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Enforceable Nondisclosure Agreements:
Protecting Trade Secrets and Other
Confidential Business Information
Today’s faculty features:
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TUESDAY, FEBRUARY 6, 2018
Presenting a live 90-minute webinar with interactive Q&A
Chris Clark, Founder, The Law Office of Chris Clark, Charlotte, N.C.
Jeff Neurman, Founding Partner, Farkas & Neurman, New York
Daniel R. Saeedi, Partner, Taft Stettinius & Hollister, Chicago
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5
Non-Disclosure Agreements:
A Litigator’s Perspective
Daniel R. Saeedi
Partner - Taft Stettinius & Hollister LLP
6
Why are Non-Disclosure
Agreements Important?
• The Three Goals of NDAs:
– NDAs provide notice and guidance to the recipient
party and the courts
– NDAs provide a contractual remedy for the sharing
party
– NDAs bolster the sharing party’s trade secret claims
7
Interplay between Trade Secrets
and NDAs
• Why are we even talking about trade secret
statutes?
– Statutory attorney’s fees
– Punitive damages of up to twice the actual damages
amount
– A well-defined body of law familiar to the courts
– Overlap between NDAs and trade secret statutes: a
wrongful disclosure often violates both the contract
and statutory law.
8
What is a Trade Secret?
• The Defend Trade Secrets Act – 18 U.S.C. 1839
• “Trade Secrets” can be several types of
business and financial information, provided:
– (A) the owner thereof has taken reasonable
measures to keep such information secret; and
– (B) the information derives independent economic
value from not being generally known.
9
What is Misappropriation?
• “Acquisition, disclosure or use of a trade secret
without express or implied consent by someone
who:
oUsed improper means to acquire it; or
oKnew it was improperly acquired; or
oDerived the trade secret from a person who owed
a duty to maintain secrecy
• Improper Means – Theft, bribery,
misrepresentation, breach or inducement of a
breach of a duty to maintain secrecy.
10
The Interplay Between Trade
Secrets and NDAs
• NDAs broaden protection against disclosure: an
enforceable NDA may protect material not
properly characterized as a trade secret.
• NDAs help define elements for a trade secret
tort claim.
• NDAs put parties on notice of compliance and
thus establish wrongful intent when violated.
11
NDAs: Defining the Scope
• Attorneys make the mistake of drafting scope
clauses with undefined general terms.
• A good NDA provides the parties and the Court
with guidance as to what falls under it.
• Customize the agreement to fit your client’s
needs: reference certain specific client
proprietary categories.
12
NDAs: Defining the Scope
• Example 1 – “Information concerning the
Company's business operations, such as
marketing techniques; business development
plans and procedures; pricing; profits; costs;
sales; losses; financial information; accounting
and unpublished accounting information ….”
• This clause leaves the courts guessing as to
whether a specific document falls under any of
these general categories.
13
NDAs: Defining the Scope
• (ii) Example 2 – “Information concerning the
Company's business operations. . . . and
information stored on the Company’s
“Customer Relationship Manager” database;
“Client Pricing” database; and any other
proprietary company database for which the
employee was given password-protected
access.”
• This clause leaves no doubt for both the
recipient party and the courts.
14
NDAs: Trade Secret Buzzwords
• Use the relevant trade secret statutory
buzzwords!
• Make sure that your NDA:
– Labels categories of information as “trade secrets”
– Acknowledges that these categories of information
are valuable
– Specifies that these categories of information are the
subject of significant efforts to maintain secrecy
15
NDAs: Trade Secret Buzzwords
• Example 3 – Acknowledgement of value and
efforts to ensure secrecy
• “Vendor agrees that Confidential Information
defined herein are trade secrets of the
Company. Vendor agrees that the Company
derives considerable economic value from
this information being kept secret, and that
the Company has expended significant time,
effort and funds to ensure that this
information is kept secret.”
16
Beware of Overly-Broad NDAs
• Warning signs
– Scope clauses that broadly define confidential
information (i.e. “all information relating to the
Company”)
– Scope clauses that violate statutory laws
– Scope clauses that do not contain exceptions (i.e.
information which is public knowledge, publicly
disclosed by the Company or lawfully known prior to
work commencement)
– In some jurisdictions, scope clauses that do not
contain durational or geographic limitations
17
Defining the NDA Violation
• NDAs should impose significant duties:
– Duty to preserve confidentiality
– Duty to return confidential information upon project
completion
• NDAs should define grounds for violation:
– Disclosing or using confidential information without
written permission
– Permitting anyone to use confidential information
without written permission
– Copying, duplicating or removing confidential
information without written permission
18
Remind Parties of NDA
Obligations
• Companies should remind parties of NDA
obligations, especially at the conclusion of a
project or employment relationship.
