Since this month is Halloween, I thought I’d write about one of the things that keeps me up at night for our clients. As a trade secrets lawyer, I worry about whether clients are doing enough to be proactive in protecting their trade secrets (or to avoid being accused of misappropriation). As a litigator, of course I get involved after there has already been an alleged misappropriation. When that happens, regardless of what side of the “v” our client is on, we must, of course, conduct due diligence on the matter, including developing an understanding what the trade secrets are, how they might have been (mis)used, what their value is, if any and whether appropriate measures were taken to preserve their secrecy (these, of course, are the core questions at issue in a trade secret case). As part of this diligence, we find ourselves reviewing any confidentiality agreement that our client has entered into prior to engaging us, often long before the purported trade secret misuse occurred. While confidentiality agreements are, to us, only the most basic of trade secrets protection tools, it is amazing to me how often these are not executed well, leaving the client in a vulnerable position at the time of enforcement.
Confidentiality agreements can be either stand-alone documents (e.g., often known as non-disclosure agreements or “NDAs”) or as clauses within other types of agreements, such as agreements for hiring a new employee or for a separation from employment, the purchase or sale of a business, an investment in a business, or some type of joint venture or other business relationship (such as vendor/customer). Regardless of context, although these agreements are often well written, on other occasions they are lacking in some manner, in a way that can make the case much more difficult for our client. Lately, I’ve seen more than a few agreements – even ones that were reviewed by a prior lawyer – that have been less than ideal for our new client.
One thing that has come up on a few occasions recently are stand alone NDAs that contain termination clauses. Having a termination clause is not, by itself, a concern. The concern arises when the termination clause does not carve out a continuing duty to maintain any confidential information learned in the relationship in confidence. This can be hugely problematic when it comes time for enforcement as, in some jurisdictions, a confidentiality clause that does not carve out a duty to maintain the information shared in confidence even after the termination of the relationship/agreement can be a death knell to enforcement, especially for trade secrets! In fact, some courts have gone so far as to hold that broad termination clauses that include a finite end to the duty to keep information confidential is evidence that the information is NOT and never was a trade secret. Now, analytically, that should not necessarily be true, given that in some trade secrets are, by their nature, ephemeral (e.g., trade secrets that ultimately are included in a patent), but this nuance is often lost later on the judge or trier of fact, and it is better not to have this argument.
Another thing I came across recently was a request that our client (whose trade secrets had been shared with the other side) include a “residuals” clause in a settlement agreement resolving a dispute over our client’s breakup with a business partner. This was a head scratcher, as I had not seen that term used in any NDAs I’ve come across (probably because all the lawyers I have worked with and whose agreements I have reviewed knew better than to agree to them!) – but it turns out today’s “residuals” clause is yesterday’s “unaided memory clause”, and is being used increasingly in recent years by private equity firms in NDAs with companies with whom they are considering making investments. But beware – this rose, regardless of its name, does not smell sweet – and it has some pretty substantial thorns! Essentially a “residuals” or “unaided memory” clause is intended to exclude from on-going confidentiality duties anything remaining in the receivers heads – i.e., in their “unaided memory.” This one is really easy for me (especially as a litigator) to opine on for any client that has important trade secrets it is sharing under a confidentiality agreement – DON’T DO IT! Although there are some things that one could do to mitigate the impact (e.g., expressly carving out anything that is a trade secret and/or covered by a patent, copyright or other IP protection), it is nothing I would want to try to enforce later. (We did find some other ways to work around the issue in the agreement that satisfied my client’s former business partner, but that is a story for another day.)
Lastly, especially in the current climate where all restrictive covenants – of which non-disclosure provisions are one – are viewed with suspicion by the Federal Trade Commission, the Department of Labor, and even some legislatures and courts, be very careful about not crafting overly broad confidentiality provisions – and about not enforcing existing provisions in overly broad ways. Although there are some situations in which things that are generally known could be part of a trade secret (e.g., think combination trade secrets), or even in which the fact that a company uses particular commercially available product or service for a particular use or application is a trade secret – if this is the argument you need to make, proceed with caution. In my view, you have better be able to justify, with real evidence, why something otherwise generally known is a trade secret because your client is using it. This can be done, to be sure, in appropriate cases, but you need to make sure you have all your proof in order and that you can clearly articulate it to a likely skeptical trier of fact. I have seen otherwise competent lawyers bungle this, focusing too much, for example, on proving the technical information and less on proving the equally (and perhaps more) critical issue of proving the unique competitive value or business advantage generated by the combination or information (or the fact that such value or advantage is missing, if you are on the defense). (There are other complex proof issues raised by combination trade secrets that include generally known elements, but this is also a story for another day.)
In short, I think it is likely that most courts would refuse to enforce an agreement to keep confidential information that is otherwise public without some clearly articulated reason why it brings unique value to the business, especially in the employer-employee context. Although I have seen some lawyers argue, with all sincerity, that freedom of contract is paramount and people should be allowed to agree to keep even public information confidential, I am skeptical about whether such an agreement would actually be successful in reality. After all, like all restrictive covenants, confidentiality agreements must be protecting legitimate and genuine business interests. So, while I suppose such argument is theoretically possible, it is not something I’d “bet the ranch” on if it were my client.
These are but a few of the many things about trade secrets – which are, in my view, among the most valuable intellectual property assets all businesses own, but often the hardest to protect – that keep me up at night. What keeps you up at night about your trade secrets and other IP? Let us know, and maybe we will feature ways to handle the issue in in our next blog or one of our new “Quick Tips” in our monthly newsletter. Happy Halloween!