Presenting a live 90-minute webinar with interactive Q&A Structuring Enforceable Nondisclosure Agreements: Protecting Trade Secrets and Other Confidential Business Information TUES DAY, MARCH 18, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Katie Pfeifer, Partner, Dorsey & Whitney , Minneapolis oungblood, Jr., Of Counsel, The Ford Firm , S D. Hull Y an Antonio, Texas The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Seven Deadly Sins of 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 4
Classic 7 Deadly Sins • Wrath • Greed • Sloth • Pride • Lust • Envy • Gluttony 5
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 6
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. 7
NDAs typically coupled with: • Confidentiality Agreement • Non-Circumvention Agreement • Non-Reverse Engineering Agreement • Non-Competition Agreement 8
CAVEAT: • Focus of presentation is on commercial applications – Preliminary to transaction – Credit Agreements – Mergers – Joint Ventures 9
CAVEAT: • No focus on employment agreements or covenants not to compete NOTE: • Limited interpretive case law on NDAs 10
#1 - Sin of Imprecision • A primary issue is defining the protected data • What is, and is not, “Confidential”? – Trade Secrets – Proprietary Information – Important Data 11
#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 12
#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. 13
#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 14
#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 of this Agreement.” 15
#1 - Sin of Imprecision (con’t) • Key focus of a court is determining intent of parties • Consider an overt statement of intent 16
#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.” 17
#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) 18
#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 19
#2 - Sin of Failing to 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 20
#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 21
#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 22
#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) 23
#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) 24
#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 25
#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 26
#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.” 27
#3 - Sin of Subjectivity (con’t) • This is NO standard • Ask yourself: Will this support or defeat your client’s use? 28
#3 - Sin of Subjectivity (con’t) • For more protection at least add Objectivity: – Commercially reasonable manner – Standards and practices of the relevant industry 29
#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 30
#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 31
#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 or 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 32
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