Failure to Follow NDA Protocol Can Lead to Loss of Trade Secrets

Failure to Follow NDA Protocol Can Lead to Loss of Trade Secrets

by Jerry Glover
July 17, 2013

It is common in many industries for parties who plan to enter into negotiations for the licensing of technology to sign a non-disclosure agreement (NDA) especially if those negotiations will involve the disclosure of confidential business information and/or trade secrets owned by one or both of the parties.  But be mindful of what is required by the NDA for information that is disclosed to retain its confidential status.  Unfortunately, one party to a case recently decided by the U.S. Court of Appeals for the Federal Circuit did not pay sufficient attention to the requirements of an NDA and lost all protection for information it revealed.  Convolve, Inc. v. Compaq Computer Corp., 2013 WL 3285331 (Fed. Cir. July 1, 2013).

Convolve, Compaq and Seagate Technologies began negotiations regarding the licensing of certain Convolve technology.  The parties signed an NDA which stated that for information to be considered confidential the party revealing the information must (1) mark it as confidential at the time of disclosure or (2) if the information is unmarked at the time of disclosure (for example, an oral disclosure) it must be treated as confidential at that time and later designated confidential in a written memorandum.

Convolve gave a presentation to Compaq and Seagate regarding the technology to be licensed.  After the presentation, both parties acknowledged in writing that any oral disclosure of confidential information during that meeting was covered by the NDA.  Following two other presentations, Convolve sent Compaq and Seagate copies of the presentation’s slides and a letter discussing a demonstration that was part of one of the presentations but Convolve did not state in writing that any of the disclosures during those meets were confidential.  Ultimately, the parties could not reach agreement on a deal.

Several years later Convolve sued Compaq and Seagate for breach of contract and misappropriation of trade secrets.  The trial court found that Convolve had failed to protect the confidentiality of certain information it revealed to Compaq and Seagate because it failed to designate it as confidential as required by the NDA. Convolve appealed claiming that Compaq and Seagate understood that all mutual disclosures during their discussions were confidential whether marked as such or not and, in the alternative, that Compaq and Seagate had misappropriated Compaq trade secrets in violation of California law.

In reviewing the NDA on appeal, the Federal Circuit concluded that the parties intended that all disclosures between the parties that were confidential had to be marked as such at the time of disclosure or later via written memoranda.  The court noted that Convolve’s argument that the parties understood that all disclosures were designated as confidential, whether designated as such or not, was contrary to the agreement the parties had signed.  The court pointed to California law, which governed this case, and noted that if a modification to a contract is going to be implied the parties’ conduct must be inconsistent with the written contract to warrant that modification.  At trial, only one of Seagate’s employees testified that he believed that all disclosures were confidential.  The appellate court noted, however, that the subjective intent of one of the parties is not indicative of the mutual intent of both parties.

Convolve also argued that because Compaq and Seagate had acknowledged at their first meeting that all disclosures made that day were confidential the companies could not now require strict adherence to the NDA marking requirements.  The Federal Circuit, however, held that the parties had signed a document after that first meeting acknowledging that what was revealed at the meeting was confidential.  Therefore, this writing requirement had to be met each time Convolve revealed confidential information.

Convolve tried to avoid the problem of not adhering to the requirements of the NDA by arguing that Compaq and Seagate had also misappropriated trade secrets in violation of the California Uniform Trade Secrets Act.  That statute defines “misappropriation” as use of a trade secret without express or implied consent by a person who, at the time of disclosure, knew or should have known that knowledge of the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy.  Cal. Civ. Code Sec. 3426.1(b).  But the court noted that a non-disclosure agreement can supersede the requirements of the statute.  The court concluded that Convolve should not be able to avoid its obligations under the NDA by using some implied duty argument.

We advise our clients who are going to be revealing confidential business information during negotiations to avoid signing an NDA that requires all confidential information to be marked or later identified in writing as such.  These marking requirements can be easily overlooked.  Failure to following marking requirements can lead to the loss of confidentiality/trade secret status.  If an NDA with marking requirements is executed, however, clients should make sure that all of their employees who are involved in the third party negotiation are aware of those requirements.

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