Structuring Enforceable Nondisclosure Agreements: Protecting Trade - - PowerPoint PPT Presentation

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

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TUES DAY, MARCH 18, 2014

Presenting a live 90-minute webinar with interactive Q&A

Katie Pfeifer, Partner, Dorsey & Whitney, Minneapolis

• D. Hull Y
• ungblood, Jr., Of Counsel, The Ford Firm, S

an Antonio, Texas

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Seven Deadly Sins

• f

Non-Disclosure Agreements

Presented By:

• D. Hull Youngblood, Jr., The Ford Firm

hull.youngblood@ford-firm.com

Katie C. Pfeifer, Dorsey & Whitney LLP

pfeifer.katie@dorsey.com

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Classic 7 Deadly Sins

• Wrath
• Greed
• Sloth
• Pride
• Lust
• Envy
• Gluttony

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7 NDA Deadly Sins

# 1 - The Sin of Imprecision # 2 - The Sin of Failing to Define the Deal # 3 - The Sin of Subjectivity # 4 - The Sin of the Mark # 5 - The Sin of Legally Required Disclosure # 6 - The Sin of Forgetting the Rolaids # 7 - The Sin of Fiduciary Foundering

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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.

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NDAs typically coupled with:

• Confidentiality Agreement
• Non-Circumvention Agreement
• Non-Reverse Engineering Agreement
• Non-Competition Agreement

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CAVEAT:

• Focus of presentation is on commercial applications

– Preliminary to transaction – Credit Agreements – Mergers – Joint Ventures

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CAVEAT:

• No focus on employment agreements or

covenants not to compete NOTE:

• Limited interpretive case law on NDAs

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#1 - Sin of 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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#1 - Sin of Imprecision (con’t)

• For example, Supreme Court of Texas has

established 6 criteria to determine “trade secret”

• These criteria are non-exclusive

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#1 - Sin of Imprecision (con’t)

• (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 info to owner and rivals;
• (5) effort or money spent to develop; and
• (6) effort needed to acquire the information.

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#1 - Sin of Imprecision (con’t)

• NDAs can be broader than common or

statutory law

• By contract you can agree to protect data that

is not otherwise protected

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#1 - Sin of Imprecision (con’t)

• 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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#1 - Sin of Imprecision (con’t)

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

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#1 - Sin of Imprecision (con’t)

• 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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#2 - Sin of Failing to 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?

– Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch. 2012), aff’d 68 A.3d 1208 (Del. 2012)

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#2 - Sin of Failing to Define the Deal (con’t)

• Martin Marietta

– “Pre-merger discussions” NDA – Merger under discussion was one of equals – Operative NDA language: provided that protected information was to be used “solely for the purposes of 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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#2 - Sin of Failing to Define the Deal (con’t)

– Point of contention: What does “between” mean

• A “business combination between” the parties
• r
• 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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#2 - Sin of Failing to Define the Deal (con’t)

– First draft by MM used a former NDA for 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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#2 - Sin of Failing to 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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#2 - Sin of Failing to Define the Deal (con’t)

• Consider restricting “use”: May limit recipient’s

ability to pursue an alternative opportunity after receiving confidential information under an NDA

• Goodrich Capital, LLC v. Vector Capital Corp., 11
• Civ. 9247 (S.D.N.Y. June 26, 2012)
• Mabrey v. SandStream, Inc., 124 S.W.3d 302 (Tex.
• Ct. App. 2003)

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#2 - Sin of Failing to Define the Deal (con’t)

• Mabrey:

– 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 of analysing his proposed investment with SandStream, “and not for any other purpose (including any use which could reasonably result in a competitive disadvantage to the disclosing party [SandStream]).”

