Don't tell anyone

Non disclosure agreements: How to

What is protectible as a trade secret ?

Non Disclosure Agreements (NDAs) try to protect trade secrets. Trade secrets are protected by Federal and State statutes which all define it similarly:

  • that is not generally known to the public;
  • confers some sort of economic benefit on its holder;
  • is the subject of reasonable efforts to maintain its secrecy.

The best known example is of course the Coca-Cola formula that is kept in the safe in Atlanta and only the CEO and his trusted chemist are allowed to see it (but only on Sundays when noone is in the office).

How are trade secrets protected by law

The Uniform Trade Secrets Act (UTSA) is a model law drafted by the National Conference of Commissioners on Uniform State Laws. UTSA attempts  to clearly define the protections that were hitherto only available through common law trade secret protection. 46 states adopted UTSA, however, in 2010, UTSA was introduced in the Massachusetts, New York, and New Jersey legislatures.

Federal law also protects trade secrets under the  Economic Espionage Act of 1996 (“EEA”).  The EEA makes theft or misappropriation of a trade secret a federal crime. Finally, trade secrets can be protected through contract law, that is concluding a Non-Disclosure Agreement.

Trade Secrets and Copyrights

Software for example can be protected by Trade Secret Law and Copyright Law. However, copyright law applies to all creative works of authorship fixed in a tangible medium of expression. For software it is not uncommon to not disclose the source code and thus continue protection of trade secret law regarding the source code. Once a copyrighted work (no registration needed) has been published, it is no longer “not generally know to the public” and trade secret law protection ceases.

Trade Secrets and Patents

Patents are inventions that are novel, useful and nonobvious, however, their existence has to be disclosed in the patent filing. Hence, trade secret protection no longer applies once the invention has been disclosed in a patent application.

What to pay attention to

Many entrepreneurs believe that their new business idea is so cool that it needs to be protected. Hence they include in the subject matter that is not allowed to be disclosed “ideas”. It is questionable whether ideas are protected under state trade secret law, since the economic benefit lies in the implementation of an idea and not in the idea itself (idea: social network, implementation: facebook).  The point to remember is that an over-broad protection can cut both ways  (that might not be an issue with employer-employee type NDAs).  I prefer to be clear than overly protective, since one never knows what the court is going to throw out.

Make sure that the NDA is mutual. Both parties have to protect  the other party’s information from disclosure. I have seen agreements where only one party is obligated to protect the other’s secret.

Also remember that some companies, I am thinking about the VCs in the Silicon Valley, will not sign any NDA. So regardless of how fair or equitable you drafted the non-disclosure agreement, it is not going to get signed.

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