Enforceable Nondisclosure Agreements: Protecting Trade ...media.straffordpub.com/products/enforceable... · 9.08.2016 · Non-Disclosure Agreements—Common Pitfalls Define the Deal

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Presenting a live 90-minute webinar with interactive Q&A

Enforceable Nondisclosure Agreements:

Protecting Trade Secrets and Other

Confidential Business Information

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, AUGUST 9, 2016

Whitney Holmes, Partner, Dorsey & Whitney, Denver

Katie Pfeifer, Of Counsel, Dorsey & Whitney, Minneapolis

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Avoiding Common Pitfalls

in Drafting Non-Disclosure Agreements

Whitney Holmes, [email protected]

Katie Pfeifer, [email protected]

Dorsey & Whitney LLP

August 9, 2016

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mailto:[email protected]

mailto:[email protected]

Non-Disclosure Agreements—Common

Pitfalls CAVEAT

• Presentation focuses on commercial applications

– Preliminary to transaction

• Mergers & Acquisitions

• Public offerings

– Throughout the transaction

• Credit Agreements

• Private placements

• No focus on employment agreements or covenants not to compete

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Pitfalls Fundamentals

Non-Disclosure Agreements (NDAs) a/k/a Confidentiality Agreements:

• Critical component of business relationships in the information age

• Often a prerequisite to opening discussions

• Can also be a critical component of ongoing relationships

• Invariably a balancing act

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Pitfalls Fundamentals

NDAs frequently coupled with:

• Letter of Intent/Auction Procedures

• Debt Instruments and Offering Documents

• Non-Circumvention Agreement

• Non-Reverse Engineering Agreement

• Non-Competition Agreement

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Non-Disclosure Agreements—Common Pitfalls

Practice Pointer: The Principal Principle

Overarching Rule for Drafting NDAs:

• Draft NDAs as carefully as you would a real estate deal, or understand the risks in failing to do so

• There is limited interpretive case law on NDAs

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Pitfalls Top Pitfalls

# 1 – Imprecision

# 2 – Failing to Define the Deal

# 3 – Beware Subjectivity

# 4 – To Mark or Not to Mark

# 5 – The Risks of “Legally Required Disclosure”

# 6 – Where’s the Remedy?

# 7 – Non-Use and Fiduciary Duties

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Pitfalls Imprecision

#1 – Imprecision

• A primary issue is defining the protected data

• What is, and is not, “Confidential”?

– Trade Secrets

– Proprietary Information

– Important Data

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Pitfalls Imprecision (con’t)

Sources Defining “Trade Secrets”

• Federal Law – Defend Trade Secrets Act of 2016 (DTSA), which operates in parallel with state law (no preemption)

• State Law – Uniform Trade Secrets Act (UTSA)

• Common Law

• Terms of the NDA (Private Ordering)

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Reliance on statutes and common law can be risky

• UTSA

– Generally requires plaintiff to plead and prove damages or unjust enrichment

– Although UTSA provides for equitable remedies (injunction) courts avoid equitable remedies in the absence of harm

• DTSA

– Also provides for injunctive remedies, but too soon to know whether courts will be more likely to grant injunctions in the absence of proven damages

– Significant preconditions and limitations apply to the availability of injunctive remedies (can’t prevent employment, evidence of threatened misappropriation required in some cases)

• Other state law claims (breach of contract or duty of loyalty, for example) also frequently require proof of damages

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Statutory Example – Colorado

• Colorado is a UTSA state

• Colorado defines “trade secret” by statute as “the whole or any portion or phrase of any scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession which is secret and of value.” Colo. Rev. Stat. § 7-74-102.

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The Colorado statute further provides that, in order for information to be deemed a “trade secret,” the owner “must have taken measures to prevent the secret from becoming available to persons other than those selected by the owner to have access thereto for limited purposes.” Colo. Rev. Stat. § 7-74-102.

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• Similarly, the Texas Supreme Court has set out six non-exclusive factors for determining whether something is a “trade secret”:

(1) degree known outside the business;

(2) degree known by employees/others in the business;

(3) measures taken to safeguard the secrecy;

(4) value of the information to owner and rivals;

(5) effort or money spent to develop; and

(6) effort needed to acquire the information.

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• NDAs can be broader than common or statutory law

• By contract you can agree to protect data that is not otherwise protected

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• Can default to everything being confidential: “All information and data, received by RECEIVING PARTY (“RP”) from DISCLOSING PARTY (“DP”) in any form or format, is conclusively deemed to be Confidential Information, unless expressly excluded from Confidential Information by the specific terms of this Agreement.”

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• Key focus of a court is determining intent of parties

• Consider an overt statement of intent

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Practice Pointer: Why Are We Here?

