Protecting Trade Secrets with Non-Disclosure Agreements

Information is one of the most vital assets of a company. Information may qualify as a trade secret under various federal and state laws. It is imperative that a company protect its trade secrets with non-disclosure agreements (NDA). Without the use of NDAs, a company risks losing valuable legal protection and competitive advantages.

The definition of “trade secret” varies among state and federal laws. It is generally defined as any formula, pattern, physical device, idea, process, compilation of information or other information that both (i) provides the owner of the information with a competitive advantage in the marketplace; and (ii) is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it. Examples of potential trade secrets include customer lists, marketing plans and computer algorithms.

In general, a trade secret will be protected from exploitation by those who either obtain access through improper means, those who obtain the information from one who they know or should have known gained access through improper means, or those who breach a promise to keep the information confidential.

The protection afforded to trade secrets by the various federal and state laws can be of great benefit to a company. Trade secret protection allows a company whose trade secrets have been misappropriated to seek damages, profits, reasonable royalties and injunctive relief to prevent further use or disclosure. Additionally, theft of trade secrets is a crime under both federal and state law.

NDAs play a pivotal role in meeting the second prong of the above definition. When disclosing a trade secret to a vendor, customer, joint venture partner or any other party, a company is at risk of losing its trade secret status if it fails to take reasonable steps to prevent the party receiving the information from making further disclosures. Contractual obligations regarding confidentiality and use, such as those typically contained in an NDA, provide means to reasonably restrict further disclosure.

Careful attention should be paid to tailoring an NDA to the needs of the transaction. Too often companies standardize NDAs and do not evaluate their appropriateness for a given transaction. Issues that should be considered include (i) how long will the agreement stay in force; (ii) does the agreement cover all interactions between the parties or is it limited to a specific transaction; (iii) how long does protection last for information disclosed under the agreement; (iii) how is information that falls under the agreement identified to the receiving party; and (iv) what restrictions are placed on disclosure to consultants and affiliated companies of the receiving party.

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