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Trading Secrets A Law Blog on Trade Secrets, Non-Competes, and Computer Fraud

Words Matter: Your Non-Disclosure Agreement May Trump Governing Trade Secret Law

Posted in Practice & Procedure, Trade Secrets

Reaching back over a decade, the Convolve and MIT v. Compaq and Seagate litigation involves a dispute between MIT, the owner of intellectual property related to signal haping technology, and Compaq and Seagate. 

While the dispute involves many facets, and the Federal Circuit’s most recent ruling included a reversal of a non-infirngement finding, notable for current purposes is the portion of the decision holding that the parties’ negotiated non-disclosure language served to override any governing state law related to trade secret misappropriation.

Factual Background

Convolve, through its founder Dr. Neil Singer (then a graduate student at MIT), developed technology to move equipment quickly while minimizing the resultant vibrations.  Through its 2000 lawsuit, Convolve alleges that, in 1998, Convolve and Compaq engaged in license negotiations related to the hard drive technology developed by Dr. Singer’s research, entering into a non-disclosure agreement (”NDA”) to facilitate those discussions.  Opinion, pg. 8.  The agreement specifically identified the confidential information as “storage peripheral market information and technology information” from Compaq and “algorithims and processes for enhancing positioning systems” from Convolve.  The NDA further states 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 designated confidential in a written memorandum summarizing and identifying the confidential information.  Id. at * 8-9.  Convolve entered into a similar agreement, with simialr terms, with Seagate.  Id. at 9.  The parties engaged in several meetings and negotiations.  During the first meeting, the information provided by Convolve was clearly identified as confidential, and a subsequent memorandum was sent confirming that all information discussed was confidential.  However, on two subsequent meetings, Convolve did not state in writing that any of the disclosures were confidential.  Id. at *10.

The Federal Circuit’s Ruling

As required under California law, Convolve identified numerous trade secrets, 15 of which remained at issue at the time of the lower court’s summary judgment ruling.  Id. at * 11.  The lower court ultimatley held that several of the claim trade secrets were revealed during these subsequent meetings, and, therefore, Convolve could not seek trade secret protection.  Id. at *12-14.  On appeal, Convolve argued: (1) enough evidence existed that the the information was presented under the protection of the NDA; (2) the parties course of conduct allowed for a broad interpretation of the NDA, not requiring specific indentification of trade secrets as confidential; and (3) a claim still existed, regardless of the NDA, for the tort of trade secret misappropriation.  Id. at *19.  After rejecting the “sufficient evidence” argument, id. at *21, the Court undertook an analysis of the “broad construction” argument.  The Court likewise rejected this argument, holding that the intent of the parties was clear not only from the plain language of the mutually drafted agreement, but also by their conduct.  Specifically, because the parties followed-up the first meeting with a written memorandum identifying all discussions as confidential, the Court found that the intent of the parties was clear that such memorandum was required.  Id. at * 25.  Finally, and perhaps most notably, the Court rejected the argument that trade secret law supplements any obligations under the NDA.  The Court noted that, under general principles of contract law, a written memorandum supplants any oral or implied understanding, citing Union Pacific R.R. Co. v. Mower, 219 F. 3d 1069, 1076 (9th Cir. 2000).  Id. at * 26.  Further, the Court noted that the California Uniform Trade Secret Act required a similar finding, as misappropriation only occurs under circumstances that give rise to a duty to maintain secrecy.  Cal. Civ. Code § 3426.1(b).  The Court concluded that those circumtances, here, were governed by the NDA.  Id. at * 27.

Implications

While this decision applies to a specifically negotiated license agreement, the ruling may have broad implications as to any contractual relationship between parties, including an employee-employer relationship.  As most non-competition agreements contain paragraphs defining confidentiality obligations, companies should take care to ensure that they do not place obligations upon themselves greater than those required under governing trade secret law, as the Court found Compaq, Seagate and Convolve did here.  While some courts ultimately may require appropriate markings for confidential information, by placing such a strong ongoing obligation on the parites via their NDA, Convolve was found to have involuntarily revealed what it believed was protected.