Trade Secrets

What Is Non-Disclosure Agreement?

A Non-Disclosure Agreement is a contract to protect information considered to be confidential or proprietary and disclosed in an employment relationship or in business transactions. It is sometimes called “Confidentiality Agreement” or “NDA.”

Why Is A Non-Disclosure Agreement Necessary?

To Protect Trade Secrets. A Non-Disclosure Agreement is used to protect trade secrets. A trade secret is any type of information that is not generally known by the public and from which actual or potential economic value can be derived. The owner of a trade secret must use reasonable efforts to maintain secrecy. By using Non-Disclosure Agreement, a trade secret owner can maintain the trade secret status, while preventing the recipient of the information from further disclosing the information to a third party and retaining control over use of that information. In many circumstances, a NDA can be specifically enforced judicially through injunctive relief.
To Create A Business Relationship. A Non-Disclosure Agreement is also used in common business transactions where any confidential or proprietary information is shared. For example, when companies expand their business or create a strategic alliance such as a joint venture, development agreement or outsource business processes, the strategic partner receiving the confidential information needs limits on use and further disclosure of the confidential information. A Non-Disclosure Agreement allows the disclosing party to share its proprietary and confidential information with others without unduly jeopardizing the information.

Non-Disclosure Agreement Considerations

Definition of Confidential Information. The definition of “Confidential Information” plays a very important part of a Non-Disclosure Agreement because it determines the scope of information disclosed and protected under the NDA. The definition of confidential information needs to be specifically defined such as the forms of confidential information (e.g., tangible or intangible). In most cases, the agreement includes the provision where orally disclosed information is protected if the disclosing party confirms the confidential nature of the disclosure in writing within a certain period of time. Indeed, the form of confidential information is irrelevant to its status as a trade secret. The Washington Supreme Court held that a memorized customer list did not lose its trade secret protected status merely because a former employee did not take the list in a tangible form.
Non-Disclosure Agreement Types. A Non-Disclosure Agreement is often categorized as either mutual or one-way, but it is also used among multiple companies such as for the purpose of a strategic alliance.
No Use or Disclosure of Confidential Information. Typically the disclosing party seeks to limit the recipient from disclosure to any third party or restrict use of the confidential information other than the purpose described in the NDA. Indeed, a typical requirement is that the confidential information is allowed to be provided to the disclosing party’s employees on a need to know basis. Generally, where confidential information is sought by a governmental body or requested by subpoena or other court order, the recipient must resist such request, notify the disclosing party and cooperate with the disclosing party in challenging the request.
Limits on Confidential Information. A Non-Disclosure Agreement generally puts some limits on the type of information such as information already in public domain, possessed by the recipient before being disclosed by the discloser or independently developed within the recipient’s organization. Another purpose to limit confidential information is to make sure that the Non-Disclosure Agreement is not extended too much and to comply with the Uniform Trade Secret Act.
Term of Non-Disclosure Agreement. A Non-Disclosure Agreement is usually meant for a specific purpose and should be documented for each purpose. Generally, the protection of confidential information remains even after the relationship of the parties ceases, so long as the confidential information remains a secret.

What Is A Trade Secret?

A trade secret is any information that derives economic value from not being generally known, has been maintained in confidence, and is not known by competitors. A company that owns trade secret may petition a court for a relief against those who have obtained or used its trade secret through improper means. The trade secret owner can also institute an action against those who wrongfully publicly disclose the trade secret in violation of legal obligations such as conditions set out under a non-disclosure agreement (“NDA”).

Trade Secret Law

Each state has its own statute or regulations that govern trade secrets. Most states, however, have enacted a form of the Uniform Trade Secret Act (UTSA). Although the majority of states have adopted the UTSA, the enacted versions and judicial interpretations of the UTSA may also differ from state to state. In Washington State, Uniform Trade Secret Act is set out in Chapter 19.108 of the Revised Code of Washington (RCW).

Trade Secret Protection

Trade secret law requires maintenance of secrecy, and it is a type of intellectual property law. Whereas patent law protects inventions, processes or useful business methods for a number of years in return for the owner’s full disclosure of the information to U.S. Patent and Trademark Office (USPTO). On the contrary, a trade secret can be protected permanently so long as it is not disclosed to the public and reasonable steps are undertaken to preserve secrecy.

Companies need to consider whether hey seek protection under trade secret law or another type of intellectual property law such as copyright or patent law. A typical example for this choice is the Coke® recipe. The Coca-Cola Company protects the Coke® formula as a trade secret, which allows for indefinite protection so long as the company takes reasonable efforts under the circumstances to maintain secrecy.

Compare protection under patent law, which gives the owner the exclusive rights to make, use and sell the protected item for a limited period of time. Patent rights are more comprehensive for a finite period, but require patent filings with the USPTO. Patents can also be very expensive to prosecute. On the other hand, the trade secret owner does not have to file a trade secret application or registration with any government office.

The fact that no registration is needed does not mean that obtaining trade secret protection is easy. Trade secret protection requires significant efforts by setting up a program to create and administer reasonable measures to keep the information secret. Moreover, a trade secret owner does not command exclusive use of the trade secret. Any competitor may lawfully use the subject of the trade secret so long as it is independently developed and implemented.

Trade Secret Protection Methods

Since the key in determining whether information is deemed to be a trade secret is the confidentiality of the information, it is essential to institute a preventive program to protect the company’s confidential information.

Physical Measures. Companies need to develop a variety of physical measures to protect their proprietary information. Reasonable security measures are required for trade secret protection. Reasonableness may require that areas in which the information was being used or store were made physically inaccessible to others (for example, one is personally escorted to another floor where all the doors are locked and monitored). For trade secrets stored electronically, reasonable efforts may require adequate IT security measures such as commercially reasonable firewalling, access control and use of encryption technologies.
Contractual Measures. Under many circumstances, someone receiving a company’s trade secret takes it subject to an implied obligation not to disclose. However, having a written agreement has several benefits for the trade secret owner. The existence of a NDA provides evidence that the owner of the trade secret is taking confidentiality measures. The formality of an agreement also ensures that the recipient of the trade secret is expected to protect the information and it warns of possible consequences if it is not implemented. A written agreement also makes available a remedy for breach of the agreement as well as trade secret liability.

Trade Secret Protection Limitations

While a patent, for example, gives the patent owner the exclusive use of the patent, trade secret protection does not protect against independent development of a product or process that is the subject of the trade secret. Moreover, trade secret law does not protect information that is in the public domain.

Trade Secret Litigation

The owner of the trade secret harmed by trade secret theft can commence by filing of a complaint describing the defendant’s wrongful conduct. Such action should be done as soon as the leakage of the trade secret is discovered.

Litigation between a company and its former employee is the most common trade secret case. This situation typically arises where an employee departs from the former employer and starts their own business or joins another company, either of which is a competitor of the former employer. Employers often file a trade secret action, claiming that the former employee is using the employer’s trade secret. Memorization of trade secrets is typically is not a defense. A successful plaintiff can obtain injunctive relief to prevent further leakage of the information and monetary damages to compensate the owner of the trade secret.