Non Employee Trade Secret Agreements

Secrecy agreements are finding their way into more business transactions every day. At one time, they were generally limited to negotiations to buy and sell businesses. Now, they are frequently used in many types of transactions from contract bidding to employment. Before you sign a secrecy agreement, you should know that many seemingly harmless, evenhanded agreements have provisions with subtle but important ramifications, depending on whether you are the discloser or recipient of the information. This memorandum discusses the key distinctions between a discloser oriented and a recipient oriented agreement.

Fortunately, companies frequently disclose confidential information as much as they receive it, so they are sensitive to both sides of these issues. Most successful business people know that it is not only good business ethics, but a sound business practice to respect the proprietary information of the entities with which they do business.

Marking Requirements

The discloser's agreement will simply say that the recipient will keep confidential “all information” provided by the discloser.

The recipient's agreement will require the discloser to mark as confidential or proprietary any information disclosed under the agreement and will require that visual or oral disclosures be identified as confidential at the time of disclosure and summarized and confirmed in writing as confidential within “X” days of disclosure. This, the recipient argues, reduces the likelihood that the discloser will later assert that the recipient had a duty to keep confidential some very routine information that the parties might have discussed and helps assure that the parties know what each party considers to be proprietary as early as possible so that later disputes can be avoided or so that proof of prior knowledge can be gathered earlier.

Although not every discloser recognizes it, it is in its interest to regularly identify and mark its proprietary information. It is not enough to rely on the existence of a secrecy agreement as the basis for a claim by a discloser that it took all appropriate action to protect its proprietary information.

Model Language For This Problem:

Proprietary Information may include, without limitation, data, knowhow, formulae, processes, designs, sketches, photographs, plans, drawings, specifications, samples, reports, customer lists, pricing information, studies, findings, inventions and ideas. To the extent practical, Proprietary Information shall be disclosed in documentary or tangible form marked proprietary or confidential. In the case of disclosures in nondocumentary form made orally or by visual inspection, Discloser shall have the obligation to confirm in writing the fact and general nature of each disclosure within “X” days after it is made.

Burden Of Proof

The recipient’s agreement will simply recite the usual exclusions from the definition of confidential information, i.e.,

Information already in the public domain;

Information innocently received from third parties; and

Information independently developed by the recipient.

The discloser, who would otherwise have the burden of proving a breach, will provide an agreement that shifts the burden by defining the exceptions as that information the recipient can prove by written records was in the public domain or innocently received or independently developed.

One way to solve this problem is to strike a compromise by making the recipient prove the exception without expressly requiring written proof.

Model Language For This Problem: Recipient shall have no obligation with respect to:

Information that Recipient can demonstrate was publicly available or in its possession at the time of disclosures;

Information that Recipient can demonstrate was developed independently of and subsequently to disclosure under this Agreement;

Information which Recipient can demonstrate it obtained, subsequent to disclosure under this agreement, from a third party without any obligation of confidentiality or limitation of use and which Recipient had no actual knowledge was wrongfully obtained or disclosed by the third party.

Commencement & Termination Of Obligations

The discloser’s agreement will not mention a termination date for the obligation of confidentiality and nonuse. If a specific term is mentioned, it will be measured from the date that activities contemplated under the agreement end.

The recipient's agreement will include a very short obligation period beginning from the date of disclosure of the particular information or perhaps even from the date of the agreement. The obligations of nonuse and confidentiality for information disclosed on the first day will expire in, for example, two years according to the recipient’s agreement, even if the project and disclosures continue beyond that time.

Most disclosers recognize that it is difficult, if for no other reason than the administrative burden, for recipients to accept eternal obligations. Most disclosers, therefore, will accept a period of some number of years after termination of the agreement or termination of the defined project on the premise that the information will be outdated by that time.

Model Language For This Problem:

The period during which information will be exchanged pursuant to this Agreement shall terminate “X” years from the date of this Agreement. The obligations of confidentiality and nonuse shall survive for a period of “X” years from the date of such termination.

Definition Of Public Domain

The recipient’s agreement will simply say that its obligations will not apply to information in the public domain.

The discloser, seeking to capitalize on the way in which it has assembled bits of information, some of which may be in the public domain, will have an agreement providing that information will not be deemed to be in the public domain or already in the recipient’s possession just because the information may be embraced by more general information already in the recipient’s possession or in publications or patents.

The fact is that the discloser has the better argument here. There is a big difference between knowing something and spending many dollars to learn that a particular combination of information can have very useful and valuable applications.

Model Language For This Problem:

Proprietary Information shall not be deemed in Recipient’s possession or publicly known because it is embraced by more general information in Recipient’s possession or because it is embraced in general terms in publications or patents.

