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NDAs are Important for Licensees as well as Licensors!

Proprietary information agreements, also known as confidentiality agreements or nondisclosure agreements, are essential when dealing with intellectual property. While trade secrets are often protected under state trade secret laws, which are usually based on the Uniform Trade Secrets Act (UTSA), proprietary information agreements provide an added level of protection. In the absence of an express confidentiality agreement, a confidential relationship does not exist between a licensee and licensor. Seatrax, Inc. v. Sonbeck Int’l, Inc., 200 F.3d 358 (5th Cir. 2000).

A proprietary information agreement may protect information a licensor or licensee desires to keep confidential but which may not constitute a trade secret. These agreements provide a level of contractual protection as opposed to statutory protection under the trade secret laws. Proprietary information agreements allow a party to obtain a level of protection not offered by trade secret laws. While Section 7(a) of the UTSA provides that it “displaces” all conflicting state law providing civil remedies for the misappropriation of trade secrets, Section 7(b) clearly states that it “does not affect contractual remedies, whether or not based upon misappropriation of a trade secret. . . .” See IDX Sys. Corp. v. Epic Sys. Corp. et al., 285 F.3d 581 (7th Cir. 2002) (claim for breach of nondisclosure agreement not preempted by Wisconsin UTSA); Celeritas Technologies, Ltd. v. Rockwell Int’l Corp., 150 F.3d 1354 (Fed. Cir. 1998) (California UTSA does not preempt plaintiff’s claim for breach of nondisclosure agreement). One commentator believes that if the breach of contract/nondisclosure claim simply restates a party’s obligation not to disclose trade secrets, the court may view such claim as being preempted by Section 7(a) of the UTSA. Voltchenko, Software Development Outsourcing: NDAs Go Beyond Intellectual Property Laws—But How Far? 20 Computer L. Ass’n. Bull. 98, 101 (No. 3, 2005). Thus, a proprietary information agreement can potentially prevent two customers from comparing their respective relationship with a licensor or exchanging any information that falls outside the definition of a trade secret.

Most licensors insist on using their template non-disclosure agreement arguing that it will be quicker to do so and allow the licensor to maintain uniformity in its contractual obligations. Licensors often respond to a customer’s request to sign the customer’s non-disclosure agreement by saying the approval process will take longer because legal will have to review the customer’s non-disclosure agreement and potentially negotiate its terms. An exception arises when a customer issues an RFP and the licensor must sign the licensee’s non-disclosure agreement to receive the RFP. In such situations, the licensor should insure that the customer’s non-disclosure agreement protects the licensor’s information not only during the RFP process but after the contract has been awarded. This is especially important during the RFP process as the licensor does not want the customer to disclose its confidential information including its pricing and methodologies to other bidders in the RFP process.

Practical Considerations

While it is not required that nondisclosure provisions governing the parties’ confidentiality obligations be set forth in a separate agreement from the license agreement, it is preferable to utilize a separate and distinct agreement. A separate agreement avoids any claim that the parties’ confidentiality obligations do not survive the termination of the license agreement which is especially important for the licensor. Further, distinct agreements are usually broader and more comprehensive than the confidentiality language contained in many license agreements. A distinct nondisclosure agreement may be appropriate where there will be many stages of a particular project and the parties want to have one agreement govern the relationship throughout the many stages.

To limit the potential for misappropriation of a party’s confidential information, the parties should not disclose confidential information at an initial meeting. Only after the parties have determined their interest in entering into a potential transaction should confidential information be disclosed. Doing so will reduce the amount of information disclosed and limit the risk of misappropriation or inadvertent disclosure.

Utilizing Unilateral or Bilateral Agreements

Proprietary information agreements may be unilateral or bilateral. A unilateral agreement protects only one party’s information, while a bilateral agreement would protect both parties’ information. Given that it is likely that both parties will be exchanging confidential information, it is prudent to sign a bilateral agreement. Some parties seek to limit their liability by only entering into unilateral nondisclosure agreements that protect their confidential information and not the information of the other party. They often proclaim that they do not want to receive the other party’s confidential information and that the other party must seek their consent prior to disclosing such party’s confidential information. Further, any information disclosed to such party without its consent will not be considered confidential. Often the party seeking to prohibit the disclosure of confidential information is a large company that believes that it cannot adequately protect the other party’s information. This argument is specious as each party should agree to protect and acknowledge the confidential nature of the other’s information. A more likely reason is that these companies want to avoid a claim by a smaller disclosing party that the receiving party’s intellectual property was developed from the disclosing party’s intellectual property. Prohibiting disclosure reduces any potential misappropriation claim by the disclosing party.

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