Trade secrets are an important aspect of any business. These secrets may include any information that is of economic value to the business that is not available in the public domain. Any business needs to take the necessary precautions to help prevent any trade secrets from being revealed to unauthorized persons as they are an important factor for the success of the business. These secrets may include formulas, sales plans, methods, programs, customer data, product specification, market and pricing strategies, techniques, among others.
Even though trade secrets must be kept from leaking, the staff and the employees, however, may be in possession of the trade secrets as they may need the information to help them in conducting their daily duties. To prevent the Receiving Party from disclosing any confidential information to any other person, the best option for the business to ensure that their trade secrets are safe is to enter into a Non-Disclosure Agreement (NDA). The business may also consider; keeping all materials in a secure place, limiting all crucial information from employees on a need to know only, and lastly, ensuring that all sensitive information is clearly marked as confidential.
Example of NDA usage
Possession of trade secrets, for instance, a secret recipe, formula, or an algorithm not only provides a business with commercial advantage but also creates an aura of mystique, consequently increasing customer curiosity.
For instance, businesses like Coca-Cola and KFC have gone the extra mile in ensuring that their secrets are protected. For decades, it is believed that only two Coca-Cola executives actually know the original Coca-Cola formula. The same goes for KFC, only a handful of employees know its secret recipe and reportedly, all of them have entered into a confidentiality agreement.
Difference between Trade Secret and NDA
Confidential information is any information that is not available in the public domain, while a trade secret is any piece of information that is not ordinarily known within the industry and has commercial value to the company.
To avoid any inconveniences and confusion that may arise if the recipient fails to understand what is to be termed as a trade secret and what is to be termed confidential information, you should have a clear understanding of both terms. Below is an example clause from Coca Cola’s Agreement on confidentiality, Non-competition, and Non-Solicitation that clearly shows the difference between “Confidential Information” and “Trade secrets.”
When entering a non-disclosure agreement, you must clearly define the specific duration to which the information is to remain as such. This will help you avoid the NDA being termed as too restrictive by the court.
This is, however, not the case with trade secrets. Trade secrets may have an indefinite period should the necessary conditions be put in place to ensure that it does. When using a legal agreement for trade secrets only, it is not necessary to restrict the agreement to a specific time frame.
Below is an example clause from Coca-Cola’s Agreement on Confidentiality, Non-competition and Non-Solicitation that clearly define the key difference in the amount of time confidentiality is expected for any information that is termed as a trade secret and what is simply confidential:
Misappropriation of Trade Secrets
Trade secrets may be misappropriated through:
- Breach of duty to maintain secrecy
- Electronic and other forms of espionage
If trade secrets have been misappropriated, the business may offer an injunction or a restraining order; consequently, if the party benefited from misappropriation of the trade secrets, they may be forced to pay for the damages caused to the business in the process.
Creating a Confidential Relationship
The main purpose of an NDA is to institute a Confidential Relationship between the Disclosing and the Receiving Party when sharing trade secrets. In such a relationship, you can use an NDA to help in keeping the confidentiality of the information. Confidential Relationships can, however, be created with an oral agreement or can, at times, be implied from the code of conduct of both parties.
Elements of a Non-disclosure Agreement
Non-disclosure agreements have five distinct features:
- Definition of Confidential Information
- Exclusions from Confidential Information
- Duties and responsibilities/obligations of the receiving party
- Contract duration
- Miscellaneous provisions
Definition of Confidential Information
All Non-disclosure agreements provide in detail all the types or categories of Confidential Information that are to be protected in the agreement. This is meant to establish the boundaries of the disclosure, without disclosing secrets. For instance, an NDA may state: “Confidential Information includes recipes, marketing strategies, cookbooks, and all processes.”
Failure to list specific categories of information may result in the agreement being deemed by the court as overly broad and thus unenforceable.
Exclusion from Confidential Information
Parties receiving information might be excluded from ensuring that the information obtained remains confidential if the receiving party obtained the information before signing any agreement with the disclosing party.
Obligations of the Receiving Party
Non-disclosure agreements usually state clearly that the Receiving Party shall at all-time uphold the integrity of the information and limit its use.
Some agreements require that the receiving party maintain the Confidential Information for a specific time. It may be stated in an NDA that “The receiving party shall not in any way disclose any Information obtained from the Disclosing Party for five years commencing the date of execution of the agreement.”
Miscellaneous terms of the agreement are usually included at the end of NDAs. These may include matters such as:
- The state laws that will apply in the event of a breach in the agreement
- Whether arbitration will be applied in the event of a dispute or
- Whether the prevailing party in a dispute will be awarded attorney’s fees.
How To Write A Trade Secret Non-Disclosure Agreement
Here is a guide on how to write a Trade Secret Non-Disclosure Agreement.
Fill in the names of both parties entering into the agreement, i.e., Your name (company name) and the recipient’s name\
Describe the nature of the Trade Secrets without actually disclosing any information that is confidential, for example, “An application that helps you unlock your car.” You must ensure that the information you are providing if at all it is confidential must be designated as such.
In this paragraph, clearly state the duties and responsibilities of the Receiving Party upon disclosure of the information.
Return of Trade Secret Materials
In this paragraph, make clear the time duration accorded to the Receiving Party if they would like to return the Trade Secret Materials.
Describe all the information not covered by the agreement. Such information is usually under court decisions and state trade secret laws that indicate clearly that such information is not to be part of the trade secret protection.
Any agreement is bound to last as long as the information remains confidential. This, however, may not be the case in the Internet and technology business as a result of the rapid innovations
Attorney Fees and Expenses
To ensure that in the event of a court battle, you are awarded the attorney fees always include an attorney fees provision. This may, however, be challenged by the receiving party as they may deem this as a motivation for you to litigate.
This provision authenticates that the version you are signing is the final version and that none of the Parties can use any statement made in the past.
You can decide to choose any state’s law that will govern the Trade Secret agreement regardless of where you live or where the agreement is signed.
This clause provides that; in the event of a legal battle over the agreement and it is ruled by the court that a section of the agreement is invalid, that section can be cut out and the rest of the agreement remains valid.