Non-Disclosure Agreements In California
By: Richard E. Korb, Esq.[1] ©2011
An inventor has a great idea worth millions that he wishes to sell to a company, but the inventor wants to make sure the company won’t use it without his permission before discussing his idea with the company. An employer wants to hire a new employee, but wants to ensure that the new employee won’t give company secrets to a competitor when that employee leaves. A business wants to give journalists information on a new product for marketing purposes, but wants that information to be publicly released at different time intervals to generate public excitement for that product. If you have ever been in any of these situations, a Non-Disclosure Agreement, or NDA, might be a viable method of ensuring confidentiality.
What is an NDA?
An NDA is a contract between two or more parties, individuals or organizations, outlining information, materials or knowledge the parties wish to share with each other, but want to restrict or deny to third parties. An NDA, as discussed above, is commonly used in business relationships to ensure the silence of certain parties with regards to certain information. The information can include, but is not limited to: financial information, surveys, lab tests/results, business/marketing strategies and client databases. Breaking an NDA can result in civil suits with punitive damages rewarded to the injured party.
An NDA can be mutual; all parties are restricted by the agreement, or one-way: only certain parties are prohibited from releasing information. Mutual NDA are generally used when two or more parties, usually businesses in a mutual NDA, wish to begin a business venture or partnership. One-way NDA are typically used in employer-employee relationships or with company employment of outside contractors.
In California, the California Civil Code Section 3426-3426.11, or Uniform Trade Secrets Act, governs what occurs when a non-disclosure agreement is broken.
Possible Defenses if Accused of Breaking an NDA
Breaking an NDA can result in a number of legal claims against you. The most common legal claims put forth if you are suspected of breaking an NDA are:
1) Breach of Contract, infringing a written promise you made.
2) Misappropriation of Trade Secrets, acquiring company information through illegal methods, such as theft or fraud.
3) Conversion, depriving someone of their personal property without their consent.
4) Copyright infringement, using legally protected information for your own benefit
5) Patent infringement, using information without legal authorization
6) Breach of Fiduciary Duty, breaking the trust of a business relationship which requires a high amount of trust, such as the relationship between executive officers and a board of directors.
The first and most common defense is to deny that a breach of NDA has ever occurred. Many non-disclosure agreements are very specific about who, what and when information can be shared with outside parties. This is especially true of agreements involving individual inventors and large companies, as most companies will not sign an NDA with an individual inventor if the company believes there is a strong chance they would be on the receiving end of a legal claim.
This defense may work if one of the following is missing, excluded or expired: parties in the agreement, definition of what is confidential and what is permissible to use, what information or materials are confidential, how long the confidential information is to remain secret, and when the NDA itself ends. If, for example, the NDA does not list what information is deemed confidential, the agreement may be deemed too vague to be valid. Likewise, “confidential” information which is already publicly available is not covered by an NDA, and if it was, that portion of the NDA would be ruled as invalid.
It is also common for businesses to use non-disclosure agreements to give themselves ownership of products and inventions their employees develop while an employee is working for their employer. In the case of Armorlite Lens Co. v. Campbell (2007), however, California courts ruled that such provisions in NDA contracts must be limited. The provision of Mr. Campbell’s NDA stated that:
“in case an invention is described in a patent application or is disclosed to third parties by me within one (1) year after terminating my employment with APPLIED, it is to be presumed that the invention was conceived or made during the period of my employment for APPLIED, and the invention will be assigned to APPLIED as provided by the Agreement, provided it relates to my work with APPLIED or any of its subsidiaries.”
The court ruled that this clause was too board to be enforceable, as the clause could have easily been applied to the former employee’s work which involved public information, as well as the confidential information listed in the rest of Campbell’s NDA. The inventions the clause tried to retain ownership of had to be specifically related to the confidential information listed in the agreement, or the contract would inhibit Campbell’s right to mobility of employment.
Another defense is finding an exception to the NDA. Sometimes the NDA itself lists what is not covered by the NDA. Other times, outside factors may compel a party out of silence. If disclosure is required by law, such as a subpoena or court order, the contract is not considered violated. As such, time lines or time frames are a crucial part of a case over breach of NDA. However, such exceptions tend to be obvious, and so are rarely used as a serious defense against a claim.
Companies are often seriously threatened when they suspect company secrets might become available to parties they don’t want discovering their secrets. However, the damages to the company must still be real for an NDA to be violated. When Mark Hurd, former CEO of Hewlett-Packard, a major technology company, attempted to accept a new job with one of Hewlett’s competitors, Hurd’s former company sued him for breaching his NDA in an attempt to keep him from that job.
Hewlett’s argument was that Mark Hurd’s breach of NDA was a prime example of inevitable disclosure: Mr. Hurd could not perform his new job without revealing Hewlett’s business secrets to Hewlett’s competitor. Hence, the breach of Hurd’s NDA will be unavoidable as long as Mark Hurd performed his new job. As written in the Uniform Trade Secrets Act, “a complainant may recover damages for the actual loss caused by misappropriation.” Hurd’s argument was that under California’s Business and Professions Code Section 16600, employees have the right to work wherever they please and that this right has priority over a businesses right to confidential information if the information wasn’t critical. The court ruled in favor of Hurd, deciding that the Uniform Trade Secrets Act could only apply if Hewlett-Packard could prove there was an actual loss, not a hypothetical one.
Conclusion
A non-disclosure agreement is a contract between two or more parties prohibiting one or more of the signing parties from sharing information with outside parties. Most non-disclosure agreements in California are regulated by the Uniform Trade Secrets Act. Violating an NDA can result in a number of legal claims filed against you, but in order for the claims to succeed, the plaintiffs have to prove that: the violation was within the confines of the NDA contract and that other statues, contracts or rights are not violated by the enforcement of the NDA.
Defending against, or prosecuting an NDA violation claim may seem simple, but like most contract law, it can become very complicated depending on the language of the contract and outside factors. If you have any questions, please contact business attorney Richard Korb for a free consultation and further advice at 510-524-0903.
[1] RICHARD E. KORB is a seasoned attorney with 30 years of business, IP and real estate litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, bankruptcy and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2011 Richard Korb
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