Developing Airtight Confidentiality Agreements

Confidentiality agreements, sometimes referred to as nondisclosure agreements, are contracts commonly used in business when companies seek to both share and protect proprietary information, particularly information tied to or based on intellectual property: patents, trade secrets, copyrights, potential trademarks, and licensing agreements.

The purpose of an NDA is to create a confidential relationship between the entity with the proprietary information and the person or entity to whom it is disclosed. Such agreements can arise between companies considering a joint venture; an inventor seeking a manufacturer; a distributor or retailer retaining a new sales executive; or an establishment interviewing consultants to develop and expand existing back-office programs.

While involving myriad scenarios, confidentiality agreements raise many common issues and concerns: What information is disclosed? For what end? How is the information identified? To whom is it disclosed? How is it used? How long is it maintained? What happens to it after the purpose of the disclosure has been met? What are the consequences of breach, or other disclosure beyond the permitted disclosure?

To prepare airtight NDAs, companies should focus on the following key elements and considerations:

1. Define the confidential or proprietary information subject to nondisclosure.

Increasingly, companies insist on protecting “trade secrets and other confidential and proprietary information … of whatever kind.” They define trade secrets to include but not be limited to broad categories of information: “any formula, drawings, pattern, compilation, program, device, method, technique, or process, that: (i) derives independent economic value … from not being generally known to and not being regularly ascertainable by proper means by other persons … and (ii) is the subject of reasonable efforts, under the circumstances, to maintain its secrecy.”

By invoking such language, the parties embrace the provisions of the Uniform Trade Secrets Act (largely adopted by most states) to accord substantial protection to both trade secrets and other confidential or proprietary information.

2. Specify the exclusions of certain types of information from the definition of confidential information.

Often the nondisclosing entity wants to retain certain rights, and individuals seek to protect information that the recipient can demonstrate they had before any disclosure. This may include information that becomes known to the public through no fault of the recipient; information already in the possession of a particular party; information that comes into its possession lawfully from another source; and information that becomes public knowledge without breaching the NDA and information independently created by the recipient.

3. Allocate responsibility for inventions during the course of employment.

To assure loyalty and continued adherence to the NDA, require the employee to agree to disclose promptly and to agree to assign to the company his or her entire right, title, and interest in any “inventions” disclosed to, made, conceived, or developed by that employee at any time during the course of employment or an applicable period after employment ends.

“Inventions” need to be carefully defined and should expressly include ideas and concepts if these are intended to be covered by the term. Not surprisingly, companies wish to assure full cooperation by their employees to perform any acts necessary both during and after employment to fully vest in the company or to establish as a matter of record any such ownership rights or inventions.

4. Deal specifically and frankly with potential ambiguities in language to establish expectations.

Ambiguity resulting from inconsistent or uncommon usage has the potential to work serious consequences for companies and individuals. Such ambiguities may defeat the intentions and expectations of at least one party and result in contentious litigation and unexpected consequences.

An example of such unexpected consequences is reflected in a recent ruling involving the “Bratz” line of dolls by the U.S. Court of Appeals for the Ninth Circuit. Mattel Inc. v. MGA Entertainment Inc., 96 USPQ2d 1012 (9th Cir. 2010) (80 PTCJ 419, 7/30/10). The dolls, some sketches, the Bratz name, and a preliminary sculpt were developed by a former Mattel employee (Bryant) who pitched the idea to MGA while still in Mattel’s employ. The Ninth Circuit commenced its July 22 opinion by asking: “Who owns Bratz?” Mattel argued, inter alia, that Bryant violated his employment agreement by going to MGA with the Bratz idea rather than disclosing it and assigning the idea to Mattel.

While Mattel prevailed in the district court, and that court awarded the entirety of the Bratz franchise to Mattel, the victory was short-lived. On appeal, the Ninth Circuit reversed, determining that Bryant’s agreement with Mattel, which provided his commitment to turn over to Mattel all inventions “as defined below” included “developments” and “designs” but not “ideas.” The court of appeals found that while “the agreement could be interpreted to cover ideas … the text does [not] compel that reading.”

Agreements with employees other than Bryant did include a transfer of the employee’s ideas. The appellate court deemed fatal the district court’s failure to consider extrinsic evidence or to permit a properly instructed jury to decide the issue.

