Enforceable Nondisclosure Agreements:

Protecting Trade Secrets and Other

Confidential Business Information

Today’s faculty features:

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TUESDAY, FEBRUARY 6, 2018

Presenting a live 90-minute webinar with interactive Q&A

Chris Clark, Founder, The Law Office of Chris Clark, Charlotte, N.C.

Jeff Neurman, Founding Partner, Farkas & Neurman, New York

Daniel R. Saeedi, Partner, Taft Stettinius & Hollister, Chicago

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Non-Disclosure Agreements:

A Litigator’s Perspective

Daniel R. Saeedi

Partner - Taft Stettinius & Hollister LLP

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Why are Non-Disclosure

Agreements Important?

• The Three Goals of NDAs:

– NDAs provide notice and guidance to the recipient

party and the courts

– NDAs provide a contractual remedy for the sharing

party

– NDAs bolster the sharing party’s trade secret claims

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Interplay between Trade Secrets

and NDAs

• Why are we even talking about trade secret

statutes?

– Statutory attorney’s fees

– Punitive damages of up to twice the actual damages

amount

– A well-defined body of law familiar to the courts

– Overlap between NDAs and trade secret statutes: a

wrongful disclosure often violates both the contract

and statutory law.

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What is a Trade Secret?

• The Defend Trade Secrets Act – 18 U.S.C. 1839

• “Trade Secrets” can be several types of

business and financial information, provided:

– (A) the owner thereof has taken reasonable

measures to keep such information secret; and

– (B) the information derives independent economic

value from not being generally known.

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What is Misappropriation?

• “Acquisition, disclosure or use of a trade secret

without express or implied consent by someone

who:

oUsed improper means to acquire it; or

oKnew it was improperly acquired; or

oDerived the trade secret from a person who owed

a duty to maintain secrecy

• Improper Means – Theft, bribery,

misrepresentation, breach or inducement of a

breach of a duty to maintain secrecy.

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The Interplay Between Trade

Secrets and NDAs

• NDAs broaden protection against disclosure: an

enforceable NDA may protect material not

properly characterized as a trade secret.

• NDAs help define elements for a trade secret

tort claim.

• NDAs put parties on notice of compliance and

thus establish wrongful intent when violated.

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NDAs: Defining the Scope

• Attorneys make the mistake of drafting scope

clauses with undefined general terms.

• A good NDA provides the parties and the Court

with guidance as to what falls under it.

• Customize the agreement to fit your client’s

needs: reference certain specific client

proprietary categories.

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NDAs: Defining the Scope

• Example 1 – “Information concerning the

Company's business operations, such as

marketing techniques; business development

plans and procedures; pricing; profits; costs;

sales; losses; financial information; accounting

and unpublished accounting information ….”

• This clause leaves the courts guessing as to

whether a specific document falls under any of

these general categories.

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NDAs: Defining the Scope

• (ii) Example 2 – “Information concerning the

Company's business operations. . . . and

information stored on the Company’s

“Customer Relationship Manager” database;

“Client Pricing” database; and any other

proprietary company database for which the

employee was given password-protected

access.”

• This clause leaves no doubt for both the

recipient party and the courts.

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NDAs: Trade Secret Buzzwords

• Use the relevant trade secret statutory

buzzwords!

• Make sure that your NDA:

– Labels categories of information as “trade secrets”

– Acknowledges that these categories of information

are valuable

– Specifies that these categories of information are the

subject of significant efforts to maintain secrecy

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NDAs: Trade Secret Buzzwords

• Example 3 – Acknowledgement of value and

efforts to ensure secrecy

• “Vendor agrees that Confidential Information

defined herein are trade secrets of the

Company. Vendor agrees that the Company

derives considerable economic value from

this information being kept secret, and that

the Company has expended significant time,

effort and funds to ensure that this

information is kept secret.”

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Beware of Overly-Broad NDAs

• Warning signs

– Scope clauses that broadly define confidential

information (i.e. “all information relating to the

Company”)

– Scope clauses that violate statutory laws

– Scope clauses that do not contain exceptions (i.e.

information which is public knowledge, publicly

disclosed by the Company or lawfully known prior to

work commencement)

– In some jurisdictions, scope clauses that do not

contain durational or geographic limitations

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Defining the NDA Violation

• NDAs should impose significant duties:

– Duty to preserve confidentiality

– Duty to return confidential information upon project

completion

• NDAs should define grounds for violation:

– Disclosing or using confidential information without

written permission

– Permitting anyone to use confidential information

without written permission

– Copying, duplicating or removing confidential

information without written permission

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Remind Parties of NDA

Obligations

• Companies should remind parties of NDA

obligations, especially at the conclusion of a

project or employment relationship.

