That Nondisclosure Agreement Just Cost You Your Business

There are a lot of nondisclosures signed every day.  How many are read before they are signed?  Not all of them.  When they are read, how often do the readers think through how the terms of the nondisclosure relate to their business practices?  Apparently not often enough.

Here is a cautionary tale.

Convolve, Inc. entered into a nondisclosure agreement with Compaq (remember them?).  Convolve entered into a similar nondisclosure agreement with Seagate.  Each nondisclosure included a provision that disclosed information would be considered confidential only if the information was:

1.         marked as confidential at the time of disclosure; or

2.         if unmarked at the time of disclosure, was treated as confidential at the time of disclosure and subsequently identified in writing as confidential.

Convolve made disclosures of Convolve confidential information without meeting either of those conditions.  Convolve sued to keep the information it disclosed confidential.  The court said:

1.         Convolve’s failure to meet either of the two conditions meant the nondisclosure agreement did not apply to the Convolve’s information; and

 2.         as a result that information was no longer a Convolve trade secret.

Very unfortunate for Convolve. 

Other courts in other places, under different circumstances have come to the opposite conclusion.  But why take the chance?

Here’s some additional language that might have saved Convolve:

or that the receiving party knows, or should reasonably be expected to know, is confidential to the disclosing party

The kind of thing that happened in the Convolve case can happen for a lot of reasons.  Sometimes the people reading or drafting the nondisclosure agreement don’t communicate the requirements to the people making the disclosures.  Another is the unthinking use of form agreements.  (Don’t get me started about people who get their legal forms from the Interwebs.)    

Finally, there are lots of other pitfalls with nondisclosure agreements.  In particular, watch out for limitations of liability.  Be careful out there.

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