5. Adopt and adhere to internal policies to maintain secrecy of proprietary information.

To invoke the protections of the Uniform Trade Secrets Act, companies must show that they engaged in reasonable efforts to protect their confidential information from disclosure. In a recent case—Bimbo Bakeries USA Inc. v. Botticella, 613 F.2d 102, 96 USPQ2d 1151 (3d Cir. 2010) (80 PTCJ 476, 8/6/10)—the makers of Thomas’ English muffins, moved to enforce a confidentiality agreement and enjoin a former employee from working for a competitor. Record evidence established that the executive was one of only seven in the company with complete access to the processes that created the muffin’s famed “nooks and crannies.” Integral to the court’s analysis was the extent to which the company had sought to keep secret this and other proprietary information.

6. Limit each party’s use of the confidential information.

Importantly, confidentiality agreements can specify what information is to be used and to guide a court, if necessary, as to the scope of the opportunity for disclosure and potential consequences. For example, a confidentiality agreement can specify that the confidential information may be used to evaluate the disclosing company’s new product but it cannot be used in the recipient’s business.

7. Define the standard by which parties will handle the confidential information.

Investigate whether the recipient’s practices regarding maintaining secrecy of its own information parallel your own. If such practices are substandard, the confidentiality agreement must contain specific provisions concerning limiting the access to confidential information and specifying to whom it may be disclosed and the steps which are expected to maintain confidentiality, including limits on numbers of copies, password protections, and limited physical access.

8. Define the time period during which disclosures may be made and the period which confidentiality of information should be maintained.

Critically lacking in some confidentiality agreements are periods within which the confidentiality of the information is to be maintained. The failure to set such time frame creates problems in future.

A good rule of thumb is to make the confidentiality time period start with the beginning of the disclosure time period and to specify the time, if any, when the confidentiality expires.

9. Consider the introduction of non-competition and non-solicitation provisions in any employment contract.

Often, a company has invested substantial time, money, and resources in the development and retention of its inventions, trade secrets, and confidential information. To further protect that investment, companies should consider carefully drafted provisions precluding competition and solicitation after the employment period ceases. Such provisions provide the legal basis to reinforce the confidential relationship between the parties and the mechanism to preclude reemployment by a competitor when a rogue employee seeks to capitalize on his or her access to confidential and proprietary information.

With an appropriate record— i.e., downloading confidential economic projections and business plans, theft of recipes for complex products, etc.,—the court will enjoin misappropriation or misuse of data and award damages.

10. Remedies in the event of breach.

Confidentiality Agreements should specify the potential consequences in the event of misuse or misappropriation/disclosure of proprietary information. Common remedies include the right to enjoin misuse or misappropriation of the protected information, enforcement of confidentiality provisions by barring employment by a competitor, an award of consequential and punitive damages, attorneys’ fees and costs in the event that the breach is established.

11. Whom do you trust?

Many potential business partners will, as a matter of policy, not enter into an NDA. The inventor or author who wants to interest the company in developing her idea or publishing a book using her program is going to be told to rely on his or her or its patent and copyright rights, or forgo making the disclosure. Such potential business partners often will simply refuse to consider an idea, proposal, program, or the like, that comes unsolicited and other than through a recognized broker or agent.

The person wishing to make the disclosure has to evaluate the potential risk of misuse against the potential reward of disclosure and the integrity of the party to whom the information will be disclosed.

12. Buyer beware!

No matter how airtight the agreement, technology makes it increasingly difficult to control and restrict the flow of information, even as there are means based on technology to restrict disclosures and the flow of information. That is, while information may be encrypted, password-protected and access-limited, means exist to secure access and replicate that crucial data. For example, MGA recently accused Mattel of conspiring to steal its trade secrets by improperly gaining access to showrooms, which were open to buyers and potential buyers, but not competitors, in an effort to protect information which was confidential prior to product launch.

At day’s end, assuming the non-disclosing party is prepared to sign an NDA, the surest way to have an agreement that protects the confidential information is to enter into an agreement with reputable businesses sensitive to the importance of disclosing no more than is necessary during the preliminary stages, and of taking steps to secure patent, copyright, and trademark protection as may be available.

Before disclosing anything, the disclosing party should: understand the prospects for patents and have on file at least a provisional application if such may properly be filed; understand the scope and limit of copyright protection and apply for registration if and to the extent protectable; and understand what can and cannot be protected by trademark and apply for registration if such is reasonable under the circumstances.

Other salutary provisions include (i) a limitation on the number and nature of copies of the material that may be distributed, tagged for tracking purposes; and (ii) a time limit on the availability of the disclosed material to the disclosure.

If there is going to be an ongoing working relationship, there should be a separate agreement addressing issues such as ownership and the right to use, modify, sell, license, patent, or otherwise protect the product of that collaboration.