Confidentiality Agreements, Non-Disclosure Agreements, Secrecy Agreements – whatever the name, these ubiquitous and seemingly simple agreements are so common in today’s business environment that many business people routinely sign them without much, if any, actual review or consideration. A common justification for the cursory handling of these legal agreements is that they are often precursor to a subsequent, more comprehensive agreement that presumably will receive more careful review. Besides, the story often goes, the agreement only lasts for 1 year (or 2, or 3).
We’ve all seen them – confidentiality agreements with provisions that say something like: “The confidentiality obligations set forth herein shall last for one (1) year after disclosure of Confidential Information.” On the surface, provisions like this seem helpful because they establish a finite expiration of a company’s legal obligations under the agreement. This may be fine in many cases. But if trade secret information will be disclosed under the agreement, those provisions are traps for the unwary.
Here’s the problem: valuable information can be protected as a trade secret forever – as long as the owner continues to take reasonable efforts to maintain the information’s secrecy. If a company discloses information to another company using a confidentiality agreement that has a fixed duration of the confidentiality obligations – like 1 year – then after that time, the information will likely not be protectable as a trade secret. Since the recipient of such information has no duty to keep the information confidential after the specified time period, courts will likely not allow a company to claim that the information is a trade secret – even if the company is suing an unrelated party for misappropriation of the information.
The obvious answer to this situation would appear to be using confidentiality agreements without specified time durations if there’s a chance that trade secret information will be disclosed. But wait – it’s not that simple. Some states view confidentiality agreements without a specified duration as unreasonable restraints on trade if they apply to information that, while confidential, does not rise to the level of being a trade secret under applicable law.
If a perpetual confidentiality agreement is used in these states and both trade secret and non-trade secret confidential information is disclosed, then a company runs the risk that a court may find the agreement unenforceable, which would thereby extinguish trade secret protection for any disclosed information. In these states, a common practice is to include two terms of protection in confidentiality agreements – a 1-or 2-year term applying to non-trade secret confidential information and a longer term protecting trade secret information for so long as such information remains a trade secret under applicable law.
For companies that operate in numerous states and need to disclose confidential information, we recommend the following best practices:
- Conduct or commission legal research to determine the applicable state law regarding confidentiality obligation durations in each state in which the company regularly does business.
- Consider whether trade secret information is likely to be disclosed prior to signing every confidentiality agreement.
- If the company does business in a state that recognizes the enforceability of perpetual confidentiality agreements, establish a company form confidentiality agreement with a perpetual confidentiality obligation that designates that state as the governing law and insist upon its use when company trade secrets will be disclosed.
- If use of another company’s confidentiality agreement is necessary for a transaction and legal research will not be performed regarding confidentiality durations, include provisions distinguishing trade secrets from other confidential information and provide for a limited (1 or 2 year) confidentiality term for the non-trade secret confidential information.
- Don’t accept changes in choice of law for confidentiality agreements without analyzing the impact on trade secret protection.
A possible alternative to the best practices above would be for a company to create a form confidentiality agreement that includes two terms of protection – a possibly perpetual term for trade secrets and a shorter term for non-trade secret confidential information – and use that form in all states. The following sample provisions could be used for this alternative:
“Proprietary Information” means non-public information relating in any way to Discloser’s business that is not a Trade Secret and that is provided to Recipient by Discloser.
“Trade Secret” has the meaning ascribed to that term in [insert reference to state statutory definition or to definition in the Uniform Trade Secrets Act].
All Proprietary Information shall be safeguarded by Recipient as required by this Agreement for a period of one (1) year from the date of disclosure to Recipient. All Trade Secret information shall be safeguarded by Recipient as required by this Agreement in perpetuity or for so long as such information remains a Trade Secret under applicable law, whichever occurs first.
While this alternative would appear to address the issues discussed above in a simple way, there is a possibly significant disadvantage to using this alternative in a state that enforces perpetual confidentiality obligations for all confidential information. Namely, if a confidentiality breach occurs after expiration of the shorter term, then in order to enforce the agreement the Discloser will have the burden to establish that the information at issue is a trade secret.