Trade Secret and Contract Law

The Federal Circuit has recently articulated the position that a contractual agreement to transfer otherwise secret information will override trade secret protections that may be in place. The recent case on-point was Convolve, Inc. v. Compaq Computer Corp., No. 2012-1074, 2013 WL 3285331 (Fed. Cir. July 1, 2013), reaches back more than a decade to 1998, when MIT and Convolve sued a group of defendants for both trade secret misappropriation and infringement of Convolve’s U.S. Patent Nos. 6,314,473 and 4,916,635. The dispute between Convolve and Compaq began when they effectuated a non-disclosure agreement (NDA) to facilitate sharing of their respective confidential information. After the NDA was in place, several meetings took place where Convolve presented on its input shaping technology and the applications of the technology. The NDA required that the disclosed information must be (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later confirmed in writing as confidential. During two of the four presentations, Convolve failed to acknowledge in writing after the meeting that any unmarked oral disclosure of confidential information was covered by the NDA.

The Federal Circuit, on appeal, concluded that Seagate did not breach the NDA to the extent it may have appropriated the information disclosed because the information was disclosed without the mandatory follow-up memorandum pursuant to the NDA. Convolve argued that, even if it failed to disclose or confirm the confidentiality of its trade secrets in writing, its tort claims should succeed. It pled misappropriation under the California Uniform Trade Secrets Act (“CUTSA”), which does not require trade secrets to be identified as such in writing.

The Federal Circuit found that the written NDA overrode any other duty of confidentiality that may have existed between the parties. Since the parties agreed on the limits of their confidential relationship through the NDA, one party cannot unilaterally alter or impose new confidentially obligations on the other party by implication. Further, CUTSA states that misappropriation occurs when a trade secret is acquired under circumstances giving rise to a duty to maintain its secrecy. Such duty never arose in this case since Convolve disclosed its alleged trade secrets to Seagate pursuant to the provisions of the NDA but failed to follow procedural steps to protect its trade secrets. The agreement stated that any confidential material or presentations must be particularly identified as confidential and Convolve was unable to show that it followed the procedures required by the NDA.

Accordingly, a closer review of agreements as they impact transfer of confidential and trade secreted materials, procedural implementation concerning such agreements and advice of counsel in this regard may prevent such undesirable outcomes.