDA between a company and an employee because "overly broad nondisclosure agreements, while not specifically prohibiting an employee from entering into competition with the former employer, raise the same policy concerns about restraining competition as noncompete clauses where … they have the effect of preventing the defendant from competing with the plaintiff." TLS Mgmt. & Mktg. Servs., LLC v. RodriguezToledo, 966 F.3d 46, 57 (1st Cir. 2020). An NDA with an employee may be overbroad in three different ways:
- when it "prohibit[s] the employee from using general knowledge acquired by the employee"
- "when the agreement prohibits disclosure of information that 'is not in fact confidential' because it is public knowledge"
- "when it extends to information properly provided to the defendant by third-party sources"
Id. at 58-59. If the NDA is significantly over-inclusive, some courts may invalidate the entire agreement. Thus, an NDA with an employee should exclude these three categories of information. Further, if an NDA includes a non-compete provision or effectively prevents an employee from competing with the company after departure, it may trigger additional statutory or common law requirements applicable to non-compete agreements to be enforceable.
- In addition to defining the information that it covers, an NDA also establishes limits on the recipient's permissible use of that information. It may be important to carefully define those limits in some circumstances, especially in cases involving disclosure of trade secrets to a competitor or potential competitor. For example, an NDA might provide that the recipient will not attempt or permit any other person to attempt to reverse engineer, disassemble, decompile or otherwise discover the trade secrets with respect to any technology, equipment, device, software, hardware or other information or item provided by the disclosing party.
- An NDA can be a two-edged sword with respect to a trade secret claim. On one hand, it can bolster a trade secret claim by constituting strong evidence that a company considers particular information to be secret and has taken reasonable measures (i.e., the NDA) to keep it secret. See ExpertConnect, L.L.C. v. Fowler, 2019 WL 3004161, at *6 (S.D.N.Y. 2019) (holding that plaintiff plausibly alleged a trade secrets claim where defendants obtained information "through improper means—specifically, by breaching their NDAs," and then used that information to steal plaintiff's clients).
- On the other hand, an NDA may undermine a trade secret claim if the NDA does not cover the information at issue or if the plaintiff has not complied with its own obligations under the NDA. The U.S. Court of Appeals for the Federal Circuit has explained that "misappropriation occurs when a trade secret is acquired under circumstances giving rise to a duty to maintain its secrecy" and that "the 'circumstances' giving rise to a duty to maintain the secrecy of the disclosed information is dictated by the terms of the NDA." Convolve, Inc. v. Compaq Computer Corp., 527 F. App'x 910, 925 (Fed. Cir. 2013).
- For example, if the NDA requires covered documents to be marked and the plaintiff has failed to mark the document at issue, it may doom a trade secret claim. See id. Likewise, 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. See Silicon Image, Inc. v. Analogk Semiconductor, Inc., 2008 WL 166950, at *16-17 (N.D. Cal. 2008); B. Riley, Inc. v. AB Engineering Corp., 977 F.Supp 84, 91 (D. Mass 1997).
- Some courts have opined that a plaintiff's non-compliance with an NDA does not necessarily preclude a trade secrets claim if it is outweighed by other evidence. Thus, one court found that a company's failure to comply with a marking requirement was not determinative because it had "presented evidence that it used other means to notify its employees and agents that its technological and customer information was confidential." PQ Labs, Inc. v. Yang Qi, 2014 WL 334453, at *4 (N.D. Cal. 2014). But situations in which a company's failure to comply with its own NDA is not fatal to a trade secrets claim will be the exception, not the rule.
- Because trade secret or confidentiality protection may be lost upon the expiration of a time limit in an NDA, the duration of the NDA should match the life expectancy of the information at issue. If the information will lose its value after a period of time, then the NDA need only last that long. But if the information has perennial value, the NDA should not have a time limit.
- A related issue is addressing the return of confidential information upon the termination of either the NDA or the business relationship between the parties. No return provision is necessary in situations where the NDA expires because the information has lost its value. Otherwise, a return provision is desirable. Typically, it would provide that the receiving party must return or destroy all disclosed confidential information and any derivative information. It may also include a requirement that the receiving party confirm the return or destruction in writing. Note, however, that the return or destruction of the information does not eliminate the need for an ongoing non-disclosure requirement to safeguard against the use of information that might be remembered by the receiving party.
- Another issue that NDAs should address is the relief to which the disclosing party is entitled in the event of a breach of the NDA. Generally, the primary goal is to halt the ongoing misappropriation through a temporary or permanent injunction. In order to obtain such relief, the company must face irreparable injury that cannot be adequately remedied through money damages. Thus, NDAs commonly provide that unauthorized disclosure or use of confidential information will result in irreparable injury and shall entitle the disclosing party to receive injunctive relief. Some courts may treat such a provision as controlling, see Clear-View Technologies, Inc. v. Rasnick, 2015 WL 13298075, at *13 (N.D. Cal. 2015), and some will give it presumptive weight. See Endowment Research Group, LLC v. Wildcat Venture Partners, LLC, 2021 WL 841049, at *8 (Del. Ch. 2021). Most federal courts, however, will not consider such a provision to be dispositive. See MasTec Power Corp. v. Gateway Cogeneration I, LLC, 2020 WL 5946151, at *5 (D. Colo. 2020); ZeniMax Media Inc. v. Oculus VR LLC, 2018 WL 4078586, at *1 (N.D. Tex. 2018); Palomo v. DeMaio, 2017 WL 6001825, at *9 (N.D.N.Y. 2017). Nonetheless, it may prove helpful even if it is not binding on the court.