The Requirement of Secrecy and Confidentiality Agreements
“About the author: Scott Lesowitz is a cum laude graduated of Harvard Law School and a former Assistant U.S. Attorney. His practice is located in Beverly Hills, California.His e-mail address is scott@syversonlaw.com.”
This article addresses two issues regarding the secrecy requirement of trade secret law. The first is the importance of confidentiality or nondisclosure (NDA) agreements. The second is at what point there are too many people who know the contents of information for the information to be deemed a legally protectable trade secret. The law will not provide trade secret protection to information simply because a business believes that the information is proprietary.
Unsurprisingly, for information to constitute a trade secret, there must be secrecy. Under California’s version of the Uniform Trade Secrets Act, for information to be a trade secret, it must not be “generally known” and must be “the subject of efforts that are reasonable under the circumstances to maintain its secrecy.” California Civil Code, § 3426.1(d).
Information need not be a complete secret in order to receive trade secret protections. Religious Technology Center v. Netcom On-Line Communication Services, Inc., 923 F.Supp. 1231 (N.D. Cal. 1995) (finding religious documents to be trade secrets even though they had been distributed to thousands of parishioners). There will often be people and companies who need to know the trade secret such as employees, third-party vendors, and service providers. If complete secrecy were required, it would often be impracticable to effectively use a trade secret.
Confidentiality or Nondisclosure (NDA) Agreements
I begin this section with a caveat: it is important for trade secret holders to obtain confidentiality agreements with employees, vendors, service providers, and anyone else who will necessarily use or come into contact with confidential or proprietary information. In trade secret lawsuits, courts love confidentiality agreements and NDAs. Courts place great weight on whether confidentiality agreements and NDAs were used in determining whether reasonable efforts were made to maintain secrecy.
That said, the ultimate question is whether the recipient of the trade secret knew or should have known that the disclosure was made in confidence. A confidentiality agreement or NDA is not a prerequisite for a trade secret misappropriation lawsuit. (Even a simple e-mail informing a recipient that the information must be handled in a confidential manner is helpful.) Through the nature of a transaction, relationship, or generally understood expectations, there could be an implicit agreement to maintain secrecy. Direct Technologies, LLC v. Electronic Arts, Inc., 836 F.3d 1059, 1070-71 (9th Cir. 2016). For example, it may be deemed obvious that an employee knew that information was confidential and proprietary. Alex Foods, Inc. v. Metcalfe, 137 Cal.App.2d 415, 426-27 (1955).
Also, remember that documents containing trade secrets may be given to others through simple carelessness. Thus, if possible, documents or files should be labeled “confidential.” This puts the recipient on notice of confidentiality and makes it more likely secrecy is maintained. Also, on a practical level, people are reminded not to disseminate documents when they are marked as “confidential.” Trade secret misappropriation often does not come from nefarious trade secret theft. It oftens come from events such as someone forwarding an e-mail attachment without thought.
The Number of People who Know the Secret
Allowing access of proprietary information to too many people may lead a court to find that there were not reasonable efforts to maintain the information’s secrecy or that the information became generally known in the relevant industry or community. Servicetrends, Inc. v. Siemens Med. Sys., Inc., 870 F.Supp. 1042, 1074 (N.D.Ga.1994) (holding that information was not kept secret, despite being marked “proprietary data” and “confidential,” because the information was widely distributed to customers); Montgomery County Ass'n of Realtors, Inc. v. Realty Photo Master Corp.. 878 F.Supp. 804 (D.Md.1995) (finding the MLS real estate database was too widely distributed within the industry and to potential real estate buyers to constitute a trade secret).
That said, it seems that if strong steps are taken to put even a large number of people on notice, courts are likely to find the existence of a trade secret. E.g., Religious Technology Center v. Netcom On-Line Communication Services, Inc., 923 F.Supp. 1231 (N.D. Cal. 1995) (cited above, religious documents distributed to thousands of parishioners found to be trade secrets). Once again, courts love confidentiality agreements and NDAs.