• The “Exit Interview.” This further helps establish

wrongful intent if a subsequent disclosure

occurs. Also an opportunity to receive

confidential information in the possession of the

other party.

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Other Helpful Clauses to

Potentially Include in an NDA

• Work product clause

• Return of Company property clause

• Non-Competition / Non-Solicitation clauses

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Crafting the Remedy

• Choice of Law

• Choice of Forum – make it exclusive!

• Attorney’s Fees Clause

• Irreparable Harm Clause

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Any Questions?

Contact Information:

Daniel Saeedi

Taft Stettinius &

Hollister LLP

111 E. Wacker Drive

Suite 2800

Chicago, IL 60601

dsaeedi@taftlaw.com

(312) 840-4308

Elements of an NDA Key provisions and considerations

February 2018 22

I. Parties Involved

• Bilateral or one-way: Will both parties be sharing information or just one?

• Less is more: From disclosing party’s perspective, the more narrow the permissible recipients the better

• “Representatives”: Often receiving party will wish to include other parties – e.g., employees, officers, directors, equityholders, counsel and accountants, sometimes defined as the receiving party’s “Representatives”

• Limit to those who have a legitimate need to know and, ideally, sign an NDA too

• Parties should agree on whom may receive confidential information (CI) • Additional signatories?: Often disclosing party will require any party that

receives the information to either sign the NDA or get a representation from the main recipient that those with whom it shares the information are aware of the NDA and its terms or are otherwise bound by an NDA in favor of receiving party

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II. Scope of Relationship

• Generally, it is in disclosing party’s interest to describe the relationship as broadly as possible

• Broader description makes it less likely that receiving party will be able to claim that certain information was provided to it in the course of a separate arrangement between the parties and thus outside the NDA

• Nonetheless, too broad a definition could permit receiving party to use CI more widely than disclosing party intends.

• This is a particular concern if the parties are pursuing a relationship other than an investment by receiving party (e.g., the parties are competitors discussing a possible joint venture)

• Important to pick up any information disclosed before NDA was signed

• CI should only be allowed to be used in the context of the relationship

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III. Standard of Care

• General standard: Receiving party treats and safeguards, as confidential and secret all CI received by it and shall not (nor permit its Representatives to), without prior written consent, disclose or reveal any CI or the fact that it has received CI

• Existence of discussions: The mere fact that the parties are in discussions at all should often, if not generally, be kept confidential as well

• Alternative approach: Receiving party may suggest to treat CI "with the same degree of care that it maintains its own sensitive information."

• Hard to verify: Disclosing party may should generally resist this formulation as there is often no simple way to verify appropriateness of receiving party's confidentiality protection processes.

• Compromise: Agree to how receiving party handles its own sensitive information but add a qualifier that the degree of care the receiving party uses "shall be no less than a commercially reasonable degree of care."

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IV. What is Confidential Information • Confidential Information: Any information not generally

known to the public or recognized as standard industry practice. Examples include know-how; strategies; strategic partnerships and the existence of the discussions between the parties; employee information; financial records and inventory records of disclosing party; intellectual property; trade secrets; ideas; concepts; inventions; methods or processes; clients and agreements with clients, suppliers and any third party; customer lists; supplier lists; marketing arrangements; channels of distribution; pricing policies and records

• Also any other information (i) normally understood to be confidential or (ii) designated as such in writing by disclosing party

• Includes information derived from any of the above or that comes into receiving party's possession as a result of the NDA or relationship.

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V. What is not Confidential Information • General categories excluded from definition of CI:

1. Prior possession: Information in receiving party’s possession prior to disclosure to it by disclosing party, provided that such information was not furnished to it by a source known by receiving party to be bound by a confidentiality agreement or otherwise prohibited from disclosing the information

2. Public: Information generally available to the public other than as a result of a disclosure by receiving party or its Representatives

3. 3rd Party Source: Information that becomes available to receiving party on a non-confidential basis from a source other than disclosing party or any of its Representatives, provided that such source is not known by receiving party to be bound by a confidentiality agreement with receiving party or otherwise prohibited from disclosing the information

4. Independently Developed: Information which was or is independently developed without violating NDA’s obligations

February 2018 27

VI. Other Exception to Confidentiality Receiving party may request provision permitting disclosure of CI if required to do so by law, regulation, or court order.

