This article is written by Alvira Shaikh who is pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from Lawsikho.
“If you can’t get people to listen to you any other way, tell them it’s confidential.”
Table of Contents
Introduction
Imagine owning a famous restaurant having its own unique recipes that attract a lot of customers to your restaurant. What if these recipes get disclosed to the public? Wouldn’t this lead to a huge loss for your business? In today’s competitive market, it has become necessary for businesses to keep innovating new ideas to help their products stand out.
Along with this rapid innovation comes the need to protect our unique ideas and products. A Non-Disclosure Agreement caters to this need of protecting our sensitive and valuable information. In order to conduct business, sometimes it becomes necessary to share our trade secrets with our employees or other parties with whom we would like to do business.
By signing a Non – Disclosure Agreement with the Party, we can ensure that our information is not disclosed or used in any unauthorised manner.
In this article, we are going to discuss in detail how you can protect your valuable trade secrets and confidential information with the help of the Trade Secret Agreement and Non- Disclosure Agreement.
What is a trade secret?
A trade secret is any information produced or any practices carried out by a company that has some commercial value, offers some economic benefit and is protected with reasonable care.
Generally, trade secrets are a type of intellectual property and comprise formula, pattern, design, method or any other confidential information that offers a competitive advantage to a company and provides value to the customers.
For example, Coca – Cola, their secret recipe of coke is a well-guarded trade secret. In 2006, a few employees stole the formula and tried to sell it to Pepsi, but Pepsi brought this to the attention of coca-cola and the employees were arrested.
Another example is the Google Search Algorithm which has remained a top-secret algorithm till today and is kept away from businesses and people.
What is a Non-disclosure agreement (NDA)?
A Non-Disclosure Agreement (“NDA”) is a legally binding contract between two or more people. It protects the confidential information of the Parties which needs to be shared with the other party to carry out their business.
Certain information that creates a competitive advantage for a company needs to be protected. Information like the business and marketing information, customer information and lists, inventions, information related to the intellectual property, IT related information may be shared between the parties to carry out their purpose of the Agreement.
If this information is revealed or shared with any third party or the general public, then it may cause severe loss to the parties. In order to avoid such disclosure or use of the information in an unauthorised manner, businesses enter into a Non-Disclosure Agreement and protect their confidential information.
A Non-Disclosure Agreement is of three types:
- Unilateral NDA – In this type of NDA, there are two parties involved, but the confidential information is shared by only one party and the other party is required to maintain confidentiality.
- Bilateral NDA – In this type of NDA, there are two parties involved, the confidential information is shared by both the parties and each party is required to protect each other’s confidential information.
- Multilateral NDA – In this type of NDA, two or more parties are involved, either one or all parties share the confidential information with each other with an intention to protect the confidential information.
What is a trade secret agreement?
An owner of a trade secret would always want to protect it to avoid any disclosure and incur any loss due to such disclosure. However, in order to carry out a business, the owner of the trade secret has to share his confidential information with his employees or any other parties with whom he is carrying out the business. A Trade Secret Agreement ensures that all your secret designs, inventions, ideas, etc. are protected and not disclosed to any third party or the public.
Trade secrets must be specifically defined in your agreement as they are treated differently from confidential information by the courts. Hence, to avoid any confusion, it is very important to define what constitutes trade secrets and what constitutes confidential information.
Important clauses
Description of parties
The description of parties is the first and most essential part of any agreement. In an NDA, the parties should be described properly along with their name and registered address.
It is also essential to mention which party is the disclosing party and which is the receiving party to avoid any confusion in the interpretation of the agreement.
For example:
Party 1, a manufacturing company of automobiles established under ________ and having its principal place of business at _______ (hereinafter referred to as “Party 1”), which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include its successors and permitted assigns of the ONE PART;
AND
Party 2, a manufacturing company of bearings established under ______and having its principal place of business at______ (hereinafter referred to as “Party 2”), which expression shall, unless repugnant to the context or meaning thereof, be deemed to mean and include its successors and permitted assigns of the OTHER PART;
Definition of confidential information
The most crucial component of an NDA is to clearly define the confidential information that is shared between the parties. Every kind of information has to be included under this clause so as to avoid any future disputes. However, the information which is already known to the party or which is already in the public domain, need not be mentioned under this clause.
