Enforceable Nondisclosure Agreements: Protecting Trade Secrets and - - PowerPoint PPT Presentation

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Enforceable Nondisclosure Agreements: Protecting Trade Secrets and Other Confidential Business Information

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, AUGUST 9, 2016

Whitney Holmes, Partner, Dorsey & Whitney, Denver Katie Pfeifer, Of Counsel, Dorsey & Whitney, Minneapolis

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Avoiding Common Pitfalls in Drafting Non-Disclosure Agreements

Whitney Holmes, holmes.whitney@dorsey.com Katie Pfeifer, Pfeifer.Katie@dorsey.com Dorsey & Whitney LLP August 9, 2016

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Non-Disclosure Agreements—Common Pitfalls  CAVEAT

• Presentation focuses on commercial applications

– Preliminary to transaction

• Mergers & Acquisitions
• Public offerings

– Throughout the transaction

• Credit Agreements
• Private placements
• No focus on employment agreements or covenants

not to compete

6

Non-Disclosure Agreements—Common Pitfalls  Fundamentals

Non-Disclosure Agreements (NDAs) a/k/a Confidentiality Agreements:

• Critical component of business relationships in the

information age

• Often a prerequisite to opening discussions
• Can also be a critical component of ongoing

relationships

• Invariably a balancing act

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Non-Disclosure Agreements—Common Pitfalls  Fundamentals

NDAs frequently coupled with:

• Letter of Intent/Auction Procedures
• Debt Instruments and Offering Documents
• Non-Circumvention Agreement
• Non-Reverse Engineering Agreement
• Non-Competition Agreement

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Non-Disclosure Agreements—Common Pitfalls

• Practice Pointer: The Principal Principle

Overarching Rule for Drafting NDAs:

• Draft NDAs as carefully as you would a real estate

deal, or understand the risks in failing to do so

• There is limited interpretive case law on NDAs

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Non-Disclosure Agreements—Common Pitfalls  Top Pitfalls

# 1 – Imprecision # 2 – Failing to Define the Deal # 3 – Beware Subjectivity # 4 – To Mark or Not to Mark # 5 – The Risks of “Legally Required Disclosure” # 6 – Where’s the Remedy? # 7 – Non-Use and Fiduciary Duties

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Non-Disclosure Agreements—Common Pitfalls  Imprecision

#1 – Imprecision

• A primary issue is defining the protected data
• What is, and is not, “Confidential”?

– Trade Secrets – Proprietary Information – Important Data

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

Sources Defining “Trade Secrets”

• Federal Law – Defend Trade Secrets Act of 2016

(DTSA), which operates in parallel with state law (no preemption)

• State Law – Uniform Trade Secrets Act (UTSA)
• Common Law
• Terms of the NDA (Private Ordering)

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

Reliance on statutes and common law can be risky

• UTSA

– Generally requires plaintiff to plead and prove damages or unjust enrichment – Although UTSA provides for equitable remedies (injunction) courts avoid equitable remedies in the absence of harm

• DTSA

– Also provides for injunctive remedies, but too soon to know whether courts will be more likely to grant injunctions in the absence of proven damages – Significant preconditions and limitations apply to the availability of injunctive remedies (can’t prevent employment, evidence of threatened misappropriation required in some cases)

• Other state law claims (breach of contract or duty of loyalty, for

example) also frequently require proof of damages

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

Statutory Example – Colorado

• Colorado is a UTSA state
• Colorado defines “trade secret” by statute as “the

whole or any portion or phrase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.” Colo. Rev. Stat. § 7-74-102.

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

The Colorado statute further provides that, in order for information to be deemed a “trade secret,” the owner “must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.” Colo. Rev. Stat. § 7-74-102.

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

• Similarly, the Texas Supreme Court has set out six

non-exclusive factors for determining whether something is a “trade secret”:

(1) degree known outside the business; (2) degree known by employees/others in the business; (3) measures taken to safeguard the secrecy; (4) value of the information to owner and rivals; (5) effort or money spent to develop; and (6) effort needed to acquire the information.