• This provision should typically be acceptable to disclosing party if receiving party:

1. Agrees to notify disclosing party, before disclosing CI (if legally permitted to do so), so as to allow disclosing party to (i) prepare for disclosure and (ii) use its resources to contest the disclosure obligation or court order

2. Agrees to cooperate with disclosing party to limit the disclosure • Note: Often in this instance receiving party will require that it be

compensated for any costs incurred with such cooperation

February 2018 28

VII. The End

• NDA should specify what receiving party must do with CI at end of the applicable period.

• It is most favorable to disclosing party if receiving party must return CI. • Disclosing party should resist including language that would require it to request return of the

information (in other words, the obligation should arise automatically at the end of the period).

• Receiving parties often ask for the option to destroy materials instead of returning them.

• Receiving party might be particularly concerned about not agreeing to "return" CI contained in receiving party's own derivative documents containing CI.

• If this is agreed to, receiving party should certify in writing to disclosing party of such destruction.

• Receiving party may seek to add provision to retain copy of some or all of CI in accordance with its record-keeping policy or similar policies, laws, or regulations.

• This may be acceptable so long as the provision requires receiving party to maintain the strictest standards of confidentiality for the retained information.

• Should specify period in which return or destruction of CI must occur -- "immediately" probably not practical but "promptly" should be. Alternatively, parties can agree to a fixed time period for compliance, such as five business days.

February 2018 29

VIII. Breach

• In the case of a breach of the NDA, Receiving Party shall:

1. immediately notify the disclosing party, in writing, of the breach;

2. fully cooperate to mitigate the effect of such breach; and

3. be responsible for any breach caused by any of its Representatives or any third party to whom or to which it has provided or given access to CI.

February 2018 30

IX. Data Protection

In light of concerns about identity protection, the receiving party, and any third party to whom or to which it provides CI, will comply with all applicable laws with respect to the use and maintenance of CI, including any applicable data protection laws.

February 2018 31

X. Term and Termination

• Several options for term of an NDA including (i) an indefinite term (unlikely to be accepted by receiving party), (ii) a fixed term beginning on the date of the NDA – often a year (although longer is better for disclosing party) and (iii) a fixed term beginning after conclusion of the relationship.

• If the parties want to continue the term of the NDA beyond the point that they enter into the principal agreement for the investment in the company or other transaction, that new agreement can include a confidentiality provision that references or incorporates this NDA.

• The NDA should include a survival clause with a definite survival period. A term of two years is common.

February 2018 32

XI. Additional Provisions

• No representation about the information: The purpose of the NDA is to share information, not to make assertions about its accuracy, etc. (which would typically be covered in the definitive documentation for the transaction).

• Retention of IP Rights: This is intended to clarify that receiving party is not granted any rights or license to use CI for any purpose other than in connection with the relationship

• No Obligation: This clarifies that the NDA should not in any manner bind the parties to additional obligations – i.e., sharing information is not tantamount to agreeing to a deal.

• Injunctive Relief: Because the sharing of CI could result in hard to calculate damages, injunctive relief is generally sought.

February 2018 33

Questions? Need Assistance?

• Feel free to contact Jeff Neurman at jneurman@farkasneurman.com or 347-470-4596.

February 2018 34

Intellectual Property

Considerations for

Nondisclosure Agreements

C. Christopher Clark, Esq.

The Law Office of Chris Clark, PLLC

chris@chrisclark.law 704-837-0055

Four types of intellectual property

• Patent

• Copyright

• Trademark

• Trade Secret

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Patent

• Utility patents cover inventions

– Physical objects

– Business methods and processes*

– Computer software*

• Design patents cover ornamental (non-functional)

designs

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Patent

• Elements of patentability

– Novelty

• Public disclosure may start a clock ticking

– Utility

– Non-obviousness

• Improvements to existing inventions may be

eligible for patent protection

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Copyright

• Covers “works of authorship” (literary, dramatic, musical,

artistic, and certain other works)

• Gives the owner of copyright the exclusive right to

reproduce the copyrighted work, to prepare derivative

works, to distribute copies of the copyrighted work, to

perform the copyrighted work publicly, or to display the

copyrighted work publicly

• Protection exists when the work is fixed in tangible form

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Copyright

“WORKS OF AUTHORSHIP” EXAMPLES:

• Script

• Video

• Photograph

• Song

• 2D and 3D works of art, including sculptural and

architectural works

• Software code

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Trademarks

Trademarks are: words, logos, etc. used to identify

source of goods or services (aka “brands”)

Trademark rights are established automatically

through use of the mark, but are reinforced by

federal filing

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Trademarks “Any word, name, symbol, or device used to identify and

distinguish one’s product (service) from the products

(services) of others and to indicate the source of the

products (services).”

