Non-disclosure agreements (NDAs) are commonly used in situations where entities desire to share proprietary information and trade secrets with others – such as potential or actual venture partners, employees, or contractors.
Because both federal and state trade secret statutes require trade secret owners to take “reasonable measures” to protect their valuable proprietary information, many courts view the use of NDAs and confidentiality agreements as a minimum requirement for asserting that information qualifies as a trade secret. For that reason, best practices demands the use of NDAs and other confidentiality agreements when sharing trade secrets with any third party.
A common feature of most NDAs is a provision that the information being shared must be returned upon the occurrence of a specified event. This event can be the expiration of a defined disclosure period, or upon the termination of the contractual or employment relationship that gave rise to the need for an NDA. The failure to return information can be a breach of the NDA (i.e., a breach of contract), and can also give rise to a claim for misappropriation of trade secrets. Moreover, as Judge Koh of the N.D. Cal. recently explained in Alta Devices, Inc. v. LG Electronics, Inc, the breach of an NDA-imposed duty to return information places a trade secret owner on inquiry notice of potential misappropriation, triggering the applicable statutes of limitation in the federal Defend Trade Secrets Act (DTSA) and California Uniform Trade Secrets Act (CUTSA).
The DTSA and CUTSA both provide that an action for trade secret misappropriation may not be filed more than three years after the date the misappropriation is discovered (actual notice) or by the exercise of reasonable diligence should have been discovered (inquiry notice). In Alta Devices, Alta shared certain alleged trade secrets with LG pursuant to an NDA providing that the information had to be returned at the end of a one-year “Disclosure Period” expiring on June 13, 2012. Alta’s complaint for breach of contract and misappropriation of trade secrets, which was not filed until January 2018, explicitly alleged that LG failed to return Alta’s trade secrets when the “Disclosure Period” expired. Judge Koh held that “Alta was on inquiry notice of potential misappropriation of trade secrets when LG breached its duty to return confidential information on June 13, 2012, which was more than three years before Alta filed its complaint on January 18, 2018.” Consequently, Judge Koh dismissed the DTSA and CUTSA claims with prejudice.
Alta learned the hard way that a trade secret owner cannot sit on its hands when its trade secrets are not returned as required by an NDA. As Alta Devices v. LG makes clear, the breach of a duty to return documents imposed by an NDA (or employment agreement) starts the countdown clock for a civil action for misappropriation of those trade secrets. In such situations, a prudent trade secret owner should demand the return of the information and diligently investigate to determine whether the information is being improperly used or disseminated so that a claim for misappropriation can be brought within the statute of limitations. And, if the information is not voluntarily returned as required by the NDA, both the DTSA and state trade secret laws authorize courts to grant injunctive relief to prevent “actual or threatened” misappropriation, which includes preliminary injunctive relief requiring defendants to return trade secret information.
Arent Fox’s Trade Secret group incorporates a multi-disciplinary approach drawing upon the strengths of our Complex Litigation, Intellectual Property, Labor & Employment, White Collar & Investigations, Government Relations, and Privacy practices. We routinely counsel our clients regarding the drafting and updating of trade secret protection policies, and investigate and litigate trade secret misappropriation matters when the need arises. Arent Fox’s Trade Secrets group will continue to monitor developments in this area.