Failure to Adhere to Terms of a Non-Disclosure Agreement Can Cause Significant Loss of Rights

A recent decision of the Federal Circuit in Convolve, Inc. v. Compaq Computer Corp., No. 2012-1074, 2013 U.S. App. LEXIS 13612 (Fed. Cir. July 1, 2013), highlights the need to monitor compliance with non-disclosure agreements or NDAs.

Trade secret cases often involve parties whose attempted joint venture or joint development never came to fruition.  These cases may be brought when one of the parties to the failed venture is successful in marketing a product the other believes incorporates confidential information provided under an NDA.

In 1998, Convolve and Compaq began licensing negotiations regarding Convolve’s confidential technology.  The parties signed an NDA to further their “business relationship.” Id. at *8.  This NDA had some very specific provisions that triggered the parties’ obligations.  Specifically,

the disclosed information must be:  (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later designated as confidential in a written memorandum summarizing and identifying the confidential information.

Id. at *9

Compaq wanted to further share Convolve’s confidential information with Seagate, Compaq’s supplier.  Convolve thus executed a similar NDA with Seagate.  Under this agreement, all written material had to be marked “confidential” or something similar to be within the scope of protection.  Id. at *10.  There was also a provision for oral disclosures:

For an oral disclosure to be within the scope of the NDA, it must have been designated confidential at the time of disclosure and followed by a written memorandum within twenty (20) days of disclosure clearly providing notice of what specific information was confidential.

Id.

Shortly after executing this NDA the parties had a meeting that was followed by a writing acknowledging “that any oral disclosure of confidential information during that meeting was covered by the NDAs.”  Id. at *11.  No such writing followed two later meetings.  Id.  Convolve sent Seagate a copy of the slides it presented at a February, 1999 meeting.  It also sent a letter following an April, 1999 demonstration.  In neither of these instances did Convolve state in writing that the information disclosed at these meetings was confidential, as required to trigger the obligations of the NDA.  Id.

Following the terms of the parties’ own agreements, the Federal Circuit affirmed summary judgment on certain claimed trade secrets.  It held that even to the extent the defendants may have appropriated the plaintiffs’ disclosed information, because the disclosures were not followed by the written confidentiality follow-up memorandum required by the NDAs, the disclosed information lost any trade secret status it may have had when originally disclosed.

In the real world, NDA’s are often signed and stuck in a drawer, with insufficient attention paid to ensuring ongoing compliance with their terms.  This case serves as a reminder to in-house counsel of the need to set up proper protocols to monitor compliance with NDA’s or, better yet, to execute agreements that limit the need for significant follow through by the business team.  A failure to comply with the terms of an NDA can leave a party that spent millions of dollars to develop important technology with nothing to show for it.

For litigators, the case serves as an example of how one might focus discovery as part of a defense to a trade secret action to determine when any meetings might have occurred, what was disclosed at those meetings, what documents were exchanged in connection to those meetings, and whether the disclosures were made in conformance with the parties’ agreements.