• Words

• Logos • Sounds

• Smells

• Colors

• Packaging

• Product shapes

• Restaurant schemes

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Trade Secrets

• Must be used in business

• Gives an advantage over competitors who

do not know it

• Can include a formula, pattern,

compilation, program, device, method,

technique or process

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Trade Secrets

• US has a federal trade secrets statute

• States have trade secrets laws

• Can be an alternative or compliment to patents

– Public disclosure

– Time period

– Independent discovery

• Owner must keep it secret

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4 IP Considerations

• An NDA may protect novelty and prevent the

one-year patentability clock from starting

• An NDA may in some cases serve as an

alternative or compliment to patent protection

• An NDA may form the basis of a trade secret

misappropriation claim

• An NDA may help resolve IP ownership

questions

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Example

Alpha Corp. (“Alpha”) makes grocery shopping

list software for electronic mobile devices.

Beta, LLC (“Beta”) makes “smart” refrigerators

that use technology to track their contents.

Alpha’s CEO meets Beta’s Founder at a

conference and at the networking reception

over drinks, they decide their companies

should explore a potential business

relationship.

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Example

Alpha and Beta each instruct their development

teams to start working together on a way to

integrate Alpha’s software and Beta’s

refrigerator technology when a customer runs of

out of a particular type of food, it is automatically

added to the customer’s mobile electronic

grocery shopping list. After working together for

6 weeks, the developers submit a report to their

respective CEOs.

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Example

The jointly developed report revealed that the

teams were at first unsuccessful in integrating

the two technologies, but by working together

and using the resources available to them they

designed a new refrigerator with mobile grocery

shopping list functionality built in. Engineers and

industrial designers from each company

participated in building a prototype of the new

product.

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Example

Upon receiving the report, neither CEO

remembered meeting the other or asking that

their company personnel and other resources be

used on this project.

Who owns the various rights (patent/invention

rights? copyright? trade secrets?) associated

with the newly designed refrigerator? This issue

could have been addressed in an NDA.

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Sample Provision (from a unilateral NDA)

Ownership and Use of IP: Notwithstanding any provision in this Agreement to the contrary, no explicit

or implicit rights in, under, or to any Proprietary Information of Discloser are assigned, transferred,

licensed, or otherwise conveyed herein to Recipient; provided, however, that a Party may use IP of the

other Party for the sole purpose of enabling, and only to the extent reasonably necessary for, such

Party to effectively evaluate the Potential Transaction. Any and all rights in, under, or to any invention

that is conceived, singly or jointly with others, by Recipient or any of its employees or independent

contractors based at least in part on, or resulting at least in part from, the disclosure of any Proprietary

Information to Recipient under this Agreement (“Derivative Invention”) shall be exclusively owned by

Discloser as between the Parties and shall be deemed part of the IP of Discloser. Such Derivative

Invention shall be subject to legal obligations of assignment by Recipient and its employees and

independent contractors to Discloser at and subsequent to the time of the conception of such

Derivative Invention. Recipient agrees on behalf of itself and its employees and independent

contractors to reasonably cooperate with Discloser, at Discloser’s expense, with respect to the

procurement, maintenance, and enforcement of protection for any Derivative Invention in the United

States and in foreign countries; and to sign any and all documents that Discloser may reasonably

deem necessary or desirable in order to protect Discloser’s rights and interests in any Derivative

Invention, including without limitation, any declarations, oaths, assignments, quitclaims, powers of

attorney, and other papers. Recipient agrees not to disclose any Proprietary Information of Discloser to

any employee or independent contractor unless such person is under and subject to these obligations

and conditions or the equivalent thereto.

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Questions?

Chris Clark

704-837-0055

chris@chrisclark.law

@ChrisClarkPLLC

Thank you!

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