United States: Federal Circuit Holds That Failure To Abide By NDA Confidentiality Designation Provisions Can Preclude Trade Secret Protection

Prior to discussing or exchanging proprietary information with one another, companies frequently enter into non-disclosure agreements (NDAs) to afford protections beyond what they would otherwise be entitled to under their states' trade secret misappropriation laws. Most NDAs will lay out the scope of protectable information and procedure for designating it as such. It is important for a party entering such an NDA to understand, however, that doing so may preclude it from later pursuing a trade secret misappropriation claim in the event it believes that its confidential information has been misused. Such was the case for Convolve, the plaintiff in a trade secret misappropriation and patent infringement action against Compaq and Seagate. In Convolve, Inc. v. Compaq Computer Corp., No. 2012-1074, 2013 WL 3285331 (Fed. Cir. July 1, 2013), the Federal Circuit upheld the district court's grant of summary judgment to defendants Compaq and Seagate upon concluding that they had not, as a matter of law, misappropriated Convolve's trade secrets.

The origin of the dispute dates back to 1998, when Convolve and Compaq began licensing negotiations regarding Convolve's disk drive technology and signed an NDA to facilitate sharing of their respective confidential information. The NDA stated that in order to be protected under the agreement, 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 confidential in a written memorandum summarizing and identifying the confidential information. Seagate, Compaq's hard drive supplier, was also involved in the negotiations and signed a similar NDA with Convolve.

After the NDA was in place, Convolve gave several oral presentations to Compaq and Seagate regarding its signal shaping technology and its application to disk drives, but did not state in writing that these oral disclosures were confidential. Ultimately, the negotiations broke down and the parties failed to reach a licensing deal. Several years later, when Seagate began making a type of drive for Compaq's computers that allegedly included features of the signal shaping technology disclosed during the negotiations, Convolve sued. While Convolve acknowledged that its failure to abide by the NDA's confidentiality designations provisions precluded it from bringing a breach of contract claim, it argued that it was still entitled to assert separate state tort law claims for trade secret misappropriation under the California Uniform Trade Secrets Act (CUTSA).

The district court, and then later the Federal Circuit on appeal, disagreed. The Federal Circuit reasoned that because the NDA had expressly set the boundaries of the confidential relationship between the parties, it would not make sense to impose a separate duty of confidentiality under the CUTSA. Because the information disclosed by Convolve clearly fell within the subject matter of the NDA, and because Convolve failed to comply with the NDA's designation requirements, Convolve forfeited its right to pursue a separate tort against the defendants arising from their use of the information. This case not only serves as an important reminder that any party entering into an NDA must vigilantly abide by its requirements for designating confidential information, but it also suggests that parties wishing to preserve their trade secret claims might consider drafting their NDA language accordingly or else risk forfeiting such claims entirely.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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