As we approach and move into a new year, I will write a few posts about common mistakes that can cause a loss of trade secret status. The beginning of a new year is a good time to think about ways that we can do better and avoid mistakes.
The mistake I will discuss in this post ironically arises from a desire to mitigate risk. When drafting non-disclosure agreements (“NDA”), lawyers sometimes seek to provide their clients with certainty regarding which specific information is subject to a confidentiality restriction. The concern is that a broadly worded NDA covering all confidential information exchanged between parties can lead to later uncertainty regarding which information is subject to the NDA’s restrictions. One party may believe a specific item of information was publicly available from other sources and, therefore, not subject to confidentiality restrictions. The other party may disagree. To avoid this situation, a lawyer drafting a NDA may include in the contract procedures designed to make it clear which information is subject to the NDA and which is not.
For example, the NDA may require that all documents subject to the NDA be clearly labeled “Confidential.” The NDA might also require a party to issue a written notice specifying which orally transmitted information is subject to the NDA.
In theory, these procedures make sense. After all, clarity is better than uncertainty. The problem, however, is that the lawyers often cease to be involved in the project at issue after their clients sign the NDA. The clients begin exchanging documents and information and forget to follow the designation procedures in the NDA. When this happens, the party disclosing proprietary information runs the risk of waiving trade secret protection over its information.
Defendants in trade secrets lawsuits now use this argument and cite for support the 2013 Federal Circuit opinion, Convolve, Inc. v. Compaq Computer Corp. In that case, the court dismissed the plaintiff’s theft of trade secrets claims because the plaintiff failed to follow the procedures in its NDA for identifying which information was covered by the NDA. The court reasoned that the parties defined the boundaries of their confidentiality obligations by contract, so the court would not alter the parties’ agreement.
There is a lesson to be learned. You do not have to give up clarity in your NDA. Yet if you decide to use an NDA like those discussed above, you have to put procedures in place to insure strict adherence to the NDA protocols. This doesn’t just apply to documents that will be exchanged. Watch out for casual conversations that occur during face-to-face meetings. Because a NDA is in place, an employee may assume that they need do nothing further and can speak freely about their company’s proprietary information in a meeting with an outsider. Yet if that NDA states that no information shared orally is subject to the agreement unless later identified in a written notice, that employee may be giving away trade secrets.
Photograph by Meredith Atwater pursuant to the licence located at: https://creativecommons.org/licenses/by/2.0/legalcode