The Independent Counsel

Intellectual Property


Trade Secrets: When and How to Disclose


BY JOHN JEWETT

"Neither a borrower nor a lender be; For loan oft loseth both itself and friend..." - Wm Shakespeare (Hamlet, Counselor Polonius to son Laertes)

Much has been written about how businesses can protect their trade secrets in the event of a need for disclosure, but little is said about whether a business ought to accept or make a disclosure in the first place. In fact, any sharing of trade secrets can create problems for both recipient and discloser:

Confidential—or trade secret—information is that information which is not generally known to others that, if it were to become known to a third party, could give that party commercial benefit or advantage.

As "trade secret" implies, its owner protects the information by keeping it secret—that is by refraining from any disclosure to another without restricting its use and further disclosure. This is because, under the law, if the formerly secret information were to become known without restriction, it is said to have passed into the public domain, and may be freely used by anyone.

Trade secrets are ubiquitous in business: Silicon Valley entrepreneurs used to joke in the days when everyone was getting funded and deals were being done that area restaurants supplied form non—disclosure agreements ("NDAs") along with glasses, silverware and placemats.

One risk of receiving a disclosure is that, where the recipient has begun developing, is already developing, or may in the future develop, a technology or service that is similar to the subject of the disclosure, the disclosing party may later claim that the receiving party breached its obligation of nondisclosure or limited use under the NDA.

Secondly, an NDA imposes affirmative obligations upon the recipient that must be adhered to strictly at the risk of a later claim for damages.

Thirdly—especially where the recipient is small, with relatively few developers—the very people that design and build the recipient's products may learn the disclosing party's trade secrets. This will increase substantially the risk—actually or allegedly—of "polluting" the recipient's core technologies with the protected trade secrets of others.

The disclosing party, for its part, faces the well known problem that the more parties that are privy to a secret, the less likely it is that the secret will remain so.

Thus, the rule should be to avoid restricted receipt or any disclosure of confidential information whenever possible. Or, where information sharing is unavoidable due to business needs, the amount of information disclosed should be kept to a minimum.

The following analysis is thus recommended prior to any receipt or disclosure of a trade secret:

  1. Before receipt, first ask:
    1. What is the minimum amount of information that can be received consistent with the business relationship?
    2. How necessary is receipt of the information to the actual or potential business relationship with the discloser?
    3. How closely does the information bear on the recipient's current or anticipated business?
    4. Has the recipient developed, is it developing, or may it in the future develop technologies or services similar to or even competitive with those that are the subject of disclosure? If the answer is yes, perhaps the recipient should decline to accept the information, or at least severely limit and carefully document its extent.
  2. In contemplating a disclosure, ask:
    1. What minimum amount of information may be disclosed consistent with the business relationship?
    2. How confident is the discloser that the recipient will respect its obligations of confidentiality; i.e., how high is the risk of misuse by the recipient?
    3. How critical is the information to the discloser's business? Possibly, it should never be disclosed under any circumstances.

If after all, a disclosure is still deemed needed by both parties, the parties should enter into a written NDA. The specific provisions that an NDA might have is another subject. Suffice it to say, that ideally an NDA should not be boilerplate—consider having counsel closely tailor its terms to the specific needs of your organization in light of the above concerns.

Both discloser and recipient should archive the NDA and a record of the transaction for at least two good reasons. First, courts—the ultimate enforcers of trade secret protection—require the trade secret owner to have taken all reasonable steps necessary to protect it, including maintaining a record of what was disclosed, who received it, and when it was disclosed.

Secondly, any due diligence attendant to a financing or M&A will include a request to review any nondisclosure agreements a business has signed. If none was saved, a potential deal—either an IPO or sale—could be discouraged or torpedoed.

Comment: Disclose or receive trade secrets judiciously, and then only under a well-drafted Non-Disclosure Agreement

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 2005; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.