Most NDAs fail to protect trade secrets, part 6

24 Feb 23

Nearly all NDAs and confidentiality provisions exclude from the confidentiality and restricted use obligations information that is or becomes “public,” “publicly available,” or “publicly known.”

Contract drafting guru Ken Adams has given his imprimatur to the “is or becomes public” formulation. His preferred version of this exclusion is any information that is “already public when the Disclosing Party discloses it to the Recipient or becomes public (other than as a result of breach of this agreement by the Recipient) after the Disclosing Party discloses it to the Recipient.”

But is the “public” characterization the appropriate standard when it comes to the protection of trade secrets?

The Uniform Trade Secrets Act defines a trade secret as any information that “derives independent 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.”

The relevant standard is whether the information is known, not among the general public, but among those who can derive value or advantage from its use or disclosure—that is, competitors. This can be quite a narrow group indeed; much narrower than “the public.”

For example, in the recent case of Masimo Corp. v. True Wearables, Inc. (Fed. Cir. 2022), the Federal Circuit Court of Appeals affirmed the district court’s determination that an algorithm for determining optimizations for various medical devices was likely a protectable trade secret—notwithstanding that the algorithm had been the subject of a IEEE conference paper, cited 1200 times, and had been disclosed in statistics textbooks since the 1960s.

The fact that the trade secret has been revealed in some publication somewhere does not necessarily compel a finding that the information cannot maintain its status as a trade secret for a party in an entirely different field from the one to which the publication was addressed. ....

We need not decide the precise boundaries of the class of persons who could obtain economic value from the disclosure of the [algorithm]. In analogous cases, such persons have been described as those falling within the class of ‘business competitors or others to whom the information would have some economic value.’

Continuing a line of inquiry that demonstrates how most NDAs fail to adequately protect trade secrets (eg herehere, and here), the lawyers of Redline have proposed a new articulation of this confidentiality exception, along with redlined variations. Enter the fray here.