Definition of Confidential Information – For purposes of this Agreement, “Confidential Information” shall include all information or material that has or could have commercial value or other utility in the business in which the Disclosing Party is engaged. If Confidential Information is in written form, the Disclosing Party shall label or stamp the materials with the word “Confidential” or some similar warning. If Confidential Information is transmitted orally, the Disclosing Party shall promptly provide a writing indicating that such oral communication constituted Confidential Information.
Exclusions from Confidential Information -Receiving Party’s obligations under this Agreement do not extend to information that is: (a) publicly known at the time of disclosure or subsequently becomes publicly known through no fault of the Receiving Party; (b) discovered or created by the Receiving Party before disclosure by Disclosing Party; (c) learned by the Receiving Party through legitimate means other than from the Disclosing Party or Disclosing Party’s representatives; or (d) is disclosed by Receiving Party with Disclosing Party’s prior written approval.
Term of the agreement
The term i.e., the duration of the agreement must be expressly mentioned so that there is no place for ambiguity. Some trade secrets may be required to be protected even after the expiry of the agreement, this needs to be specifically mentioned in the NDA.
For example:
The non disclosure provisions of this Agreement shall survive the termination of this Agreement and Receiving Party’s duty to hold Confidential Information in confidence shall remain in effect until the Confidential Information no longer qualifies as a trade secret or until Disclosing Party sends Receiving Party written notice releasing Receiving Party from this Agreement, whichever occurs first.
Legal obligation to disclose
What if you have signed a Non-Disclosure Agreement with a company and you are obligated to disclose the information due to a court order? Will you be liable for disclosing such information? The answer is No.
If there is a legal requirement or order from the court or any administrative entity, then the receiving party is not held liable. Such a clause should always be incorporated in your NDA to avoid any confusion or unnecessary disputes.
However, the clause should also state that the receiving party should only disclose the relevant information that is absolutely necessary and should also notify the disclosing party about the same.
Return of the confidential information
After the termination of the non-disclosure agreement, what happens to the information shared with the party? It has to be returned to the disclosing party and to ensure that it is duly returned, it is necessary to include such a clause specifically stating that the receiving party is bound to return any information that he/she possesses.
Nowadays, most of the information is shared via electronic media which makes it very difficult to identify whether the receiving party has actually deleted the information shared. Hence, to impose an obligation on the receiving party, this clause plays a major role to ensure that the information is deleted or destroyed as stated and not used in an unauthorised manner by the party.
For example:
Upon the termination of this Agreement, both Parties will ensure that all documents, memoranda, notes and other writings or electronic records prepared by them that include or reflect any Confidential Information are returned or destroyed as directed.
Dispute resolution and governing law
What if there is any dispute between the parties in future and the parties decide to seek the court’s help? Under whose jurisdiction will this case fall? There is always a possibility of such an issue arising between the parties. In order to avoid any confusion regarding this, it is necessary to include a clause specifically stating which court has jurisdiction over any legal issue arising between the parties.
For example:
Any dispute or claim arising out of or in connection therewith, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the provisions of Procedure of the Indian Arbitration & Conciliation Act, 1996, including any amendments thereof. The arbitration tribunal shall be composed of a sole arbitrator, and such arbitrator shall be appointed mutually by the Parties. The arbitrator/arbitral panel shall also decide on the costs of the arbitration proceedings.
This Agreement shall be governed in accordance with the laws of India and shall be subject to the jurisdiction of the courts at ___.
Remedies
In case of any breach of the agreement, there is a loss incurred by the disclosing party. Hence, it is necessary to make sure that the acceptable remedies are already mutually agreed upon between the parties.
Later on, the costs of a breach can be difficult to calculate and the already agreed remedies will make it easy and avoid any lengthy legal battles between the parties.
This clause should specifically mention the consequences of a breach and reserve your right to seek unbiased remedies.
How can you protect your trade secrets in a non-disclosure agreement?
Trade secrets give your business a competitive advantage in the marketplace. It becomes of utmost importance to protect these trade secrets as it distinguishes us in the market. Often, many businesses are known mainly for their unique service or method of working.