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

• NDAs can be broader than common or statutory law
• By contract you can agree to protect data that is not
• therwise protected

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

• Can default to everything being confidential:

“All information and data, received by RECEIVING PARTY (“RP”) from DISCLOSING PARTY (“DP”) in any form or format, is conclusively deemed to be Confidential Information, unless expressly excluded from Confidential Information by the specific terms

• f this Agreement.”

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Non-Disclosure Agreements—Common Pitfalls  Imprecision (con’t)

• Key focus of a court is determining intent of parties
• Consider an overt statement of intent

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Non-Disclosure Agreements—Common Pitfalls

• Practice Pointer: Why Are We Here?
• Draft for “Why Are We Here?”:

“The Parties intend for this NDA to protect from disclosure all the Confidential data, in any and every form, that will be delivered to Recipient, and any interpretation of this NDA is to be consistent with this clearly stated mutual intent.”

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Non-Disclosure Agreements—Common Pitfalls  Define the Deal

#2 – Define the Deal

• Typical language is that “Protected” or

“Confidential” data is limited to evaluation of the “Transaction” or for a “Business Purpose”

• But what do these type of terms mean?

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Non-Disclosure Agreements—Common Pitfalls  Define the Deal (con’t)

• Martin Marietta Materials, Inc. v. Vulcan Materials

Co., 56 A.3d 1072 (Del. Ch. 2012), aff’d 68 A.3d 1208 (Del. 2012)

– “Pre-merger discussions” NDA – Merger under discussion was one of equals

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Non-Disclosure Agreements—Common Pitfalls  Define the Deal (con’t)

• Operative NDA language: provided that protected

information was to be used “solely for the purposes

• f evaluating a Transaction”

– Defined Transaction as “a possible business combination transaction … between [the parties]”

• Ultimately, MM launched a hostile take-over bid

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Non-Disclosure Agreements—Common Pitfalls  Define the Deal (con’t)

• Point of contention: What does “between” mean

– A “business combination between” the parties or – A business combination “between the parties”

• Chancery Court: both readings plausible, so

ambiguous

• Relied upon extrinsic evidence regarding drafting

changes to the NDA

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Non-Disclosure Agreements—Common Pitfalls  Define the Deal (con’t)

• First draft by MM used a former NDA for an asset

swap

• Every MM change made NDA stronger (broader

scope/less use)

• MM made changes to protect from disclosure that

discussions had occurred (vs. “are taking place”) in case discussions terminated without any agreed- upon Transaction

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Non-Disclosure Agreements—Common Pitfalls  Define the Deal (con’t)

• MM changed:

– “transaction involving [MM] and Vulcan” to “transaction between [MM] and Vulcan”

• Court: “between” necessitated MUTUAL action by

the parties – not HOSTILE

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Non-Disclosure Agreements—Common Pitfalls  Define the Deal (con’t)

Mabrey v. SandStream, Inc., 124 S.W.3d 302 (Tex. Ct.

• App. 2003):
• NDA permitted Mabrey (the Receiving Party) to enter

“similar” investments

– But further stated that “Evaluation Material” would be reviewed and used by Mabrey for the “exclusive” purpose

• f analysing his proposed investment with SandStream (the

Disclosing Party), “and not for any other purpose (including any use which could reasonably result in a competitive disadvantage to the disclosing party [SandStream])”

27

Non-Disclosure Agreements—Common Pitfalls  Define the Deal (con’t)

– Mabrey used the “Evaluation Material” to decide if he should invest in a venture that would compete with SandStream – Court concluded that Mabrey could not use confidential material in deciding to invest in a company that was competitive with SandStream

• Goodrich Capital, LLC v. Vector Capital Corp., 11 Civ.

