So you’ve got your business partner, employees, and potential investors to sign your non-disclosure agreement. Great, now all your confidential information is safe and sound, right? Wrong.
Getting your NDA signed is only half the challenge of keeping your trade secrets safe. The other half is actually enforcing your NDA.
Enforcing an NDA is a hassle that often requires an expensive and messy litigation process. If you suspect that your NDA has been breached and that your valuable information has been misappropriated (obtained through improper means), you have to be prepared to take action and mitigate potential losses to your company.
Misappropriation of trade secrets can take many forms, including:
- A disgruntled employee leaks information to the public
- A competitor offers your employee compensation in return for trade secrets
- Business partners use information to start their own competing company
If you do suspect that an employee or business partner has broken their non-disclosure agreement, below are some steps that you will likely need to take.
What to do when there’s a breach
Step 1: Investigate and Gather Evidence
When you suspect that an NDA is broken, the first thing you must do is investigate the breach and gather all the facts. This is by far the most important step because the evidence you obtain will determine whether or not you can seek retribution and prevent the further loss of confidential information.
In order to bring a strong case to court, you will need to collect concrete proof to answer the following questions:
- How was the information taken/leaked?
- What was the confidential information used for?
- What parties were involved in the breach? An employee? A competitor?
Investigating an NDA breach is the hardest step in the process because in many cases it is almost impossible to gather enough evidence to connect all the dots.
Step 2: Consult with your Attorney
The next step is to have your attorney review the NDA together with the evidence so that they can suggest the best course of action. If the evidence is substantial, the most likely course of action will be to send a cease and desist letter. Also known as a ‘Demand Letter,’ the cease and desist letter will include the following:
- A reminder of the details of the non-disclosure agreement
- A summary of the proof that the person has breached the NDA
- Demand a specific action (usually to stop sharing/using confidential information)
- A warning of what will happen if the accused does not comply within a specific time period
At this juncture there are usually two outcomes:
A. The breaching party stops and you come to a settlement.
B. The cease and desist letter is ignored.
Step 3: Take Legal Action
If the cease and desist does not work, then you and your attorney must discuss what legal grounds you have to sue the person leaking confidential information.
Depending on your case, there are few legal claims that you can make, such as:
- Misappropriation of trade secrets
- Breach of fiduciary duty
- Copyright infringement
- Patent infringement
Hopefully, the court will rule in your favor and order an injunction, which will require the breaching party to stop disclosing the information and return it back to the owner.
In addition, the court may order the breaching party to pay monetary damages. It will be up to you and your lawyer to determine the dollar value of the total damages that you have suffered as a result of the breach. Unfortunately, it is likely the damages awarded to you will not sufficient in remedying the loss of your company’s trade secrets. Once the trade secrets have been released, the damage may be irrevocable.
Be Proactive, Not Reactive
As you can see above, actually acting on a non-disclosure agreement can be an excruciating process that exhausts both time and money. That’s why it is important to be proactive in protecting your business’s information and preventing leaks, instead of just merely being reactive when cases of misappropriation occur.
Step 1: Be selective with who you share information
One of the easiest ways that you can minimize risk is to only share confidential information with those who are motivated and capable of keeping it a secret. Whether they are employees or business partners, whoever you share the information with should feel invested in keeping it safe.
Step 2: Properly label confidential documents
Next, make sure that people are aware that a specific piece of information (product plans, supplier lists, emails, etc) falls under a non-disclosure agreement by appropriately labeling it with something to the effect of “THIS DOCUMENT CONTAINS CONFIDENTIAL INFORMATION OWNED BY [COMPANY NAME]. UNAUTHORIZED DISCLOSURE IS PROHIBITED.”
Infolawgroup.com also suggests using additional safety measures like “electronic date and time stamps, tag lines, embedded code, digital certificates, watermarks, or metadata” to mark materials as confidential and to prove authorship.
Step 3: Ensure that business partners protect your secrets
Lastly, before collaborating with another company, it’s important that you review their security protocol to ensure that any sensitive information you share with them will be protected. Emphasize the need for them to guard your secrets as they would their own.
All of the above safety practices are simple, but necessary ways of minimizing the risk of a security leak and protecting yourself in the event that one does occur.
Understanding The Uniform Trade and Secrets Act (UTSA)
Even without an NDA, company trade secrets are still protected under the Uniform Trade and Secrets Act (USTA). Passed in 1979, the USTA provides a legal framework through which companies can protect their trade secrets.
According to the UTSA, trade secrets are defined as:
“information, including a formula, pattern, compilation, program, device, method, technique, or process, that derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might obtain economic value from its disclosure or use; and is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
Except for New York and Massachusetts, every state has adopted some form of the UTSA framework.
How the USTA can work for you
If your trade secret is obtained through misappropriation, the UTSA offers several actions that the plaintiff can take to rectify the situation. These actions include:
- injunctions against disclosure
- injunctions compelling the return or deletion of documents and data
- payment to compensate the plaintiff for damages incurred
- payment of royalty fees
- punitive damages for “willful and malicious” conduct
Under the UTSA, you are obligated to prove that you actually made efforts to keep your information confidential. These efforts usually include using NDAs with your employees, training your staff how secure confidential information, encrypting valuable documents, and implementing IT security protocol.
How the Defend Trade Secrets Act can work for you
Until this year, trade secret owners could only take their civil cases to a state court. With the recent signing of the Defend Trade Secrets Act (DTSA) by Obama, trade secret misappropriation cases can now be taken to federal court. Since federal courts have smaller caseloads than state courts, the DTSA helps to speed up the claims and litigation process.
The DTSA largely mirrors the UTSA and uses similar definitions of trade secrets and misappropriation. However, the one major difference between the two is that the DTSA allows for ex parte seizures of property by law enforcement officials “to prevent the propagation or dissemination of the trade secret.”
A non-disclosure agreement is an important deterrence mechanism that help prevent the loss of your company’s valuable trade secrets. However, when it comes to actually enforcing an NDA, the process can be tough. Don’t just wait for someone to break your NDA. Be proactive about implementing the proper security measure so that you can properly respond to an information leak. Finally,when drafting your NDA or confidentiality agreement make sure your forms are compliant with all state and federal laws regarding trade secrets.