As we all know, companies enter into non-disclosure or confidentiality agreements in the normal course of business to protect their trade secrets and other confidential information. In addition, many technology and commercial agreements include non-disclosure and confidentiality terms. Two of the many issues that need to be considered in connection with entering into an NDA or an agreement with confidentiality terms are (i) how important/valuable is the information to be disclosed and (ii) how long do the obligations regarding non-disclosure and non-use last.
We have seen in a number of instances where a proposed NDA puts a “term” on how long the non-disclosure and non-use obligations last. This is potentially dangerous territory if the information being disclosed includes valuable trade secrets.
The Uniform Trade Secret Act defines a trade secret as “information …that: (i) derives independent economic value, …, from not being generally known to … other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”
If a trade secret is disclosed under an NDA and the NDA says the obligation of non-disclosure and non-use expire after some period of time (e.g., 3, 5 or 10 years), at least two courts have indicated that having such expiration periods is evidence that the trade secret owner is not exercising reasonable efforts to maintain the secrecy of the information. See Silicon Image, Inc. v. Analogk Semiconductor, Inc. (N.D. Cal. Jan 17,2008) and D.B. Riley, Inc. v. AB Engineering Corp, 977 F.Supp 84 (D. Mass 1997). While these cases might not control in any particular instance, they provide examples of instances where trade secret status was lost or likely lost.
Therefore, care should be taken when entering into NDAs where there is an expiration period on the non-disclosure and non-use obligations.
One final thought on this. When the NDA is initially signed, if the NDA has a time limit on the non-disclosure and non-use obligations, then each party is incentivized to disclose information that will have limited value as a secret after the expiration of such period. However, after the initial signing of an NDA, we often here the following “We have an NDA with them, so we can disclose confidential information to them.” Yet rarely does someone go back to review the NDA to see if there is an expiration on the non-disclosure and non-use obligations.