Signing a Non-Disclosure Agreement? Prepare for Trade Secret Litigation

Any time you sign a non-disclosure agreement, prepare to wind up in trade secret litigation.  Let me explain:  I focus on non-compete and trade secret litigation.  I have been involved in hundreds of disputes.  I see these fact patterns all the time:

Non-Disclosure Agreements & the Failed Joint Venture

Company A and Company B are in talks for a merger, acquisition or joint venture.  They sign a non-disclosure.  Company A then gives Company B  some information.  Company A is really pushing the merger, acquisition or joint venture.  Company A needs Company B.  Unfortunately, Company B is not impressed by what Company A has pitched or presented to them.  Company B has similar projects already in the works.  Company B doesn’t see any real value in proceeding forward with Company A.  Company B breaks off the talks.  Things go south.

Company A is is basically the jilted lover at this point. Company A lawyers up and decides that not only has Company B breached the NDA but – surprise – Company B also STOLE TRADE SECRETS.

Non-Disclosure Agreements & the Consultant

Another fact pattern:  Person A is a consultant.  Person A provides consulting services to Company A.  Person A would never sign a non-compete; he doesn’t need to; he’s in high demand.  But Person A does sign a non-disclosure agreement.  Person A consults with Company A for a few months then moves on.  Fast forward.  Person A is now consulting with another company in the same industry.  Company A gets wind of it and flips out.  Company A lawyers up and decides that not only as Person A breached his NDA but – surprise – Person A also STOLE TRADE SECRETS.

This happens all the time.  In these scenarios, Company A is a run-of-the-mill claim for breach of a non-disclosure agreement and dressing it up as a claim for misappropriation of trade secrets.  Strategically, that makes sense.   Additing a claim for misappropriation of trade secrets provides several benefits:

  • Another claim; another shot at winning.
  • Exemplary / punitive damages.
  • Stronger predicate for injunctive relief.

So in signing an NDA, if you’re the party that will be on the receiving end of the supposedly confidential information, then you should recognize that it may turn into trade secret litigation someday.  In light of that, consider the following:

Negotiating Non-Disclosure Agreements – The Takeaways

  • Don’t sign a boilerplate NDA:  Unless you have no other options and you need to engage on unilateral terms (because you don’t have leverage), you should never sign a boilerplate NDA.  Always negotiate specific terms.
  • Negotiate jurisdiction:  If you’ve read anything else I’ve written, you’ll know that I’m always beating the drum about the importance of forum/jurisdiction.  So here you go:  In any NDA, you should include a provision saying that any trade secret claims must be brought in federal court under the federal Defend Trade Secrets Act.  That’s the sort of provision that probably won’t ruffle any feathers during contract negotiation, but that will pay huge dividends down the road.  You’re basically preventing Company A from suing you in state court on a bogus trade secret claim.  If that doesn’t seem like a big deal, consider the following: When you defend a trade secret claim in state vs. federal court, you’re (1) less likely to get summary judgment and (2) more likely to be subject to abusive discovery tactics by which the other side will use discovery to steal YOUR trade secrets.
  • Jurisdiction Part II:  Do not give up your right to a federal venue.  Scrutinize the venue/forum selection clause.  At a minimum, the clause should say “state or federal courts of Florida” or “state or federal courts that have jurisdiction over Broward County.”  But careful.  If you sign something that says “the state and federal courts in Pasco County, FL” then you just waived federal jurisdiction because there are no federal courts in Pasco County.
  • Insist upon a broadly written prevailing party attorneys’ fees provision:  You need a broadly written provision that’s going to cover attorneys fees for the entire action.  This should include any claims arising under or related to the contract or the parties’ course of dealings.  The provision should provide for recovery of (1) actual fees paid and (2) all litigation-related costs, including all sums spent in discovery, paying third party vendors for document collection, processing production, etc.

Jonathan Pollard is a competition lawyer based in Fort Lauderdale, Florida.  He has extensive experience litigating non-compete, trade secret and unfair competition cases.  His office can be reached at 954-332-2380.