The importance of correctly worded NDAs

A trade secret is any process, method or other information that is kept reasonably secret and if known to a competitor, would give that competitor an advantage. In regular commerce, you often have to disclose trade secrets to develop, team, expand, or otherwise commercialize your products. It is critical that in making that disclosure, you obtain a properly worded Non Disclosure Agreement – and a recent case makes this point even more clear.

In Nova Chemicals, Inc. v. Sekisui Plastics Co. LTD. a trade secret holder licensed technology, but included a clause in the agreement that the obligation to keep the information disclosed confidential would expire in a defined period. The court held not only that the trade secret expired as between the parties on the date the obligation terminated, but also discussed that the trade secret itself was destroyed upon entering into the agreement defining the period when its confidentiality would terminate. This can cause grave damage to a company that relies on trade secrets. For example, trade secrets are often the basis of many employee restrictive covenants, and most confidentiality agreements except out “publicly known” information. Thus one small mistake can cause a catastrophic loss of intellectual property rights, as it did in the Nova case.

The Nova case also is a painful reminder that if a license agreement is not worded correctly, a license may last in perpetuity without a corresponding royalty payment (the Nova case noted that the parties can agree to continue making royalty payments even on expired trade secrets, but that using language that a license is “fully paid up” can be ambiguous and result in a determination that there was not intent to continue royalties after expiration of the validity of the intellectual property). Please contact Mike Oliver at oliver@bowie-jensen.com if you have questions about this issue.