How to Use an NDA to Protect Trade Secrets
This week I’m considering how entrepreneurs and businesses fail to secure “trade secrets” which is a type of intellectual property.
What are Trade Secrets?
A trade secret is a type of intellectual property that covers business ideas, data, and other information that is:
serving a legitimate business purpose by being kept confidential;
not easily replicated; and
actually kept confidential.*
*or at least the owner tries to keep it confidential by using confidentiality agreements and other measures.
You probably own (or used to own) some trade secrets without even knowing it. But unfortunately many of you have lost your trade secrets because you don’t know the rules of how to keep them.
In this article I will teach you how to maintain your trade secrets.
How To Maintain Your Trade Secrets
Once an owner of a trade secret stops making efforts to keep the information confidential, the legal standard for trade secrets is not met.
What does it mean to stop making efforts to keep the information confidential? One thing it means is failing to use confidentiality agreements.
Therefore, if you fail to use confidentiality agreements, then the requirement to keep information confidential is not met, and your trade secret is no longer valid.
You need to use confidentiality agreements with everyone, even people you trust. Why? Because it’s not about trust, it’s about satisfying a legal technicality so that when someone you don’t trust gets their hands on your sensitive information, you will have recourse against that person.
What If I don’t Use Confidentiality Agreements?
You to the Judge: “But I did take efforts to keep the information confidential, please don’t invalidate my trade secrets”
Judge: “No you didn’t, you let all your friends get the information without making them sign confidentiality agreements”
You: “But I don’t need confidentiality agreements with my friends because I trust them”
Judge: “That’s not the law, I’m taking away your trade secrets, case dismissed”
Watch Out For Termination Provisions In Confidentiality Agreements
When reviewing confidentiality agreements, you will likely find a provision saying that the confidentiality requirements will terminate after the confidentiality period. The confidentiality period is usually around 1-3 years in most cases. Although some may prefer a longer confidentiality period, courts often do not enforce confidentiality provisions longer than 3 years.
Typical Termination Provision in Confidentiality Agreements
Confidentiality agreements often include termination language similar to the following:
The Confidentiality Period will be the lesser of [1-3] years.
Although courts often do not enforce confidentiality restrictions beyond 3 years, there are exceptions. One of those exceptions is for trade secrets. You should take advantage of this exception to protect your trade secrets.
Extending the Confidentiality Period for Trade Secrets
What happens to your trade secrets when the confidentiality period in your confidentiality agreement expires?
Unfortunately, it means your trade secrets may be invalid, but there is a fix: you can carve out trade secrets from the 3 year confidentiality period.
That carve out will generally be enforceable by courts in the United States, even though those same courts might not enforce confidentiality periods beyond 3 years.
Therefore, confidentiality agreements should include language similar to the following:
The Confidentiality Period will be the lesser of 3 years, except for Confidential Information that is a Trade Secret. The Confidentiality Period for Confidential Information that is a Trade Secret will be as long as such Trade Secret Confidential Information retains its trade secret status.
Adam Yohanan represents entrepreneurs, investors, freelancers, startups, small businesses, artists, and entertainers in a wide variety of transactional and regulatory matters, with an emphasis on complex commercial contracts, business formations, corporate governance, M&A, finance, intellectual property, and entertainment law. His office can be reached at 212-859-5041.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