• Draft for “Why Are We Here?”: “The Parties intend for this NDA to protect from disclosure all the Confidential data, in any and every form, that will be delivered to Recipient, and any interpretation of this NDA is to be consistent with this clearly stated mutual intent.”

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Pitfalls Define the Deal

#2 – Define the Deal

• Typical language is that “Protected” or “Confidential” data is limited to evaluation of the “Transaction” or for a “Business Purpose”

• But what do these type of terms mean?

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Pitfalls Define the Deal (con’t)

• Martin Marietta Materials, Inc. v. Vulcan Materials Co., 56 A.3d 1072 (Del. Ch. 2012), aff’d 68 A.3d 1208 (Del. 2012)

– “Pre-merger discussions” NDA

– Merger under discussion was one of equals

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• Operative NDA language: provided that protected information was to be used “solely for the purposes of evaluating a Transaction”

– Defined Transaction as “a possible business combination transaction … between [the parties]”

• Ultimately, MM launched a hostile take-over bid

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• Point of contention: What does “between” mean

– A “business combination between” the parties or

– A business combination “between the parties”

• Chancery Court: both readings plausible, so ambiguous

• Relied upon extrinsic evidence regarding drafting changes to the NDA

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• First draft by MM used a former NDA for an asset swap

• Every MM change made NDA stronger (broader scope/less use)

• MM made changes to protect from disclosure that discussions had occurred (vs. “are taking place”) in case discussions terminated without any agreed-upon Transaction

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• MM changed:

– “transaction involving [MM] and Vulcan” to “transaction between [MM] and Vulcan”

• Court: “between” necessitated MUTUAL action by the parties – not HOSTILE

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Mabrey v. SandStream, Inc., 124 S.W.3d 302 (Tex. Ct. App. 2003):

• NDA permitted Mabrey (the Receiving Party) to enter “similar” investments

– But further stated that “Evaluation Material” would be reviewed and used by Mabrey for the “exclusive” purpose of analysing his proposed investment with SandStream (the Disclosing Party), “and not for any other purpose (including any use which could reasonably result in a competitive disadvantage to the disclosing party [SandStream])”

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– Mabrey used the “Evaluation Material” to decide if he should invest in a venture that would compete with SandStream

– Court concluded that Mabrey could not use confidential material in deciding to invest in a company that was competitive with SandStream

• Goodrich Capital, LLC v. Vector Capital Corp., 11 Civ. 9247 (S.D.N.Y. June 26, 2012)

• Depomed, Inc. v. Horizon Pharma, PLC, No. 1:15-CV-283834 (Cal. Super. Ct. Nov. 19, 2015)

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Practice Pointer: Consider Restricting Use

Consider restricting “use”:

• May limit recipient’s ability to pursue an alternative opportunity after receiving confidential information under an NDA

• Examples:

– “no use competitive with Disclosing Party”

– “no use that is detrimental or adverse” to Disclosing Party

– “no use other than [defined deal]”

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Pitfalls Beware Subjectivity

#3 – Beware Subjectivity

• Common NDA Provision: “Recipient will keep the Data as secure and confidential as the recipient keeps and protects its own confidential data.”

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Pitfalls Beware Subjectivity (con’t)

• This is NO standard

• Ask yourself: Will this support or defeat your client’s use?

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Pitfalls Beware Subjectivity (con’t)

• Objective standards = more protection:

– Commercially reasonable manner

– Standards and practices of the relevant industry

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Practice Pointer: Limitations and Requirements

Other provisions to consider:

• Disclosure only to those who “require” the information

• Recipients must be informed of terms of NDA

• Recipients must sign an acknowledgement of confidentiality

Balancing act: enabling the transaction or burdening it?

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Pitfalls To Mark or Not to Mark

#4 – To Mark or Not to Mark

• Typical Provision: “All Confidential Information will be marked as confidential.”

– Burden/risk of failure to mark on producing party

• Convolve, Inc. v. Compaq Computer Corp., 527 Fed. Appx. 910 (Fed. Cir. 2013): Failure to mark as confidential lead to waiver of trade secret protection

– Also, tracking Confidential Data to be returned can be a nightmare

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Pitfalls To Mark or Not to Mark (con’t)

• Some alternatives:

– Everything delivered is confidential – unless specifically excluded by the NDA “All information and data, received by RP from DP in any form or format, is conclusively deemed to be Confidential Information, unless expressly excluded from Confidential Information by the specific terms of this Agreement.”

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Pitfalls To Mark or Not to Mark (con’t)

– Add a post-delivery window for objection to confidentiality, otherwise deemed confidential

– Add a post-delivery requirement to be applied to information delivered orally: such information is not protected UNLESS written designation received within __ days of delivery

Back to balancing: certainty and protection or practical reality?

