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Contractual Agreements Protecting Trade Secrets


Non-disclosure Agreement:
A non-disclosure agreement (NDA), also called a confidentiality disclosure agreement (CDA), confidentiality agreement or secrecy agreement, is a legal contract between at least two parties which outlines confidential materials the parties wish to share with one another for certain purposes, but wish to restrict from generalized use. In other words, it is a contract through which the parties agree not to disclose information covered by the agreement. An NDA creates a confidential relationship between the parties to protect any type of trade secret. As such, an NDA can protect non-public business information.

Noncompete Agreement:
A contract limiting a party from competing with a business after termination of employment or completion of a business sale. Found in some business contracts, noncompete agreements are designed to protect a business owner's investment by restricting potential competition. Generally, businesses pursue these agreements in two instances: when hiring new employees, or when purchasing an established business. The noncompete agreement is a form of restrictive covenant, a clause that adds limitations to the employment or sale contract. These agreements protect the business by restricting the other party from performing similar work for a specific period of time within a certain geographical area. First used in the nineteenth century, and common today in certain professions, noncompete agreements sometimes have an uncertain legal status. Courts do not always uphold them. Generally, courts evaluate such clauses for their reasonableness to determine whether they constitute an unfair restraint on trade.

One way to protect against the disclosure of trade secrets is by written agreement to maintain the secret nature of the information. A party could have contractual remedies available in additional to the remedies potentially available under the state’s version of the UTSA.

EXAMPLE: Consider again Ted’s potential meeting with Gnarly-Sellargesum. In order to protect himself, Ted might condition the meeting on Gnarly-Sellargesum’s willingness to sign a non-disclosure agreement. Such agreements are basically promises not to disclose information learned for some specific period of time. To the extent that Ted could enforce this contract in a court of law, Gnarly-Sellargesum would be prevented from selling Ted’s idea to another company.

But Gnarly-Sellargesum is a motorcycle manufacturer and would probably prefer to make the new motorcycles itself rather than sell the idea. In this case the nondisclosure agreement would not help Ted. Instead, he would need some sort of noncompete agreement (also called a covenant not to compete). This would bind Gnarly-Sellargesum to the promise that if they do not go into business with Ted they would not use Ted’s plans to build a competing product. Again, such an agreement would bind the parties for a limited time.

Most often, contracts will contain both types of agreements.

EXAMPLE: Years before coming up with his design, Ted had gone to work in a motorcycle shop owned by Josh. One condition of employment was signing an agreement not to disclose trade secrets to others and not to use any such trade secrets to complete with Josh during employment and for 2 years following employment.

As noted earlier, protecting secrets is a balancing act just like those involved in other areas of intellectual property law. We want to protect Josh from employees who take his ideas and use them to their own advantage (whether by selling them to others or incorporating them into their own businesses). That said, we do not want to allow Josh to prevent employees from moving onward and upward. Preventing employees from using what they’ve learned on the job might make it impossible to effectively grow in their field. Similarly, preventing them from using information for a long period of time might be considered unfair. Therefore, in order to be enforceable in most states, these agreements must be reasonable in their scope.

EXAMPLE: Lowell works for an education services company which asks him to sign a noncompete agreement. The agreement would prevent him from competing with the company for one year following termination of employment within 100 miles of the company’s office. Because this would prevent Lowell from earning a living in his chosen field without moving out of state, a court is likely to refuse to enforce the covenant not to compete as being unreasonable.