Non-Disclosure Agreements: A Cautionary Tale

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Agreements which contain non-disclosure obligations (also known as a confidentiality agreements, CAs, NDAs or confidential disclosure agreements) are common in many industries - from licensing deals to franchise agreements, from manufacturing to retail industries. Confidential information may be disclosed during early-stage negotiations, even before a formal contractual relationship is concluded. Or it may be disclosed in the course of an ongoing contract, for example, a licensing or manufacturing agreement. In all of these cases, the exact definition of “Confidential Information” may be critical.

In CONVOLVE, INC. AND MASSACHUSETTS INSTITUTE OF TECHNOLOGY v. COMPAQ COMPUTER CORPORATION and SEAGATE TECHNOLOGY, LLC, the US Federal Circuit Court of Appeals dealt with a claim for misappropriation of trade-secrets and breach of confidence, arising out of a certain Non-Disclosure Agreement (NDA) signed between the parties.

The Court noted that: “The NDA states that, to trigger either party’s obligations, the disclosed information must be: (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later designated confidential in a written memorandum summarizing and identifying the confidential information.” This definition of confidential information meant that certain disclosures by Convolve which failed to include a written designation or notification of confidentiality were not considered to be confidential. The failure to mark that information as “confidential” meant that the information was not caught by the agreement. The Court also decided that Convolve’s remedies under the California Uniform Trade Secrets Act (CUTSA) were pre-empted by this NDA, leaving Convolve (the disclosing party) without any remedy for misappropriation of this information by the other side.

Lessons for business?

  • While this decision turns, in part, upon an interpretation of US law (remember there is no equivalent of the Uniform Trade Secrets Act in Canada), the take-away is the same: NDAs are not just “boilerplate”. They protect the secrets of your organization, the information that gives you an advantage over the competition.
  • The definition of “Confidential Information” is important, and following the definition of “Confidential Information” is just as important. The first may be easy to focus on while the agreement is being negotiated and vetted by legal. The second is more difficult to remember as the parties engage in fast-paced negotiations, and information is disclosed by personnel within the organization who may never actually see the written NDA.