Non-disclosure agreements (NDA)

Confidential
Confidential information

Non-disclosure agreements (NDA) can help preserve business trade secrets and other confidential information, but don’t expect your attorney to sign one.

Businesses often use non-disclosure agreements with their contractors, employees, product evaluators, and site visitors, as well as with other businesses such as suppliers, customers, potential partners, and the like.  These agreements are often required to establish diligence in preserving trade secrets.  If breached, such agreements may also be used, along with other suitable evidence, in subsequent legal action in state or federal court.

Although in some states, non-disclosure agreements are sometimes used as a backdoor form of a non-compete agreement (e.g. attempting to restrict an ex-employee’s employment elsewhere), this is not a universal practice. California, for example, disallows this sort of thing.

NDA typically include various clauses establishing:

  • Who is disclosing the information, and who is the recipient
  • The boundaries of the confidential information – what is and is not covered
  • Confidentiality obligations
  • When and/or how the agreement ends
  • Other legal provisions (beyond the scope of this blog)

Generally, NDA have carve-outs for publically available information and terminate either when information subsequently becomes available to others through no-fault of the recipient, or after a pre-negotiated number of years.

NDA can be particularly useful when you are working on an invention, but either have not filed a patent application yet, or else are continuing to work on improvements to the invention.  Here, if you want to work with vendors or contractors to produce components of the invention, NDA (and other IP rights agreements) can be important.

Attorneys, including myself, usually refuse to sign NDA.  Why is this?  The reason is that attorneys are already subject to strict state (and federal) attorney-client rules and regulations that require them to keep client (and potential client) secrets. In essence, by agreeing to talk to you, the attorney has already agreed to a standardized, legally enforced, type of attorney-client “NDA”.

Consider what would happen if this were not the case.  Clients would be afraid to even ask an attorney about their particular problems. Attorneys would be signing hundreds of NDA each year, each with different terms. The legal system would grind to a halt.

Professional investors (VC, Angels) usually also refuse to sign NDA.  Here, there is no duty of confidentiality.  However, the finance people control the money, see a lot of ideas they don’t fund, and usually don’t want any constraints on their future investments. This is where it is good to have your patent applications filed in advance.

Trade Secrets

secrets
“Sshh” by Deborah Azzopradi

Consider trade secrets, especially when your commercially important secrets are unsuitable for patent or copyright protection.

Consider the formula for Coca-Cola and its “natural flavorings”, which dates back over 100 years.  Even if the formula could have been patented (unlikely), the patent would be long expired.  The formula might not be even eligible for copyright since it is a list.  In any event, a copyright by now would be both expired and useless since a copyright is only for the printed words.  However as a closely guarded trade secret, the formula remains valuable (the trademark, of course, is almost priceless).

In addition to recipes, trade secrets can include production methods, marketing methods, computer software, and the like. Pretty much any information that gives a business competitive advantage, and is not generally known, is a potential trade secret.

Trade secret protection is very narrow – unless you can prove to a court that you carefully guarded the secret, and someone with access to the secret then misappropriated the secret, you are out of luck. If someone figures out the secret by other means (e.g. reverse engineering), there is no protection, even for Coca-Cola.

However if you can convince the court that trade secret theft occurred, you can request injunctions (e.g. block disclosure), damages (your economic harm caused by the theft), and possibly even seizure of materials and/or attorney fees.

Until recently, trade secrets were only handled at the state level.  However in May 2016, the federal Defend Trade Secrets Act of 2016 (DTSA) was signed into law.  Trade secret theft can now be handled in either state or federal court. Trade secret theft can now be charged under both civil and even criminal law.

So if you are doing a startup, think about which of your non-commonly known information gives you a competitive edge. Where appropriate, apply for patents and trademarks, and register copyrights to prove copyright ownership.  For the rest, although some disclosure may be required for marketing and fund-raising, try to limit this disclosure, and take positive steps (e.g. restriction of access, nondisclosure agreements) to preserve not-generally-known information that is competitively important.