Definition Of Recipient

The recipient, to avoid liability for disclosures, even if inadvertent, to its parent company, subsidiaries, or related entities, will sometimes define the recipient as including recipient’s affiliates and subsidiaries.

The discloser, seeking to limit dissemination of its information as much as possible, will not define the recipient as broadly. If the Recipient has a legitimate need to disclose to a specified affiliate, the Recipient should be able to be careful enough to avoid other disclosures.

Model Language For This Problem:

Recipient may disclose Proprietary Information to “X” provided that “X” agrees to the obligations of confidentiality and nonuse contained in this Agreement.

Return Of Information

The discloser's agreement will provide that all information and all copies of information will be returned at a specified time.

The recipient, wary of being exposed to liability for forgetting to return the information, will not mention this obligation.

The compromise is to require the return of information, but only if the discloser requests that it be returned. It also allows the recipient to keep one copy. If the recipient is later alleged to have violated the agreement or if it needs to monitor its compliance with the agreement, it will need to be able to know to which information the obligation extends.

Model Language For This Problem:

Recipient will, upon request, promptly return to Discloser any proprietary information received from Discloser, including any product samples, except that one copy of proprietary information may be retained for archival purposes.

Disclosure Required By Order Or Regulation

Many recipients’ agreements state that the recipient’s obligations do not apply to information that the recipient must disclose pursuant to an order, regulation, or subpoena.

The discloser, after pointing out that the recipient really does not mean that the existence of such an order, regulation, or subpoena gives the recipient the ability to use or disclose the information as it desires, will strike this language or require an opinion of counsel that disclosure is required.

The compromise is to provide that the disclosure of information pursuant to a court order is a permitted use or a permitted disclosure of the information. Such an order does not exempt the information from the terms of the agreement or from discloser's desire to otherwise prevent use and disclosure of the information. Also, receiving advice of counsel that disclosure is required is more feasible and less expensive than an opinion of counsel.

Model Language For This Problem:

If Recipient is requested or required to disclose Proprietary Information pursuant to a subpoena or an order of a court or governmental agency, Recipient shall:

Promptly notify Discloser of the governmental request or requirement;

Consult with Discloser on the advisability of taking steps to resist or narrow the request;

If disclosure of Proprietary Information is required, furnish only such portion of the Proprietary Information as the Recipient is advised by counsel is legally required to be disclosed; and

Cooperate with the Discloser in its efforts to obtain an order or other reliable assurance that confidential treatment be accorded to that portion of the Proprietary Information that is required to be disclosed.

Disclosure to Employees

The discloser’s agreement might restrict disclosure to those recipient employees who have expressly agreed to be bound by the particular agreement and might require the recipient to be responsible for breaches by its employees, regardless of whether those breaches occur during or after their employment with the recipient.

The recipient is not readily willing to take on the administrative and legal burden of guessing which employees will ultimately have access to the information and then requiring that these employees execute individual agreements.

The compromise is not requiring employees to execute agreements for every project they work on. It should, however, be based on the presumption that the recipient either requires that its employees execute secrecy or confidentiality agreements upon hiring or that the recipient has a written policy in force requiring employees to protect the confidential information of both the recipient company and others.

Model Language For This Problem:

Recipient shall have the right to disclose Proprietary Information to those of its employees who have a need to know for the purpose of this Agreement and who have been bound in writing, by policy or agreement, to maintain Proprietary Information in confidence both during and after the term of their employment with the Recipient.

Obligation Of Nonuse

This memorandum assumes that the recipient has the dual obligations of confidentiality and nonuse. Many recipient agreements neglect to mention this obligation. The discloser's agreement is always careful to expressly include this obligation.

The discloser is entitled to assurance not only that its information will not only not be disclosed to third parties, but that it will not be used, even by the recipient, for any unauthorized purpose.

Model Language For This Problem:

Recipient shall not disclose Proprietary Information to any third party and shall not use Proprietary Information except for the purposes of this Agreement.

Commercial Terms

Many disclosers slip commercial terms governing the result of the activity contemplated by the secrecy agreement into the agreement. Such terms include provisions that any information, products, or technology developed as a result of the activity for which disclosure is required will belong to the discloser or that recipient will sell any such newly developed information, products, or technology exclusively to the discloser.

The recipient’s agreement will provide that the secrecy agreement and any action taken pursuant to it does not obligate either party to enter into any further relationship and that the conditions of any further relationship will be negotiated and agreed to separately.

A secrecy agreement is very often used as a preliminary tool to allow the parties to discuss a transaction. Even if the parties could, at that point, make reasoned decisions on the final terms of the transaction, those terms should be set forth separately in detail.

Model Language For This Problem:

Neither this Agreement nor any action taken pursuant thereto shall obligate either party to enter into any further business relationship with the other party. The terms and conditions of any such further relationship shall be negotiated and agreed to separately.