• The “Exit Interview.” This further helps establish
wrongful intent if a subsequent disclosure
occurs. Also an opportunity to receive
confidential information in the possession of the
other party.
19
Other Helpful Clauses to
Potentially Include in an NDA
• Work product clause
• Return of Company property clause
• Non-Competition / Non-Solicitation clauses
20
Crafting the Remedy
• Choice of Law
• Choice of Forum – make it exclusive!
• Attorney’s Fees Clause
• Irreparable Harm Clause
21
Any Questions?
Contact Information:
Daniel Saeedi
Taft Stettinius &
Hollister LLP
111 E. Wacker Drive
Suite 2800
Chicago, IL 60601
(312) 840-4308
Elements of an NDA Key provisions and considerations
February 2018 22
I. Parties Involved
• Bilateral or one-way: Will both parties be sharing information or just one?
• Less is more: From disclosing party’s perspective, the more narrow the permissible recipients the better
• “Representatives”: Often receiving party will wish to include other parties – e.g., employees, officers, directors, equityholders, counsel and accountants, sometimes defined as the receiving party’s “Representatives”
• Limit to those who have a legitimate need to know and, ideally, sign an NDA too
• Parties should agree on whom may receive confidential information (CI) • Additional signatories?: Often disclosing party will require any party that
receives the information to either sign the NDA or get a representation from the main recipient that those with whom it shares the information are aware of the NDA and its terms or are otherwise bound by an NDA in favor of receiving party
February 2018 23
II. Scope of Relationship
• Generally, it is in disclosing party’s interest to describe the relationship as broadly as possible
• Broader description makes it less likely that receiving party will be able to claim that certain information was provided to it in the course of a separate arrangement between the parties and thus outside the NDA
• Nonetheless, too broad a definition could permit receiving party to use CI more widely than disclosing party intends.
• This is a particular concern if the parties are pursuing a relationship other than an investment by receiving party (e.g., the parties are competitors discussing a possible joint venture)
• Important to pick up any information disclosed before NDA was signed
• CI should only be allowed to be used in the context of the relationship
February 2018 24
III. Standard of Care
• General standard: Receiving party treats and safeguards, as confidential and secret all CI received by it and shall not (nor permit its Representatives to), without prior written consent, disclose or reveal any CI or the fact that it has received CI
• Existence of discussions: The mere fact that the parties are in discussions at all should often, if not generally, be kept confidential as well
• Alternative approach: Receiving party may suggest to treat CI "with the same degree of care that it maintains its own sensitive information."
• Hard to verify: Disclosing party may should generally resist this formulation as there is often no simple way to verify appropriateness of receiving party's confidentiality protection processes.
• Compromise: Agree to how receiving party handles its own sensitive information but add a qualifier that the degree of care the receiving party uses "shall be no less than a commercially reasonable degree of care."
February 2018 25
IV. What is Confidential Information • Confidential Information: Any information not generally
known to the public or recognized as standard industry practice. Examples include know-how; strategies; strategic partnerships and the existence of the discussions between the parties; employee information; financial records and inventory records of disclosing party; intellectual property; trade secrets; ideas; concepts; inventions; methods or processes; clients and agreements with clients, suppliers and any third party; customer lists; supplier lists; marketing arrangements; channels of distribution; pricing policies and records
• Also any other information (i) normally understood to be confidential or (ii) designated as such in writing by disclosing party
• Includes information derived from any of the above or that comes into receiving party's possession as a result of the NDA or relationship.
February 2018 26
V. What is not Confidential Information • General categories excluded from definition of CI:
1. Prior possession: Information in receiving party’s possession prior to disclosure to it by disclosing party, provided that such information was not furnished to it by a source known by receiving party to be bound by a confidentiality agreement or otherwise prohibited from disclosing the information
2. Public: Information generally available to the public other than as a result of a disclosure by receiving party or its Representatives
3. 3rd Party Source: Information that becomes available to receiving party on a non-confidential basis from a source other than disclosing party or any of its Representatives, provided that such source is not known by receiving party to be bound by a confidentiality agreement with receiving party or otherwise prohibited from disclosing the information
4. Independently Developed: Information which was or is independently developed without violating NDA’s obligations
February 2018 27
VI. Other Exception to Confidentiality Receiving party may request provision permitting disclosure of CI if required to do so by law, regulation, or court order.