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Pitfalls Practice Pointer: Data Rooms

• Data Rooms

– In larger deals, used by disclosing party to track activity by receiving party

– Can also be used by receiving party to track who has seen what in order to fulfill “return obligation” and in case litigation ensues

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Pitfalls Legally Required Disclosure

#5 – Risks of “Legally Required Disclosure”

Typical Exception to Confidentiality:

“Except to the extent disclosure is required by law or legal process.”

Back to Martin Marietta

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Legally Required Disclosure (con’t)

• During Proxy Fight, MM disclosed information received pursuant to NDA in

– SEC filings;

– investor conference calls;

– press releases; and

– communications with journalists.

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• Court: “Legally required” exception only applied to a response to an external legal demand

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• MM’s violations:

– No advance notice of the disclosure

– More was disclosed than the law required

– Disclosure was used to wage a public relations campaign to sell the deal to Vulcan’s shareholders

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Chancery Court:

• “[MM] could not take discretionary action that had the effect of subjecting it to a legal requirement to disclose”

• “[MM] is seeking to read the NDA in precisely the way that its general counsel feared that the initial draft of the NDA would allow”

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Context counts:

• Recipients that are private companies generally can accept narrower “required by law” exception (examples):

– Disclosure required by a response to a legal process initiated by an external source

– Responses to discovery in legal proceedings, subpoenas, civil investigative demands or other similar process

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• Recipients that are public companies need to be able to meet their disclosure obligations under securities laws, but do not need to be able to voluntarily trigger disclosure obligations

• Direct responses to obligations of disclosure required by law as a result of an external legal demand, such as an unprovoked disclosure obligation owed by a public entity, and not as a result of elective action or provocation of the receiving party

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• Further examples:

– Any obligation to disclose that arises from the discretionary act of the RP is not ‘required by law’ as used in this Agreement.

– Any disclosure required by law shall be made only to the extent specifically required by law, and not otherwise.

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Practice Pointer: Always Consider the Context

Context is a factor to consider in drafting various sections of the NDA:

• Definition of confidential information

• Scope of non-disclosure obligation

• Whether and how to mark confidential information

• Scope of exceptions, including legally required disclosure

• Availability and scope of remedies

Context informs balancing!

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Pitfalls Where’s the Remedy?

#6 – Where’s the Remedy?

• Reality: talks fall apart and information is sometimes used inappropriately or falls into the wrong hands

• Be Proactive: Plan on the relief!

• Make it easier to get quick relief — Injunction

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Pitfalls Where’s the Remedy? (con’t)

• Add provisions that provide the elements needed to get injunctive relief:

– Acknowledgement of irreparable harm

– Acknowledgement of no adequate remedy at law

– Waiver of requirement to secure or post a bond or other security

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Practice Pointer: Other Potential Provisions

• Venue selection

– Courts treat a NDA admission of irreparable harm differently across jurisdictions

• Applicable jurisdiction / law

• Stipulations of proof

• Represented by Competent Counsel

• Integration Clause

• No reliance on other Reps or Warranties

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Pitfalls Non-Use and Fiduciary Duties

#7 – Non-Use and Fiduciary Duties

• SEC v. Cuban, 634 F. Supp.2d 713 (N.D. Tex. 2009), rev’d and vacated on other grounds 620 F.3d 551 (5th Cir. 2010)

– District Court: a fiduciary duty can arise from an agreement imposing the obligation of confidentiality, but only if there is also an obligation not to use that confidential information for personal gain

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Pitfalls Non-Use and Fiduciary Duties

(con’t) • SEC v. Cuban

– Fifth Circuit: Reversed on a conflicting evaluation of the evidence

– The holding on the presence of a fiduciary duty was not overturned

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Non-Use and Fiduciary Duties (con’t)

• Fiduciary Duty

– Establishes clear duty to protect the beneficiary/Disclosing Party

– Fiduciary must act against its OWN interests to protect beneficiary

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Non-Use and Fiduciary Duties (con’t)

• Fiduciary Duty

– Agreement is interpreted to protect the beneficiary

– Makes injunctive relief much clearer

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Practice Pointer: What’s My Context?

• Fiduciary duty is better for the disclosing party

• Mutual NDAs / mutual duties?

– Mutuality should be considered in context, and doesn’t always make sense

– For example a public company entering into an NDA with a private company or individual

– Remember the Principal Principle: Treat the NDA like a real deal … it is

– Provisions need to make sense in context

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Pitfalls Pulling It All Together

SUMMARY:

• Define the transaction carefully

• Define “confidential information” to fit the circumstances

• Consider restricting use

• Make relief easier to get when things go wrong

• Consider the context throughout

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Non-Disclosure Agreements—

Common Pitfalls Questions?

Whitney Holmes (Denver, Colorado) Katie Pfeifer (Minneapolis, Minnesota)

Dorsey & Whitney LLP

With contribution from D. Hull Youngblood, Jr. The Ford Firm (San Antonio, Texas)

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