A case recently decided in the USA poses new risks to the confidential information of New Zealand companies looking to do business with companies in the United States.

Trade secrets and other confidential information can be protected in two ways in New Zealand. Protection can arise automatically where confidential information is disclosed in circumstances where the recipient should understand the exchange is confidential. This gives rise to an action known as breach of confidence.

Obligations of confidentiality can also be imposed by contract. Commonly, prior to disclosing sensitive information, parties enter into a contract known as a non-disclosure agreement, confidentiality agreement or confidentiality undertaking (NDA).

We understand United States law also provides similar dual protection.

The United States is a key market for New Zealand businesses looking to develop and commercialise their IP, in all manner of fields. It is very common for New Zealand and United States companies to enter into NDAs.

NDAs from the United States often provide that, to get the protections afforded by the contract, the disclosing party must mark material as "confidential" or, where information is disclosed in meetings, the disclosing party must promptly confirm in writing if anything disclosed is confidential. Those types of provisions are less common in NDAs from New Zealand.

In the 1 July 2013 decision Convolve v Compaq, the US Federal Circuit Court of Appeals considered a situation where Convolve had disclosed trade secrets as part of a negotiation with Compaq and Seagate under a NDA that included those requirements, back in 1998. The deal did not go ahead.

Convolve's trade secrets had been disclosed in meetings and copies of presentations provided to Compaq, and Convolve had not followed up in writing identifying the secrets as confidential information. Convolve became concerned that Compaq and Seagate were using the trade secrets in their own manufacturing, and sued.

The Court, predictably, held that Convolve was not entitled to rely on the non-disclosure agreement and sue for breach of contract, because it did not follow the contract's process.

But here's the sting - the Court also held that Convolve's failure to follow the contractual process meant it also lost the ability to sue for the separate breach of confidence cause of action. Essentially, the Court said the NDA set the boundaries of the confidential relationship for both types of claim.

The lessons for New Zealand companies are:

  • NDAs are serious documents, and create risks as well as protections. They should be read carefully, and legal advice sought if the implications are unclear.
  • If possible, negotiate out provisions that put formal processes around protection of confidentiality. It should be sufficient that information disclosed is treated as confidential unless the recipient can show that the information is in the public domain or the recipient already has the information.
  • If formal processes cannot be removed, ensure that all personnel follow and document the processes fully, and keep good records.
  • At the end of a negotiation, particularly if the transaction did not proceed, require the recipient to return all confidential information and permanently delete all copies from its systems.