Recent Ruling Demonstrates Importance of Carefully Drafted Non-Disclosure Agreements
A recent Federal Court of Appeals case, Marketel International, Inc. v. Priceline.com, Inc., 36 Fed. App. 423, 2002 U.S. App. LEXIS 7843 (Fed. Cir. 2002), underscores the possibility that a "non-disclosure agreement" may bring about lasting and adverse consequences.
Designed to prevent outside use or disclosure of confidential information shared between parties as they explore or enter into a business relationship, non-disclosure agreements, or "NDAs," are often executed early in a business relationship. However, as Marketel demonstrates, NDAs can significantly limit the rights of the parties who sign such an agreement.
In Marketel, a 1987 NDA signed by a Marketel consultant provided that the consultant would keep certain information confidential for a specified term. The consultant purportedly disclosed confidential information more than five years after the NDA expired. Marketel claimed trade secret misappropriation. Although acknowledging that the NDA had expired prior to the time of the consultant's alleged disclosure, the company argued that California law imposed a duty of confidentiality on the consultant that survived the expiration of the NDA. The court disagreed, holding that since the parties had chosen to negotiate their own arrangement concerning confidential information, they had effectively supplanted any state trade secret protection to which Marketel was otherwise entitled. Ironically, Marketel may have been damaged by the very NDA intended to protect it.
This case is one more example of the importance of a carefully drafted NDA. Marketel might have benefited had the confidentiality provisions in its NDA continued so long as the covered information remained confidential.
Termination provisions are only one of the significant issues that can arise in an NDA. Other examples include:
a narrow definition of "confidential information" that does not protect the information in question;
a broad definition of "confidential information" that covers information obtained outside the targeted relationship;
the exclusion from an agreement of "residual knowledge," which is, in effect, ideas, basic concepts, and other nontangible information shared or retained in human memory;
procedures to permit parties to seek protective orders prior to court-ordered disclosure;
provisions requiring the "return" of all confidential information at the end of an agreement; and
provisions more appropriately addressed in a separate document, including:
clauses designating ownership of intellectual property created during the arrangement;
noncompete/nonsolicitation provisions; and
"no shop" clauses.
As demonstrated by Marketel, seemingly innocuous NDA agreements should be reviewed with careful attention in order to avoid adverse consequences.
AI
