A/E Confidential: Protecting Trade Secrets

By G. A. Finch, Michael, Best & Friedlich, Chicago September 1, 2006

It seems as though everywhere you turn, you run into someone requesting a “confidentiality agreement.” A recent experience comes to mind.

I represented a landlord whose prospective tenant was in the commercial real estate brokerage business. The tenant demanded a general confidentiality agreement, presumably to prevent the landlord from snooping around its offices and learning its business secrets. The tenant was eventually persuaded that it was neither appropriate nor necessary; and, indeed, I believe any tenant ought to reconsider leasing if it truly worries about a landlord grabbing its perceived business secrets.

For purposes of the current discussion, this story illustrates two things:

• The increasing awareness of the value of proprietary business information and intellectual property.

• A general lack of understanding among lay business people of what can and should be protected under the law and the mechanics of obtaining such protection.

In approaching the topic of confidentiality, one must consider two often-intertwined concepts: confidentiality agreements and trade secrets. A connected concept is the non-compete covenant, which I do not address here, because its jurisprudence is complex and should be the subject of an entirely separate discussion.

Confidentiality provisions can be found in employment agreements, consulting agreements, intellectual property licensing agreements, investment offerings, acquisition agreements, project agreements, bidding proposal agreements and marketing agreements—to name only the more obvious situations. Confidentiality language may range from a few sentences to several pages.

In an early article about employment contracts (CSE 06/05, p. 49), I addressed the topic of confidentiality clauses, mainly from the employee’s point of view. I point out that a critical issue for employees is the non-compete clause that restricts their post-employment ability to work in the same business and same geographic area for a period of time. A closely related issue is possession of intellectual properties. Because the value of intellectual property rights, such as copyrights, patents and trademarks, has soared in tandem with the U.S. maturation into a predominantly knowledge-based service economy, employers are almost uniformly demanding ownership over these rights.

But confidentiality agreements go beyond all of these issues to embrace all types of information and data that a firm wishes to keep secret. In all cases, a well-drafted confidentiality agreement should not exceed two to four pages, as the longer and denser an agreement, the more likely that the signing individual will not have entirely read or understood the agreement.

The ten most important elements

A confidentiality agreement should contain, at a minimum, the following elements:

1) Identification of the persons and entities covered.

2) The definition of confidential information and acknowledgement of such information by the party to be charged.

3) A statement of obligation to treat the subject information confidentially, to refrain from disclosing the subject information and to refrain from using such information for personal or third-party benefit outside of the scope of the business or employment relationship.

4) A clear statement that the agreement restrictions do not apply to confidential information that is in the public domain through no fault of the promising party.

5) A provision that a party shall ensure that all of its employees, agents or representatives receiving, accessing or obtaining the subject information adhere to the confidentiality obligations.

6) A pre-disclosure notice provision to the protected party, where the disclosing party is compelled by law—or by legal, judicial or regulatory process—to disclose the subject information.

7) A provision for return or destruction of the subject information, contained in documents or in other forms, upon the termination of the business or employment relationship.

8) A time period for the applicability of the confidentiality obligations.

9) A provision, in the case of an employment relationship, for an employee to assign and transfer rights in intellectual property and proprietary information developed by such employee arising from his or her employment.

10) A “remedies section” for an accounting and repayment of profits arising from breach, specific enforcement of covenants and injunctive relief or other equitable relief.

Defining “confidential”

Defining what is considered confidential is critical to the enforceability of these agreements. One cannot protect information that is not defined—and for which notice has not been given to the parties charged with confidentiality.

“Confidential information” definitions might include, depending on the nature of the organization, a nearly endless list of items, including any or all of the following items:

  • financial data

  • writings

  • computer programs

  • administrative and support data

  • equations

  • methods of processing

  • flow charts

  • concepts and inventions

  • sources of supply

  • research and know-how

  • merchandising and selling ideas

  • present and prospective customers

  • plans, programs, reports

  • interpretations, research, forecasts

  • records and agreements

  • contracts and drawings

And many other types of documents containing information concerning an organization’s business or operations.

Such expansive definitions pretty much include everything related to the documentary and knowledge functions of a business. But overly broad and vague definitions create the risk of overkill—that is, if everything is secret, then nothing is credibly secret.

Consequently, precision in identifying and handling proprietary and confidential information is critically important. Taken together, all of the factors described above lead us to the concept of “trade secret” and its interplay with confidentiality.

Trade secrets

State statutes determine the elements and parameters of trade secrets. For example, Illinois has a typical statute protecting information that a firm treats as secret: information that has economic value inasmuch as it is not generally known to other persons outside the organization who could obtain economic value from its disclosure or use.

Statutorily protected trade secrets often cover, but are not limited to: technical or non-technical data, a pattern, formula, compilation, program, device, method, technique, drawing, process, financial datum, or list of actual or potential customers or suppliers. There is much overlap between the statutory definition of a trade secret and what a protected party often seeks in its confidentiality agreement.

Once again, take the Illinois trade-secret statute as an example. A protected party may seek the following:

1) Injunctive relief for actual or threatened misappropriation.

2) Damages, including actual loss caused by misappropriation and unjust enrichment caused by misappropriation.

3) Exemplary damages in the amount of up to twice the amount of damages, awarded under No. 2, above, in the case of willful and malicious misappropriation.

In order for particular information to be deemed a “trade secret,” the Illinois statute requires that it must be the subject of efforts that are reasonable under the circumstances to maintain its secrecy or confidentiality.

Accordingly, a firm should take concrete actions to demonstrate secrecy efforts such as: marking papers, folders and file drawers confidential; providing locks for drawers, cabinets and rooms with confidential information; requiring passwords for digitized information; and permitting access to information only to “need to know” persons. Such procedures will provide evidence to a court that the protected party was serious, reasonable and methodical about protecting its trade secrets.

These procedures, together with an executed confidentiality agreement, would provide sufficient notice to a person that such information is confidential and its disclosure or unauthorized use constitutes a misappropriation that would be actionable both under a trade-secret statute and a confidentiality agreement. Under these circumstances an offending party could not raise a defense of lack of knowledge that the subject information was confidential.

Organizations must first recognize that they have valuable proprietary information and intellectual property, and then take affirmative steps to protect this information and property with appropriate procedures and confidentiality agreements. As the saying goes, “An ounce of prevention is worth a pound of cure.”