Parties contemplating a transaction involving trade secrets often enter into a confidentiality or non-disclosure agreement (NDA) in order to facilitate, if not allow, meaningful dialogue. All of the parties to an NDA shoulder important obligations. Indeed, as a recent decision by the U.S. Court of Appeals for the Federal Circuit shows, a trade secret owner’s failure to comply with an NDA’s designation/notice obligations can destroy the corresponding trade secrets.
In Convolve, Inc. v. Compaq Computer Corp., 2013 WL 3285331, *3 (Fed. Cir. July 1, 2013), technology owner Convolve engaged in licensing negotiations with Compaq and two Compaq suppliers, Seagate Technology, LLC and Seagate Technology, Inc. (collectively, “Seagate”).
“To facilitate the discussions, Convolve and Compaq signed a[n NDA] and agreed to share their respective confidential information for ‘furthering a business relationship.’” 2013 WL 3285331, at *3. “The [Convolve/Compaq] NDA state[d] 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.” Id.
Convolve and Seagate also entered into an NDA. 2013 WL 3285331, at *3. “For an oral [or visual] disclosure to be within the scope of the [Convolve/Seagate] NDA, it must have been designated confidential at the time of disclosure and followed by a written memorandum within twenty (20) days of disclosure clearly providing notice of what specific information was confidential.” Id. at *3, *10.
“Despite [the parties’] meetings and continued communications, Convolve never consummated a deal with Compaq and Seagate regarding the technology.” 2013 WL 3285331, at *4. Indeed, following those meetings and communications, “Convolve and [the Massachusetts Institute of Technology] sued Compaq and Seagate for, among other things, trade secret misappropriation and patent infringement.” Id. at *1. Convolve owned all of the asserted trade secrets. Id.
As to certain asserted trade secrets, the Federal Circuit, in a non-precedential decision, found “that the district court was correct when it concluded that, to the extent they would otherwise be trade secrets and were disclosed to either defendant, [trade secret nos.] 1B, 2A, 2C, 2E, and 3B-D were disclosed in the absence of the written confidentiality follow-up memorandum mandated by the NDAs. For this reason, . . . we conclude that Seagate did not breach the NDA to the extent it may have appropriated the information disclosed. Because the disclosure of the information was not subject to the confidentiality obligations of the NDAs, moreover, . . . information relating to those [trade secrets] lost any trade secret status it might have had upon disclosure.” 2013 WL 3285331, at *9. Put more succinctly, “Convolve did not follow the procedures set forth in the NDA to protect the shared information, so no duty ever arose to maintain secrecy of that information.” Id. at *13.
Compliance with a designation/notice provision is usually a reasonably straightforward proposition, even where there is a limited (e.g., 20-day) window for such compliance. However, pressing business matters – e.g., meetings, negotiations, day-to-day operations, etc. – can be time-consuming and fast-paced. Under those circumstances, a party may fail (or forget) to comply with a designation/notice obligation, and that may be especially true where negotiating parties share a sense of optimism and the ultimate goal – a consummated deal – is believed to be attainable.
So, how can a trade secret owner improve its awareness of and compliance with its contractual obligations while still moving its business, including current negotiations, forward? There are 3 effective steps a trade secret owner can take:
- Before signing an NDA, carefully read it twice. (Then, ask your attorneys, colleagues or business partners for answers or clarifications to any questions that you have.)
- Be especially mindful of any NDA “triggering” provisions and deadlines. For example, before any meeting relating to a possible license or joint venture, anticipate and calendar deadlines for any obligations that will or could be generated by the meeting or any events at the meeting.
- Periodically audit any NDA and any other intellectual property (IP)-related agreement for compliance by all parties. In addition to designation/notice obligations, NDAs and IP-related agreements, in general, often include key provisions relating to confidentiality and ownership, with ownership sometimes addressed in connection with a “grant-back” obligation.