Mark Stall

Companies commonly rely on nondisclosure agreements (NDAs) and federal and state trade secret laws to protect the confidential information they share with employees, suppliers, customers and other third parties. How does a company ensure that the NDA’s they enter provide adequate protection for their trade secrets?

Information does not become a trade secret simply by designation of its creator. A trade secret is defined under the federal Defend Trade Secrets Act (18 U.S.C. Sec 1836, et. seq.) and substantially all applicable state trade secret laws as including information, designs, processes, procedures, devices, methods, techniques, business information, or financial information which derive independent economic value by not being readily available to others who could derive economic value from its disclosure or use, and for which the owner has taken reasonable efforts to maintain the secrecy of the information. Unlike patents, trade secrets can remain protected indefinitely provided the applicable information continues to meet the applicable statutory definition.

Whether a trade secret owner has taken reasonable steps under the circumstances to protect the secrecy of the alleged trade secret is a factual question reserved for the trier of fact. However, companies should consider the following factors when reviewing NDAs to maximize their opportunity to prevail on that issue:

Do Not Include An Expiration Date With Regard to Trade Secrets

NDAs commonly include a clause setting a time limit for the parties’ obligations, including each party’s obligation to maintain confidentiality. Given that trade secrets derive their protection from proof that the owner has taken reasonable efforts to maintain the secrecy of the information, executing NDAs with expiration dates regarding each party’s duty to maintain the confidentiality of trade secrets could undermine the owner’s ongoing ability to protect its trade secrets.

Given that trade secret or confidentiality protection may be lost upon expiration of the time limit in the NDA, the duration of the NDA should match the estimated life expectancy of the underlying information. Unfortunately, accurately anticipating the life expectancy of trade secrets can be difficult at best. In such instances, the NDA owner of trade secrets should consider incorporating a provision stating that the parties’ rights and obligations under the NDA with regard to confidential information constituting a trade secret will survive until, if ever, such confidential information loses its trade secret protection, other than due to an act or omission of the other party to the NDA.

The mobility of employees, employees’ right to use general knowledge and skills in future employment, and growing public policy concerns with the subsequent enforcement of restrictive covenants on former employees have made the inclusion of time limits in NDAs with employees particularly challenging. If an NDA with an employee contains time limits on an employee’s confidentiality obligations, that time limit should only apply to information which does not rise to the level of a trade secret.

Carefully Describe Specific Types of Confidential Information and Trade Secrets

An NDA can be a “double edged sword” with respect to a trade secret claim. On one hand, the NDA can serve as evidence that the parties intended for specific information to be kept confidential and willfully agreed to take certain steps to maintain such confidentiality. On the other hand, an NDA can undermine a trade secret claim if the definition of confidential information is not sufficiently broad. While a general description of the confidential information and trade secrets to be shared provides flexibility, the owner of confidential information or trade secrets should confirm that the NDA’s description of the specific information or categories of information to be shared is accurate and complete.

While courts have upheld NDA’s that utilize a broad description of the information covered by an NDA, at least one federal court reasoned that the NDA was between sophisticated parties and that the broad terms were limited by the common exceptions for information that was learned prior to the disclosure or information that was or becomes public.

Courts have taken a more restrictive view of the use of broad definitions of what information is deemed confidential in NDAs between a company and its former employee. Courts have become concerned that broad language raises public policy concerns and could prevent the former employee from competing against the owner of the confidential information. At least one court noted that an NDA with an employee can be overly broad in three different ways: (i) when it prohibits the employee from using general knowledge acquired by the employee; (ii) when the agreement prohibits disclosure of information that is not confidential because it is public knowledge; and (iii) when it extends to information provided to the employee by third party sources which are not under any confidentiality obligation.

Provide for Injunctive Relief Upon Breach  

In the event of a default under an NDA, a primary goal of a party seeking to enforce the NDA is to halt the misappropriation through a court-issued temporary or permanent injunction. To obtain such relief, a party must face irreparable injury that cannot be remedied by money damages. As a result, NDAs commonly contain language providing that the unauthorized disclosure or use of confidential information or trade secrets will result in irreparable harm and entitle a party to injunctive relief. Although a party cannot rely on the contractual language of the NDA to ensure that the court will grant injunctive relief, the inclusion of such language may be beneficial as some courts treat such language as controlling and others give it presumptive weight.

While confidential information and trade secrets are often critical and potentially irreplaceable company assets, all too often companies treat the drafting and execution of NDAs as a ministerial task that can be completed on any easily accessible “NDA form.” Unfortunately, company’s subsequently find out later that such an approach is the weak and fatal link in their efforts to protect one or more of the company’s most valuable assets. Stall Legal would welcome the opportunity to review your company’s existing “standard NDA forms” or to create a set of forms that are both easy to use and maximize the protection of your company’s assets.