In business, we’ve all seen the traditional nondisclosure agreement (also known, more simply, as the “NDA”) between two parties wishing to discuss a potential business transaction. While NDAs are good tools to protect a party’s confidential information during such discussions, businesses must take care to ensure that an NDA does not jeopardize the strong protections traditionally available to them under state laws.
State trade secret laws can provide substantial protection to certain confidential information, including trade secrets. These protections generally apply to information or materials that (1) have independent economic value; and (2) are kept “secret” by the owner.
Importantly for purposes of meeting the secrecy requirement, most state laws provide that, so long as the owner takes measures to protect the secrecy of the information or materials that are reasonable under the circumstances, the requirement will be deemed met.
Entering into an NDA sure sounds like at least one reasonable measure to protect the secrecy of a business’ confidential information, including its trade secrets. But business must beware: certain provisions of NDAs, if not properly addressed, could endanger state law protections regarding trade secrets. These provisions generally fall into one of two categories:
1. The term of the NDA. In many cases, the term of the NDA is limited to a one, two or three year period. The issue with NDAs of limited duration stems from the fact that, once expired, the recipient of trade secrets under the NDA might have no duty to keep such information or materials confidential. Under these circumstances, once the NDA has expired, some courts may find that the owner of a trade secret is no longer taking reasonable measures to keep its trade secret a “secret.” As a result, the relevant information or materials may lose trade secret protections under state law.
On its face, the obvious solution to this problem appears to be to use a term of indefinite duration where trade secrets will be disclosed. However, some states view NDAs without a specified duration as unreasonable restraints on trade, at least with respect to information that, while confidential, does not rise to the level of being a trade secret under applicable law. So, an indefinite term could lead to a ruling that the NDA is unenforceable. The key then, is to find a middle ground. Most commonly, this ground is an NDA term of limited duration, except with respect to trade secrets, which will be protected unless and until the information or materials cease to be trade secrets under applicable law.
2. The definition of confidential information. In some cases, the terms of an NDA require that information be designated as confidential or impose other requirements on the mechanics of disclosure in order for disclosed information to be treated as “confidential information” subject to the NDA. By implication, if businesses do not comply with these terms, then their disclosed information, including any trade secrets, would not be subject to the protections of the NDA. Making matters worse in these circumstances, some courts may find that the existence of the NDA supplants any protections implied under applicable state law. One California court so found in 2013, reasoning that a valid express contract and an implied contract which embrace the same subject but which require different results cannot co-exist.
So, why not broaden the scope of information subject to the protections of the NDA, for example, like making all information exchanged by the parties “confidential” under the NDA? A few reasons weigh against this approach, including the possibility of a state finding the scope of the NDA to be an unreasonable restraint on trade, and thus, an unenforceable protection. And assuming the NDA is mutual, broadening the scope of the NDA increases the amount of information that a business will have to protect and otherwise treat as confidential. As result, we believe that the definition of confidential information should be narrowly tailored based on the circumstances.
In light of these issues, the key take away is that NDAs matter, and that businesses should not view them as mere forms, especially if trade secrets are involved. Specifically, and for purposes of keeping trade secrets safe, in drafting or reviewing an NDA, businesses must pay close attention to the term of the NDA, and to any requirements necessary for information be treated as confidential under the terms of the NDA. Ultimately, NDAs, like other contracts, are binding documents that, if drafted poorly, can have a serious negative impact on a business and its trade secrets.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
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