Thursday, October 2, 2014

No Trade Secret For You: Courts Enforcing Written Notice Provisions in Non-disclosure Agreements to Deny Trade Secrets Claims

It's been a slow time in the Eleventh Circuit the past year for interesting decisions in intellectual property cases.  However, a couple of recent trade secrets opinions elsewhere have shown that courts are frowning on trades secrets cases where a non-disclosure agreement ("NDA") requires the party disclosing the alleged secret to give written notification of the secrets that have been disclosed and the disclosing party fails to give notice.  In both cases the plaintiffs claimed that the parties had "modified" the contractual requirement to notify the recipient of what exactly the trade secrets were that had been passed on in writing by their course of conduct, essentially claiming that everybody understood that what they were doing was supposed to be confidential.  In both cases the courts threw out that argument, because the written notice requirement in the NDA actually set forth the understanding of the parties.

The first case, Convolve, Inc. v. Compaq Computer Corp., 527 Fed.Appx. 910 (Fed. Cir. 2013) is important because it comes from the Federal Circuit, a court specializing in patent appeals and related IP claims, among other things.  There were patent infringement claims in the case that will not be discussed in this post.  Convolve is a company that specialized in technology involved in making computer disk drives locate files faster and more efficiently.  Convolve had been involved in discussions with  co-defendant Seagate Technology about licensing the technology to the defendants.  Seagate is a manufacturer of disk drives used in Compaq computers.  The parties executed an NDA that, among other things, required the party disclosing the purported trade secret orally to designate it confidential at the time of the disclosure and to give written notice within 20 days of disclosure clearly providing notice of what specific information was confidential.  Convolve had three meetings with Seagate to present and discuss the technology.   After the first meeting, both parties acknowledged in writing that any oral disclosure at the meeting was covered by the NDA.  However, Convolve neglected to do anything about the other two meetings, giving no written notice that anything was confidential or seeking Seagate's agreement of any confidentiality.  The deal never went through, and later Convolve sued Seagate and Compaq for allegedly taking and using its trade secrets and infringing two patents.

The district court granted summary judgment to the defendants on the trade secrets claims, finding that even if the supposed trade secrets had been disclosed at the second and third meetings, Convolve did not send a confirmatory memorandum following the presentations as required by the NDA.  On appeal Convolve admitted that it had not given written notice of the confidentiality under the NDA of anything said or seen at the meeting in question.  However, it argued that the parties understood that all of their mutual disclosures were confidential, and thus through the course of their conduct Convolve was not required to send a follow-up memorandum after the meeting in question.  The court rejected that argument, stating that it did not matter what the subjective belief of the plaintiff was about what was understood, there was a contract and Convolve had not followed it. 

This is a common position taken by plaintiffs in trade secret cases where they face the hurdle of an NDA requiring written notice, where no evidence of written notice exists.  Facing the hurdle of a contractual bar to any claims,  the plaintiff has to find some way around its failure to follow the contract.  Therefore, plaintiffs will commonly tout an argument of modification, waiver or estoppel based on some conduct among the parties during the transaction.  This usually involves a witness for the plaintiff claiming that they told the other side everything was confidential and that someone agreed verbally, or something to that effect.  This "he said, she said" testimony is designed to thwart summary judgment and get to a jury with some or all trade secret claims intact.

The second case, Big Vision Private Ltd. v. E.I. DuPont De Nemours, 1 F.Supp.3d 224 (S.D.N.Y. 2014), involved a similar fact pattern.  In that case the plaintiff Big Vision had entered into a possible development deal with DuPont involving a technology for digital printing that would allow banners to be recyclable.  Again, several meetings and trials of the product took place involving the two companies. The deal did not work out but ultimately DuPont produced such recyclable banners and Big Vision claimed that its technology had been used in violation of the NDA, among other claims.  Big Vision had signed an NDA requiring it to notify DuPont of any trade secrets in order to protect them from use or dissemination.  The court found that Big Vision had failed to properly notify DuPont under the contract. 

Just as in Convolve, the plaintiff tried to argue that the course of conduct of the parties had modified the NDA so that DuPont understood what trade secrets Big Vision wanted to keep secret and that DuPont had misappropriated.  The court rejected the argument, specifically citing the Convolve case. The fact that the plaintiff had a subjective belief that everything was confidential and that DuPont understood that would not be a breach of the agreement, if even DuPont had used secret material, because Big Vision did not follow the requirements of the NDA by communicating in writing what the specific information was that Big Vision wanted to protect. 

These cases are important because so many trade secret plaintiffs try a "kitchen sink" approach where two companies do business together if things do not work out and the "recipient" goes on to produce a product similar to what the two entities worked on.  It is important for a company that signs an NDA requiring written notice by the disclosing party to actually follow the contract and give the proper notice in order to protect itself.  For a company supposedly receiving secret information, it is important to have an airtight NDA that requires that any kind of exposure to information, written or verbal requires written notice so that the recipient is fully informed, and in case of a dispute it is not subject to the approach that "everyone knew it was confidential."  In cases where these written agreements exist and have not been followed, courts must be willing to grant summary judgment where it is clear that the disclosing party has ignored the agreement.