Even some restaurants are famous especially for their specific dish which has a unique recipe. All such secrets are the key factors of attracting customers and building a distinguished identity in the competitive market.
The designs, inventions, recipes, formulae, customer information are all the results of our efforts and creativity. Such information getting disclosed or used in an unauthorised manner is a great loss of our efforts and hard work.
When we enter into a Non-Disclosure Agreement, our trade secrets can be protected and the receiving party is legally bound to protect and not disclose our trade secrets to the outside world. Hence, it is important to define the trade secret separately in the NDA along with the definition of confidential information.
Here’s an example clause of Coca Cola’s Agreement on Confidentiality, Non-Competition and Non-Solicitation that provides two separate definitions to distinguish between the confidential information and the trade secret.
“Confidential Information” means any data or information, other than Trade Secrets, that is valuable to The Coca-Cola Company and/or its subsidiaries and affiliates (collectively “the Company”) and not generally known to competitors of the Company or other outsiders, regardless of whether the information is in print, written, or electronic form, retained in my memory, or has been compiled or created by me, including, but not limited to, technical, financial, personnel, staffing, payroll, computer systems, marketing, advertising, merchandising, product, vendor, or customer data, or other information similar to the foregoing;
“Trade Secret” means all information, without regard to form, including, but not limited to, technical or non-technical data, a formula, a pattern, a compilation, a program, a device, a method, a technique, a drawing, a process, financial data, financial plans, product plans, distribution lists or a list of actual or potential customers, advertisers or suppliers which is not commonly known by or available to the public and which information:
(i) derives economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
(ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. Without limiting the foregoing, Trade Secret means any item of confidential information that constitutes a “trade secret(s)” under the common law or statutory law of the State of Delaware.
Difference between non-disclosure agreement and trade secret agreement
| Non-disclosure agreement | Trade secret agreement |
| A Non-Disclosure Agreement is used to protect any information like the business and marketing information, customer information and lists, inventions, information related to the intellectual property, IT related information. | A Trade Secret Agreement specifically focuses on protecting the intellectual property that comprises formula, pattern, design, method or any other confidential information that offers a competitive advantage to a company and provides value to the customers. |
| The confidential information which is to be protected under an NDA has to be defined clearly and it consists of all the information that the Party wants to protect. | The confidential information in a Trade Secret Agreement includes the inventions of the Party, eg., a unique recipe, design, idea, etc. which needs to be clearly defined so as to distinguish it from the other information. |
| The confidential information is protected until the term of the NDA or when the Party terminates the Agreement according to the termination clause. | The trade secret is protected until the Party declares that the information is no longer a trade secret or terminates the Agreement. |
| The information which is shared in any manner has to be returned or destroyed by the receiving party after the termination of the Agreement. | The Trade Secrets like a recipe or idea which is fixed in the memory of the receiving party and which cannot be destroyed must be protected by including a clause of consequences of the disclosure of such secrets. |
Conclusion
In today’s ever-increasing competitive market, the need to protect our trade secrets and confidential information has become the need of the hour. The non-disclosure agreement provides a legal framework to protect our valuable information from getting disclosed or used in an unauthorised manner.
However, it is very important to ensure that all the clauses in the NDA are well-drafted and all the obligations are clearly incorporated in the agreement. Hence, the trade secrets and confidential information must be clearly defined in the agreement to avoid any ambiguity.
Also, all the terms and conditions of the agreement must be mutually agreed upon by the parties in order to avoid any confusion or future disputes. A well-drafted Non-Disclosure Agreement is an effective way of legally protecting our confidential information and thereby protecting our unique identity in the competitive market.
References
- https://www.mondaq.com/trade-secrets/854048/non-disclosure-agreements-for-the-protection-of-business
- https://www.nolo.com/legal-encyclopedia/nondisclosure-agreements-29630.html
- https://www.everynda.com/blog/trade-secrets-v-nda-agreements/
- https://www.jdsupra.com/legalnews/trade-secrets-and-non-disclosure-95679/
- https://blog.ipleaders.in/confidentiality-agreement-clauses/
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