9247 (S.D.N.Y. June 26, 2012)

• Depomed, Inc. v. Horizon Pharma, PLC, No. 1:15-CV-

283834 (Cal. Super. Ct. Nov. 19, 2015)

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Non-Disclosure Agreements—Common Pitfalls

• Practice Pointer: Consider Restricting Use

Consider restricting “use”:

• May limit recipient’s ability to pursue an alternative
• pportunity after receiving confidential information

under an NDA

• Examples:

– “no use competitive with Disclosing Party” – “no use that is detrimental or adverse” to Disclosing Party – “no use other than [defined deal]”

29

Non-Disclosure Agreements—Common Pitfalls  Beware Subjectivity

#3 – Beware Subjectivity

• Common NDA Provision:

“Recipient will keep the Data as secure and confidential as the recipient keeps and protects its

• wn confidential data.”

30

Non-Disclosure Agreements—Common Pitfalls  Beware Subjectivity (con’t)

• This is NO standard
• Ask yourself: Will this support or defeat your

client’s use?

31

Non-Disclosure Agreements—Common Pitfalls  Beware Subjectivity (con’t)

• Objective standards = more protection:

– Commercially reasonable manner – Standards and practices of the relevant industry

32

Non-Disclosure Agreements—Common Pitfalls  Practice Pointer: Limitations and Requirements

Other provisions to consider:

• Disclosure only to those who “require” the

information

• Recipients must be informed of terms of NDA
• Recipients must sign an acknowledgement of

confidentiality Balancing act: enabling the transaction or burdening it?

33

Non-Disclosure Agreements—Common Pitfalls  To Mark or Not to Mark

#4 – To Mark or Not to Mark

• Typical Provision: “All Confidential Information will

be marked as confidential.”

– Burden/risk of failure to mark on producing party

• Convolve, Inc. v. Compaq Computer Corp., 527 Fed. Appx. 910

(Fed. Cir. 2013): Failure to mark as confidential lead to waiver

• f trade secret protection

– Also, tracking Confidential Data to be returned can be a nightmare

34

Non-Disclosure Agreements—Common Pitfalls  To Mark or Not to Mark (con’t)

• Some alternatives:

– Everything delivered is confidential – unless specifically excluded by the NDA “All information and data, received by RP from DP in any form or format, is conclusively deemed to be Confidential Information, unless expressly excluded from Confidential Information by the specific terms of this Agreement.”

35

Non-Disclosure Agreements—Common Pitfalls  To Mark or Not to Mark (con’t)

– Add a post-delivery window for objection to confidentiality,

• therwise deemed confidential

– Add a post-delivery requirement to be applied to information delivered orally: such information is not protected UNLESS written designation received within __ days of delivery

Back to balancing: certainty and protection or practical reality?

36

Non-Disclosure Agreements—Common Pitfalls  Practice Pointer: Data Rooms

• Data Rooms

– In larger deals, used by disclosing party to track activity by receiving party – Can also be used by receiving party to track who has seen what in order to fulfill “return obligation” and in case litigation ensues

37

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure

#5 – Risks of “Legally Required Disclosure” Typical Exception to Confidentiality:

“Except to the extent disclosure is required by law or legal process.” Back to Martin Marietta

38

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure (con’t)

• During Proxy Fight, MM disclosed information

received pursuant to NDA in

– SEC filings; – investor conference calls; – press releases; and – communications with journalists.

39

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure (con’t)

• Court: “Legally required” exception only applied to

a response to an external legal demand

40

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure (con’t)

• MM’s violations:

– No advance notice of the disclosure – More was disclosed than the law required – Disclosure was used to wage a public relations campaign to sell the deal to Vulcan’s shareholders

41

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure (con’t)

Chancery Court:

• “[MM] could not take discretionary action that had

the effect of subjecting it to a legal requirement to disclose”

• “[MM] is seeking to read the NDA in precisely the

way that its general counsel feared that the initial draft of the NDA would allow”

42

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure (con’t)

Context counts:

• Recipients that are private companies generally can

accept narrower “required by law” exception (examples):

– Disclosure required by a response to a legal process initiated by an external source – Responses to discovery in legal proceedings, subpoenas, civil investigative demands or other similar process

43

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure (con’t)

• Recipients that are public companies need to be able

to meet their disclosure obligations under securities laws, but do not need to be able to voluntarily trigger disclosure obligations

• Direct responses to obligations of disclosure

required by law as a result of an external legal demand, such as an unprovoked disclosure

• bligation owed by a public entity, and not as a

result of elective action or provocation of the receiving party

44

Non-Disclosure Agreements—Common Pitfalls  Legally Required Disclosure (con’t)

• Further examples:

– Any obligation to disclose that arises from the discretionary act of the RP is not ‘required by law’ as used in this Agreement. – Any disclosure required by law shall be made only to the extent specifically required by law, and not otherwise.

