A trade secret non-disclosure agreement is a legal document that allows a business or individual, known as the releasor, to share trade secrets with another party, known as the releasee, while ensuring that the information remains confidential.
The document should clearly describe the trade secret in question to protect the releasor’s interests and establish the terms and conditions under which the releasee may use the information.
What Is a Trade Secret?
A trade secret is a piece of confidential information that gives a business a competitive edge. This information can be any formula, pattern, design, process, program, device, method, technique, or other unique business information not generally known or easily discovered by others.
Unlike patents, trademarks, or copyrights, trade secrets do not require registration with the government. Instead, trade secrets are protected by common law and statutory laws that prohibit their unauthorized use or disclosure. This protection can last indefinitely if the information remains confidential and is not disclosed to the public.
Understanding NDAs for Trade Secrets
Non-disclosure agreements protect sensitive information that parties share with one another, meaning they can safeguard trade secrets. This way, a business can disclose confidential information for collaboration purposes but still take measures to keep their trade secrets private.
The following conditions must apply to establish trade secret protection: [1]
- The trade secret must have commercial value because of its secrecy.
- The trade secret must be known only to a limited group.
- The trade secret must be minimally novel (unlike patents that must “be novel and a step beyond ‘prior art'”).
- The owner must attempt to preserve the trade secret’s privacy.
Even though trade secrets receive protection under the Defend Trade Secrets Act (DTSA), [2] an NDA clearly defines the confidential information that a disclosing party wants to protect. An NDA also provides additional legal protection because it provides evidence that the information was intended to remain confidential and that the receiving party had a duty to safeguard it.
Defining Confidential Information
Companies can label trade secrets within an NDA through one of the following methods:
- List Trade Secret Categories: You can list certain categories of sensitive information, such as all company recipes. This method is the most common, but it can become ambiguous when the courts interpret it in the event of a dispute.
- Define Each Trade Secret: You can define and describe the trade secret. For example, if you have a recipe, you could list all the ingredients and instructions to make the final product.
- Label Trade Secrets as “Confidential”: You can physically label a recipe book with a “Confidential” label, ensuring that anyone you give it to has to retain its confidentiality.
Gaining Additional Protections
Once you define trade secrets in an NDA, the receiving party will have the obligation to only use the secrets in your partnership with them. Any other misuse or unauthorized disclosure will be subject to legal remedies.
In addition to defining trade secrets, an NDA can be even broader in scope. It can cover confidential and proprietary information that doesn’t fall under the trade secret category, so you can expand the protections that your document offers.
Key Considerations for Trade Secret NDAs
Here are some key considerations when writing or implementing NDAs to protect trade secrets:
- Trade Secret Specification: Trade secrets can include customer lists, manufacturing processes, product specifications, financial data, and marketing strategies. Trade secrets are valuable assets with protections under the law but can receive additional enforcement with an NDA.
- Scope of Confidentiality: Specify the scope of confidentiality, including any non-public information that doesn’t meet the legal definition of a trade secret but still requires protection.
- Duration of Obligations: Determine an appropriate duration for the confidentiality obligations.
- Permissible Use of Information: Outline limits on how the receiving party may use the trade secrets. For example, a company may prohibit an employee from disassembling a technology product to learn how it works.
- Exclusions from Confidentiality: Specify exclusions to the confidentiality obligations, such as information that is already public.
- Return or Destruction of Information: Include procedures for returning or destroying trade secrets upon the NDA’s termination.
- Injunctive Relief Provisions: Include clauses that specify the disclosing party’s right to seek injunctive relief in the event of a breach, acknowledging that unauthorized disclosure could result in irreparable harm.
Legal Insights on Trade Secrets and NDAs
Here are some legal insights on trade secrets and NDAs:
Time Limits on NDAs May Pose Problems
If you write a clause in your NDA indicating that the receiving party’s confidentiality obligations expire, you may put your trade secret’s protection at risk. Courts may rule this expiration as a failure to provide adequate protection for your trade secrets.
Indefinite NDAs for Trade Secrets
You can circumvent this problem by not including a time limit for trade secret confidentiality in your NDA. An indefinite obligation is often enforceable and reasonable for trade secrets that remain undisclosed to the public.
NDA’s Expiration Isn’t Always a Barrier to Trade Secret Claims
Executing an NDA is a straightforward way to show that you’re attempting to protect your trade secret. This evidence is crucial to the legal establishment of your trade secret.
However, an NDA isn’t the only way to protect a trade secret. If your NDA expires, you may still be able to claim your trade secret if you have one of the following protective measures in place:
- Limit access using role-based access controls to ensure only certain partners or employees can view trade secrets.
- Implement security measures to protect trade secrets, such as password-protected access controls and encryption, and physical security measures, like locked filing cabinets and restricted access to certain areas.
- Train employees on handling confidential information.
- Establish comprehensive confidentiality policies and procedures within your organization.
- Clearly label documents and electronic files containing trade secrets as “confidential” or “proprietary.”
- Regularly monitor for breaches of trade secrets and take swift action to address violations.
Time-Bound NDAs Are Useful in Some Cases
Some trade secrets may have limited value over time. For example, depending on your industry, it may become too expensive or unrealistic to keep a trade secret private for a long period. In these cases, a time-bound NDA may be appropriate.
Before deciding whether to make the confidentiality obligations in your trade secret NDA finite or infinite, consider industry norms and other factors that may pose risks to trade secret protection. Customize your NDA appropriately and seek legal guidance if necessary.
