Psst, can you keep a (trade) secret?

Christina E. Brule

Non-disclosure agreements (NDAs) are legally enforceable contracts that bind parties to maintain specified information as confidential. Despite the intended benefit of protection, NDAs can fall short of their intended effect or be misused. They are often broadly worded to prevent employees from speaking negatively about a company and its executives.

Businesses often use NDAs to protect proprietary information, such as business information (e.g. finances, operations, customer lists), trade information, and technology, that give it a commercial advantage. It is crucial for a business to protect its technology, especially when seeking patent protection or maintaining a trade secret. Trade secret protection works if the information being protected is kept a secret, has value, and steps are taken to maintain secrecy. To protect against misappropriation of a trade secret, one must employ measures to keep the information secret. However, sometimes it is necessary to disclose part of the trade secret to others. Thus, NDAs are commonly employed to reinforce protection of the trade secret when some information must be disclosed, for example, to potential investors or employees.

An NDA may be used with the intent to preserve a trade secret, though it can sometimes backfire (See Keeping Your Trade Secrets Safe: When NDAs can Backfire). There are at least two potential issues to consider when relying on an NDA to protect a trade secret. The first issue is the term or duration for which the NDA is in effect. An indefinite term presents challenges because having to keep a secret forever is a daunting task. If accused, one has the difficult task of proving that the information was not disclosed. On the other hand, a definite term may lead to the loss of a trade secret.

The second issue is how “confidential information” is defined and specifications for how such information is to be marked. Courts treat trade secrets differently than typical confidential information. Thus, in an NDA, it is necessary to explicitly define both “trade secret” and “confidential information” (See Trade Secret Agreements v. NDAs). Having defined what constitutes a trade secret, the term of the NDA for the trade secret could be indefinite whereas the term of the NDA for confidential information could be definite. However, the best way to protect a trade secret is to not disclose the secret!

A business seeking to use an NDA to protect proprietary information must carefully consider the terms of the NDA and the preferences of the courts in which it will seek enforcement of the NDA. Some courts clearly do not support NDAs with an indefinite duration whereas other courts are okay with enforcing secrecy forever. Although an NDA might provide adequate protection, it is by no means a full-proof solution and the best practice is to not disclose a trade secret.