Talk of Non-Disclosure Insufficient for Trade Secret Protection
Do. Or do not. There is no try.
When he uttered those famous words, Yoda could have been speaking about non-disclosure agreements. As a Southern California federal court recently confirmed, talking about confidentiality and discussing the need for an NDA may not be sufficient to protect your information, especially if you’ve already disclosed it. If you want to ensure trade secret protection, you’re best off with a signed nondisclosure agreement, or at least concrete evidence of an understanding to treat your disclosures as confidential.
The plaintiff in Direct Technologies v. Electronic Arts designed a USB drive for an intermediary company. The plaintiff knew the defendant, a much larger video game publisher, to be the ultimate beneficiary of the designs. Subsequent to the disclosure of the plaintiff’s designs, the plaintiff and intermediary company discussed the need for a three-way non-disclosure agreement. Plaintiff thought those discussions created an “expectation” of confidentiality. Notwithstanding Plaintiff’s expectation, the intermediary company provided plaintiff’s designs to yet another company who produced the drives, later marketed by the defendant. The plaintiff sued the defendant for, among other things, trade secret infringement.
As the Direct Technologies court explained, “[t]o qualify as a trade secret, information must be ‘the subject of efforts that are reasonable under the circumstances to maintain its secrecy.’” The plaintiff claimed extensive efforts to protect its designs. Those efforts, according to the plaintiff, included plaintiff’s instructions to its own employees to treat the designs as confidential, and plaintiff’s postdisclosure discussions with the intermediary company about a non-disclosure agreement. Those discussions, plaintiff argued, evidenced an “expectation” that an NDA would be signed. The court rejected that those were sufficient efforts to justify trade secret protection for plaintiff’s designs. On that basis the court granted the defendant’s motion for summary judgment as to trade secret infringement.
One might wonder what the Direct Technologies plaintiff was thinking at the time it entered its agreement with the intermediary company. Apparently, that agreement didn’t so much as reference confidentiality. It’s worth remembering that the plaintiff was paid for its designs. Absent a contract stating otherwise, it’s reasonable to assume that the intermediary company and defendant received some license—even an implied one—to make use of the plaintiff’s ideas. It’s also possible that the plaintiff was so excited at the prospect of a relationship with the much larger defendant video game publisher that it set aside its intellectual property best practices. That wouldn’t be an unusual, or necessarily foolish, thing for a small company to do. Often times, the price of establishing relationships with larger players is the assumption of risk that, in other circumstances, wouldn’t make sense. For a small company, success often is a function of knowing which risks to assume, and which to avoid.
Even presuming the plaintiff had decided to proceed without a non-disclosure agreement, the plaintiff could have done far, far more to protect its designs. For example, it could have clearly, physically designated its designs, prototypes and communications as “CONFIDENTIAL.” It could also have instituted concrete internal practices sufficient to, if nothing else, create a perception of confidentiality. Perhaps most important, it could have engaged in earlier and more focused discussions about the need for confidentiality, and documented those conversations in “confirming” emails. None of those steps would have assured trade secret protection or otherwise amounted to a signed NDA. But all would have helped plaintiff’s case.
Most judges receptive to trade secrets claims. As a trade secret owner, help your future judge help you. Exercise enough self-help to at least make your claim credible. Your judge may reward you by letting your case proceed to trial or, as is more likely, a quicker settlement. Hank Burgoyne is managing attorney of the A/V-rated Burgoyne Law Group, a San Francisco-based intellectual property and business litigation law firm specializing in trade secret disputes.