45

Non-Disclosure Agreements—Common Pitfalls  Practice Pointer: Always Consider the Context

Context is a factor to consider in drafting various sections of the NDA:

• Definition of confidential information
• Scope of non-disclosure obligation
• Whether and how to mark confidential information
• Scope of exceptions, including legally required

disclosure

• Availability and scope of remedies

Context informs balancing!

46

Non-Disclosure Agreements—Common Pitfalls  Where’s the Remedy?

#6 – Where’s the Remedy?

• Reality: talks fall apart and information is sometimes

used inappropriately or falls into the wrong hands

• Be Proactive: Plan on the relief!
• Make it easier to get quick relief — Injunction

47

Non-Disclosure Agreements—Common Pitfalls  Where’s the Remedy? (con’t)

• Add provisions that provide the elements needed to

get injunctive relief:

– Acknowledgement of irreparable harm – Acknowledgement of no adequate remedy at law – Waiver of requirement to secure or post a bond or other security

48

Non-Disclosure Agreements—Common Pitfalls

• Practice Pointer: Other Potential Provisions
• Venue selection

– Courts treat a NDA admission of irreparable harm differently across jurisdictions

• Applicable jurisdiction / law
• Stipulations of proof
• Represented by Competent Counsel
• Integration Clause
• No reliance on other Reps or Warranties

49

Non-Disclosure Agreements—Common Pitfalls  Non-Use and Fiduciary Duties

#7 – Non-Use and Fiduciary Duties

• SEC v. Cuban, 634 F. Supp.2d 713 (N.D. Tex. 2009),

rev’d and vacated on other grounds 620 F.3d 551 (5th

• Cir. 2010)

– District Court: a fiduciary duty can arise from an agreement imposing the obligation of confidentiality, but only if there is also an obligation not to use that confidential information for personal gain

50

Non-Disclosure Agreements—Common Pitfalls  Non-Use and Fiduciary Duties (con’t)

• SEC v. Cuban

– Fifth Circuit: Reversed on a conflicting evaluation of the evidence – The holding on the presence of a fiduciary duty was not

• verturned

51

Non-Disclosure Agreements—Common Pitfalls

• Non-Use and Fiduciary Duties (con’t)
• Fiduciary Duty

– Establishes clear duty to protect the beneficiary/Disclosing Party – Fiduciary must act against its OWN interests to protect beneficiary

52

Non-Disclosure Agreements—Common Pitfalls

• Non-Use and Fiduciary Duties (con’t)
• Fiduciary Duty

– Agreement is interpreted to protect the beneficiary – Makes injunctive relief much clearer

53

Non-Disclosure Agreements—Common Pitfalls

• Practice Pointer: What’s My Context?
• Fiduciary duty is better for the disclosing party
• Mutual NDAs / mutual duties?

– Mutuality should be considered in context, and doesn’t always make sense – For example a public company entering into an NDA with a private company or individual – Remember the Principal Principle: Treat the NDA like a real deal … it is – Provisions need to make sense in context

54

Non-Disclosure Agreements—Common Pitfalls Pulling It All Together

SUMMARY:

• Define the transaction carefully
• Define “confidential information” to fit the

circumstances

• Consider restricting use
• Make relief easier to get when things go wrong
• Consider the context throughout

55

Non-Disclosure Agreements— Common Pitfalls  Questions?

Whitney Holmes (Denver, Colorado) Katie Pfeifer (Minneapolis, Minnesota) Dorsey & Whitney LLP

With contribution from D. Hull Youngblood, Jr. The Ford Firm (San Antonio, Texas)

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