• This provision should typically be acceptable to disclosing party if receiving party:
1. Agrees to notify disclosing party, before disclosing CI (if legally permitted to do so), so as to allow disclosing party to (i) prepare for disclosure and (ii) use its resources to contest the disclosure obligation or court order
2. Agrees to cooperate with disclosing party to limit the disclosure • Note: Often in this instance receiving party will require that it be
compensated for any costs incurred with such cooperation
February 2018 28
VII. The End
• NDA should specify what receiving party must do with CI at end of the applicable period.
• It is most favorable to disclosing party if receiving party must return CI. • Disclosing party should resist including language that would require it to request return of the
information (in other words, the obligation should arise automatically at the end of the period).
• Receiving parties often ask for the option to destroy materials instead of returning them.
• Receiving party might be particularly concerned about not agreeing to "return" CI contained in receiving party's own derivative documents containing CI.
• If this is agreed to, receiving party should certify in writing to disclosing party of such destruction.
• Receiving party may seek to add provision to retain copy of some or all of CI in accordance with its record-keeping policy or similar policies, laws, or regulations.
• This may be acceptable so long as the provision requires receiving party to maintain the strictest standards of confidentiality for the retained information.
• Should specify period in which return or destruction of CI must occur -- "immediately" probably not practical but "promptly" should be. Alternatively, parties can agree to a fixed time period for compliance, such as five business days.
February 2018 29
VIII. Breach
• In the case of a breach of the NDA, Receiving Party shall:
1. immediately notify the disclosing party, in writing, of the breach;
2. fully cooperate to mitigate the effect of such breach; and
3. be responsible for any breach caused by any of its Representatives or any third party to whom or to which it has provided or given access to CI.
February 2018 30
IX. Data Protection
In light of concerns about identity protection, the receiving party, and any third party to whom or to which it provides CI, will comply with all applicable laws with respect to the use and maintenance of CI, including any applicable data protection laws.
February 2018 31
X. Term and Termination
• Several options for term of an NDA including (i) an indefinite term (unlikely to be accepted by receiving party), (ii) a fixed term beginning on the date of the NDA – often a year (although longer is better for disclosing party) and (iii) a fixed term beginning after conclusion of the relationship.
• If the parties want to continue the term of the NDA beyond the point that they enter into the principal agreement for the investment in the company or other transaction, that new agreement can include a confidentiality provision that references or incorporates this NDA.
• The NDA should include a survival clause with a definite survival period. A term of two years is common.
February 2018 32
XI. Additional Provisions
• No representation about the information: The purpose of the NDA is to share information, not to make assertions about its accuracy, etc. (which would typically be covered in the definitive documentation for the transaction).
• Retention of IP Rights: This is intended to clarify that receiving party is not granted any rights or license to use CI for any purpose other than in connection with the relationship
• No Obligation: This clarifies that the NDA should not in any manner bind the parties to additional obligations – i.e., sharing information is not tantamount to agreeing to a deal.
• Injunctive Relief: Because the sharing of CI could result in hard to calculate damages, injunctive relief is generally sought.
February 2018 33
Questions? Need Assistance?
• Feel free to contact Jeff Neurman at [email protected] or 347-470-4596.
February 2018 34
Intellectual Property
Considerations for
Nondisclosure Agreements
C. Christopher Clark, Esq.
The Law Office of Chris Clark, PLLC
[email protected] 704-837-0055
Four types of intellectual property
• Patent
• Copyright
• Trademark
• Trade Secret
36
Patent
• Utility patents cover inventions
– Physical objects
– Business methods and processes*
– Computer software*
• Design patents cover ornamental (non-functional)
designs
37
Patent
• Elements of patentability
– Novelty
• Public disclosure may start a clock ticking
– Utility
– Non-obviousness
• Improvements to existing inventions may be
eligible for patent protection
38
Copyright
• Covers “works of authorship” (literary, dramatic, musical,
artistic, and certain other works)
• Gives the owner of copyright the exclusive right to
reproduce the copyrighted work, to prepare derivative
works, to distribute copies of the copyrighted work, to
perform the copyrighted work publicly, or to display the
copyrighted work publicly
• Protection exists when the work is fixed in tangible form
39
Copyright
“WORKS OF AUTHORSHIP” EXAMPLES:
• Script
• Video
• Photograph
• Song
• 2D and 3D works of art, including sculptural and
architectural works
• Software code
40
Trademarks
Trademarks are: words, logos, etc. used to identify
source of goods or services (aka “brands”)
Trademark rights are established automatically
through use of the mark, but are reinforced by
federal filing
41
Trademarks “Any word, name, symbol, or device used to identify and
distinguish one’s product (service) from the products
(services) of others and to indicate the source of the
products (services).”
