A recent United States Court of Appeals (Federal Circuit) case shows pitfalls in the fine print of common non-disclosure agreements (“NDA’s).
The plaintiff Convolve sued Compaq Computers for breaching of patents and trade secrets.
Certain NDA’s were put in place between the parties in the late 1990′s. Those NDA’s specified that for information to be confidential, it either had to be marked as confidential at the time of disclosure, or if it was unmarked, or delivered in a presentation, then it had to be designated as confidential in writing by a written memorandum following disclosure.
Certain presentations were made by the plaintiffs in late 1999 regarding computer hard-drive technology, but the parties never reached a licensing agreement regarding the technology.
The lower court ruled that the non-disclosure agreements did not apply, and Convolve appealed this point. On the facts of the case, following certain presentations, there were no subsequent written memos sent to confirm that information presented was confidential. Convolve argued that nonetheless when the disclosures were made all the parties understood that all of their disclosures were confidential.
But the Appeal Court rejected this interpretation stating that the NDA’s “do not appear reasonably susceptible to the interpretation Convolve urges”. The Court found that Convolve’s argument was simply contrary to the plain words of the NDA’s.
So Convolve then took another approach and argued that state confidentiality law would apply in any case, even if the non-disclosure agreement did not have suitable protection.
The Appeal Court squashed that argument as well, finding that a non-disclosure agreement, which is a contract between the parties, replaced any implied duty of confidentiality that might have existed between the parties under law. The Court found that the parties could not have a contract between them addressing confidentiality with one set of rules, while at the same time remaining protected by implied duties of confidentiality, which may not be the same as the explicit terms of the NDA contract. As the Court stated:
“One party should not be able to circumvent its contractual obligations or impose new ones over the other via some implied duty of confidentiality.”
The Court also stated:
“Convolve did not follow the procedures set forth in the NDA to protect the shared information, so no duty ever arose to maintain secrecy of that information.”
Every day many parties hoping to do business together sign NDA’s, and these agreements are often given a quick review because they all seem to be the “same”. But if you are a disclosing party, you should be certain that the definition of confidential information suits your needs. If there are certain types of information you want to be confidential, then the words should state as such. If you do not want explicit “confidential” marking requirements, or obligations following meetings to deliver follow-up memos confirming confidentiality, then the wording should say so.
NDA’s have the potential to create a plague of problems for many years, either due to lack of adequate protection, or due to a recipient being tied in knots by overly broad and unwarranted protection for information. Read the fine print before you sign.
(The case above is cited as 2013 WL3285331(C.A.Fed.) (N.Y.))
