The Role of Non-Disclosure Agreements (NDAs) in Trade Secret Protection

Trade secrets are often the lifeblood of many companies. These are recipes, processes, or information that give a business its competitive edge. When businesses share their trade secrets or confidential information with employees/third parties, they use specific laws and non-disclosure agreements (NDAs) for protection.

Imagine you’re a business owner, and you’ve invested time, money, and effort into developing something unique. Without trade secret laws, anyone could just waltz in and take your secrets, and you’d have no legal recourse. That’s where trade laws come in. They create a legal framework that allows you to protect your proprietary information.

Trade Secret Protection: Understanding Trade Secrets

A trade secret is any company practice or process that is generally not known outside the company. In the business world, trade secrets are confidential, valuable pieces of information that set a business apart from its competitors.

To be legally considered a trade secret in the United States:

• The company must make reasonable efforts to conceal the information from the public
• The secret must intrinsically have economic value (this can mean that it helps create products or allow for services that bring in revenue)
• The secret should contain information that can’t be publically attained outside of experiment and chance

Trade secrets come in all shapes and sizes, but they have one thing in common – they’re worth protecting. In the tech world, it could be the closely guarded code that powers a cutting-edge app. For Coca-Cola, it’s their famous formula.Needless to say, trade secrets are incredibly valuable. The moment your competitors get their hands on your trade secrets, they can reverse-engineer, copy, and potentially put you out of business. That’s where the armor of trade secret protection comes in: to secure your intellectual property against prying eyes.

What are Non-Disclosure Agreements?

A non-disclosure agreement (NDA) is a binding contract between two or more parties that prohibits the spread of sensitive information.

NDAs usually involve two key players. First, there’s the “disclosing party,” the one sharing the confidential information. It could be a company or an individual. Then, you have the “recipient.” This is the person or entity receiving the information and promising to keep it under wraps. These two parties come together in an NDA, creating a legal bond of confidentiality.

NDAs often include clauses about not disclosing the information to others, not using it for personal gain, and not reverse-engineering or trying to recreate whatever secret they’ve been entrusted with. Breaking these rules can lead to legal consequences, making NDAs an essential tool in keeping the trust intact.

Types of Secrets Protected by NDAs

NDAs can cover a wide range of information, including business plans, customer lists, marketing strategies, financial data, and upcoming product designs. Essentially, an NDA can protect anything a company wants to keep secret.

Note that while confidential information, trade secrets, and other proprietary data are lumped into the same category, there are several fine distinctions between them. Confidential information is a broad term referring to any non-public data that parties agree to keep secret. While trade secrets are a subset of confidential information, they also have additional protection under trade secret litigation due to their exceptional value.Proprietary data includes any information owned by a business or individual, but not all of it qualifies as a trade secret. Non-disclosure agreements help specify and protect these distinctions.

Key Components of an NDA

Like most trade secret protections, the purpose of an NDA is to establish a pact of silence. To this end, they typically consist of various essential elements that make them effective, including but not limited to:

• Identification of Parties: This section identifies the people/parties involved in the NDA. It explains who the disclosing party and recipient are, using their names and addresses.
• Definitions: Here, you’ll find the different types of information covered by the agreement, along with the rules regarding how it is handled.
• Obligations: What happens if the recipient shares any protected information? An NDA not only sets up the behavior expected from each party but also lays down the consequences of breaching the agreement.
• Scope: A clearly defined scope keeps the NDA enforceable. Using general terms like “proprietary information” is unlikely to hold up in a court setting.
• Duration: Most NDAs don’t last forever, meaning confidentiality agreements usually state the number of years the sensitive information must be kept secret. Even those with an indefinite timeframe will often indicate when the information will no longer be protected.
• Exclusions: This is the type of information that doesn’t need protection, such as public knowledge or previously disclosed details. Sometimes, trade secrets include parts that they cannot keep private from the public, such as an inventor or a portion of code that’s in the public domain.
• Return of Information: After the two parties end their business partnership, the NDA may require the recipient to confirm that records of the sensitive information have been returned or destroyed.
• Remedies: What happens if the NDA is breached? Possible remedies include restraining orders, payment for damages, and other actions for breach of fiduciary duty. Our trademark lawyers should be able to guide you in this regard.

Advantages of Using NDAs in Trade Secret Protection

As mentioned, NDAs are indispensable to trade secret protection. But why?

