Intellectual Property

NDAs & How To Lose Your Trade Secrets Without Really Trying

Don't get lulled into a false sense of security in boilerplate NDAs where trade secrets may be involved.

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Nondisclosure agreements (also referred to as “confidentiality agreements”) are essential when it comes to developing and monetizing intellectual property.  They provide a contractual mechanism for the sharing of “confidential information” in a variety of circumstances, such as to evaluate potential business relationships or as part of the business relationship itself.  That said, sometimes what needs to be shared goes beyond the realm of confidential information, requiring the disclosure of certain proprietary know-how as part of the agreement.  Such disclosures go beyond standard confidentiality and cross into “trade secret” territory.  Companies and their counsel need to be extra careful when navigating this territory, as mistakes in this area bear a heavier price than most appreciate (let alone anticipate).

When approaching NDAs, one can never be too careful. As I have written previously concerning nondisclosure agreements, taking the time to get NDAs right is essential.  When it comes to trade secrets, however, such diligence needs to occur on a whole different level.  Although “confidential information” is regularly defined to include business information of the disclosing party (e.g., marketing and business plans, customer databases, and financial information) and technical information of the disclosing party (e.g.,  specifications, formulations, tooling, prototypes, computer software (source and object codes, techniques, and inventions)), sometimes the definition will throw in “proprietary know-how” and/or “trade secrets.”  Such “catch-all” language can be a real problem to the trade-secret owner.

Why the problem?  It’s easy to see when one fully appreciates the definition of a trade secret.  Using the Uniform Trade Secrets Act (“UTSA”) as a guideline, the UTSA defines a “trade secret” as: information, including a formula, pattern, compilation, program, device, method, technique, or process that:

* Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

* Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

It’s pretty straightforward — where the information has economic value by virtue of its not being generally known (or readily ascertainable by proper means) and the owner of such information takes reasonable efforts under the circumstances to keep it secret, you have a trade secret.  Of course, each jurisdiction may incorporate some version of the UTSA or otherwise rely on common law interpretation, but the point here is that trade secrets require a greater degree of care.   What is self-evident from this definition, however, is that trade secrets enjoy such status by virtue of the fact that they are kept secret.  Once disclosed, such trade secrets do more than lose their luster — they lose their status as a trade secret as a result.

The problem is that NDAs can be inherently structured to inadvertently disclose the trade secret.  I can hear a collective “Huh?” from my readership now, but you read that correctly.  Although NDAs are designed to place parameters around what is disclosed and how it is to be handled and used, issues initially stem from when the information can be disclosed without breach of the NDA as well as when the obligation should terminate.  Most NDAs cover a specific purpose for the disclosure, and once the purpose is fulfilled, there is usually a period of time for the confidentiality obligations to be maintained after termination.  Once that nondisclosure period ends, all bets are off if the “catch-all” language above is used to include trade secrets.

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Rather than look at NDAs with a routine eye, here are some considerations to help avoid trade secret catastrophe:

Definitions in NDAs Matter When It Comes to Trade Secrets.  As you can see from the foregoing, simply adding “proprietary know-how” and “trade secrets” into the definition can be a recipe for disaster.  Rather than add such language into the laundry list, it is better to separately define trade secrets within the NDA so that it can be separately referenced within the NDA.  This nested definition creates a better mechanism to address the recipient’s obligations regarding trade secrets separate and apart from “confidential information.”

Confidentiality Term Limits are NOT Your Trade Secrets’ Friend.  I can’t stress enough how important it is to review termination clauses in NDAs and obligations of the parties post-termination.  Most boilerplate NDAs will have the confidentiality obligations cease after a period of time, ranging anywhere from immediately to a number of years post-termination.  Don’t take these provisions for granted — they do not provide any protection for trade secrets by default.  For example, where the trade secrets definition is separate as set forth in the point above, you can separately assert an ongoing confidentiality obligation for the trade secret.  Boilerplate NDA language can be dangerous in this area, so be careful and take the time to review and revise accordingly.

Don’t Let Exclusions to Confidentiality Eviscerate Your Trade Secrets.  Most NDAs will contain certain exclusions from the definition of confidentiality, such as where the disclosing party consents to the disclosure.  That said, other exclusions can be more problematic, such as where the information is in the public domain or enters the public domain during the term.  Always ensure that any exclusion referencing the public domain includes a qualifier that ensures that such disclosure occurs through no fault of the recipient.  Take the time to determine whether the exclusions listed apply to the circumstances of the NDA, and then work with the remaining provisions to reflect not only confidential information but trade secrets as well.

Granted, the foregoing is a very limited overview and does not address all the sensitive issues involving trade secrets in NDAs; however, the point here is to be aware of the problems so you can ensure they are reviewed and addressed.  Maintaining the confidentiality of information is one thing, but trade secrets are another.  So don’t get lulled into a false sense of security in boilerplate NDAs where trade secrets may be involved.  Believe me, this is one situation where a little diligence will go a very long way.

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Tom Kulik is an Intellectual Property & Information Technology Partner at the Dallas-based law firm of Scheef & Stone, LLP. In private practice for over 20 years, Tom is a sought-after technology lawyer who uses his industry experience as a former computer systems engineer to creatively counsel and help his clients navigate the complexities of law and technology in their business. News outlets reach out to Tom for his insight, and he has been quoted by national media organizations. Get in touch with Tom on Twitter (@LegalIntangibls) or Facebook (www.facebook.com/technologylawyer), or contact him directly at tom.kulik@solidcounsel.com.

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