– Mabrey used the “Evaluation Material” to decide if he should invest in a venture that would compete with SandStream (the Disclosing Party)

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#2 - Sin of Failing to Define the Deal (con’t)

–Court concluded that Mabrey could not use confidential material in deciding to invest in a company that was competitive with SandStream

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#2 - Sin of Failing to Define the Deal (con’t)

–Lesson: Consider restrictive use provisions: “no use competitive with Disclosing Party” OR “no use that is detrimental or adverse” to Disclosing Party

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#3 - Sin of Subjectivity

• Common NDA Provision:

“Recipient will keep the Data as secure and confidential as the recipient keeps and protects its own confidential data.”

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#3 - Sin of Subjectivity (con’t)

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

client’s use?

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#3 - Sin of Subjectivity (con’t)

• For more protection at least add Objectivity:

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

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#3 - Sin of Subjectivity (con’t)

• Other possible provisions:

– Disclosure only to those that “require” the information – Recipients must be informed of terms of NDA – Recipients must sign an acknowledgement of confidentiality

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#4 - Sin of The 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 of trade secret protection

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

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#4 - Sin of The 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
• r format, is conclusively deemed to be Confidential

Information, unless expressly excluded from Confidential Information by the specific terms of this Agreement.

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

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#4 - Sin of The Mark (con’t)

• Additional alternatives:

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

• f delivery

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#4 - Sin of The Mark (con’t)

• Practice pointer – 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

• bligation” and in case litigation ensues

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#5 - Sin of Legally Required

• Typical Exception to Confidentiality: “When

legally required to disclose.” – Back to Martin Marietta

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#5 - Sin of Legally Required (con’t)

• During Proxy Fight, MM disclosed information

received pursuant to NDA in – SEC filings; – investor conference calls; – press releases; and – communications with journalists.

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#5 - Sin of Legally Required (con’t)

• Court: “Legally required” exception only

applied to a response to an external legal demand

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#5 - Sin of Legally Required (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 blitz to sell the deal to Vulcan’s shareholders

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#5 - Sin of Legally Required (con’t)

Chancery Court: “[MM] could not take discretionary action that had the effect of subjecting it to a legal requirement to disclose…” Chancery Court: “[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[.]”

39

#5 - Sin of Legally Required (con’t)

• Clarify the “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

40

#5 - Sin of Legally Required (con’t)

• Clarify the “required by law” exception

(examples):

– Direct responses to obligations of disclosure required by law as a result of an external legal demand, such as an unprovoked disclosure

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

result of elective action or provocation of the receiving party

41

#5 - Sin of Legally Required (con’t)

• Clarify the “required by law” exception

(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

• therwise.

42

#6 - Sin of Forgetting the Rolaids

ROLAIDS ??????

• Reality is, 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

43

#6 - Sin of Forgetting the Rolaids (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

44

#6 - Sin of Forgetting the Rolaids (con’t)

• Venue selection

– Courts treat an 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

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#7 - Sin of Fiduciary Foundering

• The Unintended Consequences of an NDA
• “Founder” (v): to become disabled; especially,

to go lame

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#7 - Sin of Fiduciary Foundering (con’t)

• SEC v. Cuban:

– District Court: a fiduciary duty can arise from an agreement imposing the obligation

• f confidentiality, but only if there is also an
• bligation not to use that confidential

information for personal gain.

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#7 - Sin of Fiduciary Foundering (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 overturned

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#7 - Sin of Fiduciary Foundering (con’t)

• Fiduciary Duty

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

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#7 - Sin of Fiduciary Foundering (con’t)

• Fiduciary Duty

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

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SUMMARY:

• Define the TRANSACTION carefully
• Define the “data” to fit the circumstances
• Prohibit use that is adverse to the Disclosing

Party

• Make relief easier to get when things go wrong

51

Seven Deadly Sins

• f

Non-Disclosure Agreements

• r

THINGS ARE NOT ALWAYS AS THEY APPEAR!

• D. Hull Youngblood, Jr., The Ford Firm (San Antonio, TX)

Katie C. Pfeifer, Dorsey & Whitney LLP (Minneapolis, MN)

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