• Legal Protection: Non-disclosure agreements let you legally protect your trade secrets. When someone breaches the agreement by disclosing or using your confidential information, you have legal grounds to act against them.
• Preserving a Competitive Advantage: Your trade secrets are usually what set you apart from competitors. Whether it’s a unique manufacturing process, a recipe, or exclusive customer lists, NDAs help keep these differentiators safe.
• Maintaining Intellectual Property Rights: NDAs reinforce your ownership of intellectual property. The recipient must acknowledge your confidential information remains yours when they sign the agreement. This is essential in the event of any disputes or conflicts.
• Dissuading Wrongdoers: The existence of a non-disclosure agreement can deter individuals or entities from attempting to steal or disclose your trade secrets. Potential wrongdoers are less likely to take risks if they know there are legal consequences for violating the NDA.
• Enhanced Negotiation Power: With an NDA, you’re in a stronger position to negotiate deals and partnerships. It reassures the other party that their confidential information is safe with you, which can be a persuasive factor in negotiations.

Drafting an Effective NDA

To draft a legally binding non-disclosure agreement, it’s important to use specific language when defining confidential information, parties, and scope. Broad or vague language might not hold up in a legal dispute.

Also, NDA creators must be careful not to disclose sensitive details before the contract is signed. Non-disclosure agreements do not cover previously known information.

That said, how do you lay down a rock-solid NDA? Here are some key steps to consider.

• Identify the Parties Involved: Start by clearly identifying who’s going to be bound by the agreement. These are the disclosing party (the one sharing the secrets) and the recipient (the one promising to keep them secret). Make sure you have their accurate legal names and contact information.
• Define the Confidential Information: Your NDA should precisely describe what information is considered confidential. Be as specific as possible. The more clarity you provide, the less room there is for confusion or disputes later.
• Determine the Purpose: State the purpose for sharing the confidential information. Is it for a potential business partnership, investment, or employment? This helps both parties understand the context of the NDA and why the NDA is necessary.
• Confidentiality Obligations: Clearly outline what the recipient can and cannot do with the confidential information. This is where you spell out their obligations, including not disclosing, using, or copying the information without permission.
• Scope and Duration: Specify the duration for which the recipient is bound by the NDA. Is it one year, three years, or more? Also, clarify what information is covered by the NDA. Does it include information shared verbally, in writing, or through other means?
• Exclusions and Exceptions: Be transparent about what the NDA doesn’t cover. For example, information that’s already in the public domain or was known to the recipient before signing the agreement may not be covered.
• Governing Law: Specify which state laws will govern the NDA. This is important in case any legal disputes arise.
• Severability: Include a severability clause that ensures that if one part of the NDA is found invalid, the rest of the agreement remains enforceable.
• Signatures: Have both parties sign and date the NDA. Electronic signatures are widely accepted, but be sure to check the legal requirements in your jurisdiction.

If you’re dealing with particularly sensitive information or complex agreements, it’s often wise to consult a trademark lawyer. They can ensure your NDA complies with local laws and is tailored to your specific needs.

Enforcing NDAs and Remedies for Breach

Since NDAs are civil contracts, breaking one isn’t technically a criminal offense. However, it does come with severe penalties. First, here’s how the enforcement process typically works.

• Discovery of the Breach: It usually starts with someone noticing that the NDA has been violated. Once you suspect a breach, you’ll want to gather evidence to support your case. This could include emails, documents, or witnesses who can confirm the breach.
• Cease: In the case of someone threatening or planning to break your NDA, your first step is to send a “cease-and-desist” letter to the party that breached the NDA. In some cases, this can be enough to resolve the issue without going to court.
• Negotiation or Mediation: If the breach isn’t too severe, you might resolve it through negotiation or mediation. You and the other party can try to agree to correct the breach and prevent future violations.
• Legal Action: If the breach is serious or if negotiations fail, you might opt for trade secret litigation.

Now, what kind of remedies are available if the court rules in your favor?

• Court injunctions
• Monetary damages to compensate for the harm caused
• Attorney’s fees

NDA Best Practices

Finally, let’s chat about some best practices when it comes to non-disclosure agreements.

• Not all NDAs are the same. Tailor your NDA to the specific circumstances. Whether it’s for an employee, business partner, or potential investor, the agreement should match the situation.
• Stay focused and fair. An NDA should only include clauses to keep information private. Provisions like non-solicitation and non-competes will likely result in pushback from the recipients.
• Consider whether the NDA should be mutual (both parties share confidential information) or one-way (only one party shares). Mutual NDAs are often used in partnerships, while one-way NDAs are common in employment contracts.
• Use clear and concise language that focuses only on disclosure.
• Review and update your NDAs to adapt to changing circumstances.
• Always conduct due diligence and background checks when entering NDAs.

Consult Our Trademark Lawyers Today

In the ever-evolving world of business, trust and confidentiality are priceless, and NDAs are the keys to keeping that trust intact.

Non-disclosure contracts are your allies in protecting what’s valuable, preserving your competitive edge, and fostering trust in your business relationships. Use them wisely, customize them to your specific needs, and make sure they become an integral part of your business strategy.Looking to safeguard your intellectual property? Consult ETB Law’s experienced trademark lawyers to fortify your secrets better. Let’s work together to secure your future. Contact us for a consultation today.