• Words
• Logos • Sounds
• Smells
• Colors
• Packaging
• Product shapes
• Restaurant schemes
42
Trade Secrets
• Must be used in business
• Gives an advantage over competitors who
do not know it
• Can include a formula, pattern,
compilation, program, device, method,
technique or process
43
Trade Secrets
• US has a federal trade secrets statute
• States have trade secrets laws
• Can be an alternative or compliment to patents
– Public disclosure
– Time period
– Independent discovery
• Owner must keep it secret
44
4 IP Considerations
• An NDA may protect novelty and prevent the
one-year patentability clock from starting
• An NDA may in some cases serve as an
alternative or compliment to patent protection
• An NDA may form the basis of a trade secret
misappropriation claim
• An NDA may help resolve IP ownership
questions
45
Example
Alpha Corp. (“Alpha”) makes grocery shopping
list software for electronic mobile devices.
Beta, LLC (“Beta”) makes “smart” refrigerators
that use technology to track their contents.
Alpha’s CEO meets Beta’s Founder at a
conference and at the networking reception
over drinks, they decide their companies
should explore a potential business
relationship.
46
Example
Alpha and Beta each instruct their development
teams to start working together on a way to
integrate Alpha’s software and Beta’s
refrigerator technology when a customer runs of
out of a particular type of food, it is automatically
added to the customer’s mobile electronic
grocery shopping list. After working together for
6 weeks, the developers submit a report to their
respective CEOs.
47
Example
The jointly developed report revealed that the
teams were at first unsuccessful in integrating
the two technologies, but by working together
and using the resources available to them they
designed a new refrigerator with mobile grocery
shopping list functionality built in. Engineers and
industrial designers from each company
participated in building a prototype of the new
product.
48
Example
Upon receiving the report, neither CEO
remembered meeting the other or asking that
their company personnel and other resources be
used on this project.
Who owns the various rights (patent/invention
rights? copyright? trade secrets?) associated
with the newly designed refrigerator? This issue
could have been addressed in an NDA.
49
Sample Provision (from a unilateral NDA)
Ownership and Use of IP: Notwithstanding any provision in this Agreement to the contrary, no explicit
or implicit rights in, under, or to any Proprietary Information of Discloser are assigned, transferred,
licensed, or otherwise conveyed herein to Recipient; provided, however, that a Party may use IP of the
other Party for the sole purpose of enabling, and only to the extent reasonably necessary for, such
Party to effectively evaluate the Potential Transaction. Any and all rights in, under, or to any invention
that is conceived, singly or jointly with others, by Recipient or any of its employees or independent
contractors based at least in part on, or resulting at least in part from, the disclosure of any Proprietary
Information to Recipient under this Agreement (“Derivative Invention”) shall be exclusively owned by
Discloser as between the Parties and shall be deemed part of the IP of Discloser. Such Derivative
Invention shall be subject to legal obligations of assignment by Recipient and its employees and
independent contractors to Discloser at and subsequent to the time of the conception of such
Derivative Invention. Recipient agrees on behalf of itself and its employees and independent
contractors to reasonably cooperate with Discloser, at Discloser’s expense, with respect to the
procurement, maintenance, and enforcement of protection for any Derivative Invention in the United
States and in foreign countries; and to sign any and all documents that Discloser may reasonably
deem necessary or desirable in order to protect Discloser’s rights and interests in any Derivative
Invention, including without limitation, any declarations, oaths, assignments, quitclaims, powers of
attorney, and other papers. Recipient agrees not to disclose any Proprietary Information of Discloser to
any employee or independent contractor unless such person is under and subject to these obligations
and conditions or the equivalent thereto.
50
Questions?
Chris Clark
704-837-0055
@ChrisClarkPLLC
Thank you!
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