Companies routinely use Non-Disclosure Agreements (NDAs) to protect confidential information shared with potential acquirers, consultants, and other third parties.  But companies cannot merely rely on stock NDAs to protect that information.  They should understand each NDA’s procedures for designating information as “Confidential” (and ensure compliance with them), and grasp the interplay between NDAs and state trade secret laws in terms of imputing duties of confidentiality.

So, you (Party A) have just entered into an NDA with another company (Party B) to facilitate a potential acquisition or partnership.  The NDA requires that any document must be designated “Confidential” to be considered Confidential Information or, if information is disclosed orally, it must be identified as “Confidential” at the time of disclosure and later reduced to writing and designated as “Confidential.”  These are typical terms.

Party B produces some initial documents as “Confidential” under the NDA.  It later produces additional documents, containing similar information as the initial production, but does not designate them as “Confidential.”  Has Party B waived the confidential treatment of the later-produced documents?  If the matter proceeds to litigation, what controls the duties of confidentiality between the parties?

These issues were squarely addressed in Convolve, Inc. v. Compaq Computer Corp., 527 F. App’x 910 (Fed. Cir. 2013), a federal case applying California law.  The parties entered into an NDA (with similar terms as above) to share confidential information for the purpose of a potential licensing arrangement whereby the plaintiff sought to license its technology in one of the defendant’s products.  The parties had meetings and the plaintiff disclosed initial documents designated as “Confidential.”  Id. at 916.  The parties then had additional meetings and the plaintiff produced additional related documents.  Id.  However, these later-produced documents were not designated as “Confidential” under the NDA.  Id.

The proposed licensing arrangement ultimately fell through and the defendant allegedly used the later-produced information in its own technology.  Id.  The plaintiff filed suit against the defendant alleging, among other things, breach of contract, fraud, and misappropriation of trade secrets.  Id.

The plaintiff argued that regardless of the terms of the NDA, it was mutually understood that the later-produced information was considered “Confidential” based on the prior conduct of the parties.  Id. at 922.  The court held that the terms of the NDA made the intent of the parties clear—that Confidential Information would be properly designated as such in writing.[1]  Id. at 923.  The court also determined that the fact that the initial production and meetings were designated as “Confidential,” but the subsequent ones were not, clearly demonstrated the parties’ understanding of what was to be protected under the NDA.  Id.

The plaintiff then argued that the defendant’s duty of confidentiality lies in the California Uniform Trade Secrets Act (“CUTSA”), instead of the NDA, and that CUTSA does not require trade secrets to be designated as “Confidential” in writing.  Id. at 924.  The court held a written NDA supplants any implied duty of confidentiality between the parties.  Id. at 924-25.  The court cited CUTSA, noting that “misappropriation occurs when a trade secret is acquired under circumstances giving rise to a duty to maintain its secrecy.”  Id. at 925.  The court concluded that, in this case, the “circumstances” giving rise to a duty to maintain secrecy of the Confidential Information at issue were dictated by the terms of the NDA, nothing else.  Id.

Convolve has since been relied upon by courts in other jurisdictions and in different contexts.  For example, in Pawelko v. Hasbro, Inc., 2019 WL 259117 (D.R.I. Jan. 18, 2019), the plaintiff asserted trade secret misappropriation claims against the defendant where the parties had entered into an NDA governing confidentiality obligations.  The defendant filed a motion to strike the testimony of the plaintiff’s two experts who sought to opine on whether the defendant’s “breach of the industry standards of confidentiality” provided circumstantial evidence of the defendant’s misappropriation and breach of the NDA.  Id. at *1.  The magistrate judge denied the defendant’s motion to strike, finding that the “industry standard evidence in dispute may be relevant and admissible at trial on the factual issue of misappropriation.”  Id.

The defendant challenged the magistrate judge’s ruling, claiming that the confidentiality guidelines in the NDA controlled, therefore any testimony on industry standards of confidentiality was irrelevant.  Id.  The district judge agreed and sustained the objection.  Id. at *2.  In citing exclusively to Convolve, the court determined that the “NDA governs the obligations between the parties—not ‘industry standards’ that are not in the NDA” and, therefore, “testimony from experts about standards of confidentiality and misappropriation in the industry is irrelevant to the claims under the NDA.”  Id.

Convolve and its kin highlight 4 steps to more effectively use NDAs which govern the exchange and designation of Confidential Information:

  1. Be sure to follow the designation procedures in the NDA. If you are the party drafting the NDA, tailor the designation procedures to enable your company to consistently follow them.  If the NDA requires all Confidential Information to be designated as “Confidential” and you fail to designate, confidential treatment may be deemed lost.
  2. Do not solely rely on prior conduct or designations to imply confidential treatment moving forward. Rather, expressly confirm in writing that confidential treatment applies.
  3. Where there is an NDA in place, do not rely solely on “industry standards” of confidentiality as they may be deemed irrelevant and serve as a basis to exclude expert testimony.
  4. Do not rely solely on your state’s trade secret statutes to impose a duty of confidentiality on other parties. Use NDAs and written policies to further safeguard those interests, and follow them.

[1] Notably, the NDA in Convolve specifically addressed what should happen if information/documents were not designated as “Confidential”—there would be no confidential protection provided whatsoever.  Parties who fail to strictly comply with other NDAs, such as those which do not specify what should happen where information/documents are not designated as “Confidential” may still have avenues to protect those documents and the underlying confidential information.  See Vesta Corp. v. Amdocs Mgmt., Ltd, 2018 WL 4354301, at *9-10 (D. Or. Sept. 12, 2018) (where NDA was silent as to ramifications of not marketing a document as “proprietary” or “confidential,” the court determined that summary judgment was inappropriate to the extent the defendants’ arguments relied on a lack of written designation or oral disclosure).