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Protect Trade Secrets with Confidentiality Agreements

Businesswoman whispering to her colleague around a conference table Protecting Trade Secret - Confidentiality Agreement

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Understanding & Protecting Your Intellectual Property

Use Confidentiality and Non Disclosure

Agreements to Protect Confidential Information

Trade secrets and confidential information are valuable Intellectual Property that should be protected with non-disclosure confidentiality agreements. Like a Registered trademark, “Six Reasons Your Business Needs One” can help you understand what you need, trade secrets are valuable assets of your business and protection is often vital to the life of your business. Your business doesn’t need to be a major technology company with secrets at risk of theft from the Chinese in order to merit thoughtful protection.

Quite the contrary, as smaller companies with innovative products and services grow and gain acceptance, protecting trade secrets can mean the difference between huge success, or losing everything it has worked to create. An employee nondisclosure agreement alone is not enough. Protection for trade secrets and confidential information also requires clearly established rules of engagement granting access to third parties. This includes employees as well as independent contractors, manufacturers and some financial providers.  Proper management of intangibles also includes best practices in the use of domains and brands in social media and Web 2.0.

An understanding of how to create a confidential relationship with third parties where one does not otherwise exist is also important. Not all NDA non-disclosure agreements are the same. This means the use of proper language that supports the intended purpose for disclosure in the first instance is also vital. Use of the wrong type of agreement can be fatal when attempting to enforce an agreement. Relationships with employees, consultants, manufacturers of a process or product formula, bookkeepers, prospective investors or purchasers in your company, and parties making introductions (finders) for possible transactions are all examples of third parties that require NDA non-disclosure agreements, with differing terms and conditions.

Non-disclosure agreements are intended to create a confidential relationship by contract with prospective purchasers, investors, and any third party to whom sensitive business information is disclosed as part of a business transaction or prospective relationship where financial data and client lists are being disclosed. Certain relationships are confidential in nature without a need for a confidentiality agreement. Common examples include officers/directors of a company, attorneys/clients, doctors/patients and clergy. The confidentiality agreement creates the relationship by contract in situations where no such relationship would otherwise exist.

‘Confidential Information’ is information that is not public knowledge (such as certain financial data, test results, or trade secrets) and that is viewed as the property of the holder.

Employee-looking-at-top-secret-files-with-magnifying-glass-non-disclosure agreement for employees

The Law Mandates that You Use “Reasonably Available Steps” to Preserve Secrecy of Confidential Information

The law requires that the business owner take reasonable available steps to preserve the secrecy of the information sought to be protected.  Common examples in cases involving theft of trade secrets include employees who leave employment and solicit clients of the firm, or who create products or inventions during employment and share that information with a competitor upon leaving. In almost all cases, the employers who lose claims for theft of trade secrets lose for one simple reason.

They could not show they made reasonable efforts to maintain secrecy.

A Written Confidentiality and Non Disclosure Agreement with Third Parties is a Must

The absence of a written non-disclosure agreement is also relevant to assessing whether a trade secret owner took “reasonably available steps” to preserve the secrecy of an asserted trade secret. Courts have held that verbal warnings regarding confidentiality will not suffice as reasonable steps. So, get it in writing, and mark all materials that are confidential as such!  This means if you have a trade secret, treat it like a secret and get it in writing before disclosure.

Protecting a trade secret and confidential information is not only advisable, but it’s also imperative in order to prevent improper disclosure of your company mojo to competitors or the public. Sales data, customer lists, secret formulas, drawings, and ingredients are all examples of company information that should be protected from unauthorized disclosure and use without consent. This also includes employees of those companies.

Confidential company information is often referred to as “proprietary information” in the business world. “Confidential Information” is information that is “not public knowledge (such as certain financial data, test results, or trade secrets) and that is viewed as the property of the holder.”  If the information is already publicly available, it won’t qualify for trade secret protection.

When it comes to protecting valuable company information, the greatest obstacle is often the business owner’s failure to establish and follow best practices in safeguarding confidential information.Cheryl Hodgson

Maintaining Trade Secrets Means Actually Treating Confidential Information as a Secret!

nda non disclosure agreement to protect confidential informationAn enforceable trade secret protection program includes clear procedures to identify and label information as confidential, and limiting access to a need-to-know basis. Monitoring access and use by third parties are also vital. How your company treats its valuable information, can and will be used against you, if and when it becomes necessary to enforce rights.

When confronted with theft of confidential information, the company will be required to produce a paper trail and identify its practices for safeguarding company secrets, including procedures that place employees and vendors on notice that the information is confidential at the time the information is disclosed. A paper trail, or more likely into today’s world, a digital access trail, makes all the difference.

Use an Employee Non-Disclosure Agreement to Protect Trade Secrets

Employment Agreements with Confidentiality Agreement

  1. woman with fingers to lips asking to keep a secret in an employee non disclosure agreementKey employees should sign an employee non-disclosure agreement t as a condition of employment.  This type of non-disclosure and confidentiality agreement is most often contained within an actual employment agreement. There are several types of restrictive covenants including non-competition, non-solicitation, employee inventions, and confidentiality. It is important to select the appropriate type of employee confidentiality and non-disclosure agreement for each situation. This is especially important when the employee agreement includes non-competition clauses upon leaving employment.  Take care to ensure that the terms of any employee non-disclosure and confidentiality agreements are reasonable, i.e., not overly broad. In many states, non-competition agreements must be narrowly drawn as to time and location if they are to be enforceable at all since public policy favors the right of the individual to earn a living.
  2. Label documents, both paper and electronic, as confidential when they contain sensitive information.
  3. Restrict access to proprietary information to employees and consultants that have a real need to know.
  4. Return and disposal should also be regularly and consistently monitored. For example, were key documents returned by vendors? Are paper documents shredded regularly?

Graphic image of a padlock on a digital background to denote-non-disclosure-and-confidentiality-agreement

Confidentiality and Non-Disclosure Agreement
For Consultants or Potential Business Relationships

Companies typically engage independent third parties as company valuation experts or to provide outside marketing. While some third parties have an obligation of confidentiality by virtue of the nature of the relationship, others are only obligated if a written agreement established a confidential relationship.

As noted earlier, an obligation of confidentiality is automatically imposed upon doctors, lawyers, and CPAs, making it unnecessary to also sign a confidentiality agreement with them. On the other hand, other third parties have no obligation to safeguard confidential information absent a written agreement creating the confidential relationship by contract. Many company owner reach for the standard “NDA” to sign, with little or no counsel as to whether the language of the agreement is appropriate to the situation. Before signing the agreement, answer these questions:

  1. Does the agreement involve an introduction of two parties by another party for purposes of a possible transaction? If so, it may be important to also include a non-circumvention provision so the introducing party is not left out in the cold if the two parties introduced run away together, forgetting who brought them together.
  2. What type of relationship is being contemplated? For example, an independent graphic designer is less likely to be a threat to the disclosure of vital information than a competitor or key supplier with access to the deepest workings of the company and its products while in the process of providing services.
  3. Is an invention or work product being created on behalf of the company? If so, other documentation may be required such as assignments of patents and copyrights, as well as work-for-hire provisions to ensure ownership by the company.

The Intellectual Property (IP) your create as you grow your business is your most valuable business asset. It’s what you have to sell, and why an investor or purchaser looks for when you seek them out.  IP includes not only trade secrets, but your trademarks, copyrights, patents, and know-how.  When you understand the different types of IP, you can multiply business value as you grow.

[Originally Published: Sept 2, 2013. Updated: May 15, 2014. Updated February 27, 2022]
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