Now is a Good Time To Update Your Non-Disclosure Agreements
In a decision favorable to businesses attempting to protect their commercially valuable information, the Seventh Circuit Court of Appeals recently upheld a company’s non-disclosure agreement designed to protect information that falls short of a “trade secret.” A federal district court in Wisconsin previously found the agreement overly broad by attempting to prohibit the disclosure of information that did not satisfy the statutory definition of a “trade secret.” By reversing the ruling of the Wisconsin court, the Seventh Circuit expanded the rights of companies to include broad non-disclosure language in their written non-disclosure agreements. In order to take advantage of the ruling, employers may wish to review their non-disclosure agreements to ensure that all “confidential” information – not simply information that constitutes a statutory “trade secret” – is protected from disclosure. Likewise, companies should review and update the scope of their non-disclosure agreements with customers, suppliers, vendors, and other commercial parties.
“Trade Secret” or Just “Confidential” Information?
In most states, a company’s trade secrets are protected by statute under the Uniform Trade Secrets Act. This is true whether or not the parties have agreed to keep the trade secrets confidential in a written contract. Many companies attempt to protect their “trade secrets” even further by requiring employees, vendors, and customers to sign written non-disclosure agreements. Such agreements often limit the dissemination of “trade secrets” as well as other information and intellectual property deemed valuable to the company, regardless of whether the information satisfies the statutory definition of a “trade secret.”
The IDX Systems Corp. Case
The enforceability of such broad non-disclosure agreements was recently explored by the Seventh Circuit Court of Appeals in IDX Systems Corp. v. Epic System Corp., 285 F.3d 581 (7th Cir., April 1, 2002), a case arising under Wisconsin law. In that case, the plaintiff software company alleged that its customer disclosed to a competitor commercially valuable information contained in the plaintiff’s proprietary software. When the customer later terminated its contract with the plaintiff and hired the competing software developer, the plaintiff sued the customer, the competitor, and certain employees involved in the alleged misappropriation.
The District Court Finds The Agreement Overly Broad
The district court initially concluded that the plaintiff had not properly established the existence of any trade secrets in the software. The district court went on to hold that confidentiality agreements which protect information that does not rise to the level of a trade secret are “suspect” and must incorporate geographic or temporal limitations similar to those required for non-compete agreements between employers and employees under Wisconsin law. (In Wisconsin and many other states, non-compete agreements are considered partial restraints of trade, are strictly construed, and generally must be limited in duration and geographical scope.)
Seventh Circuit Holds That Company Can Protect Information That Does Not Rise to the Level of a “Trade Secret”
On appeal, the Seventh Circuit agreed with the district court that IDX had not identified its “trade secrets” with sufficient specificity. The Court recognized, however, that because “it is hard to prove that particular information qualifies as a trade secret, many producers of intellectual property negotiate with their customers for additional protection.” The Seventh Circuit then concluded that the district court had erred when it applied to the contract in question rules applicable to non-compete agreements between employers and employees. First, the Court noted that rules limiting the extent of non-compete clauses are based on the fact that they tie up human capital and, if widely adopted, may have the practical effect of preventing horizontal (competitor-to-competitor) competition. In contrast, the contract between the parties in the IDX Systems case was vertical (supplier-to-customer) in nature and protected intellectual property without affecting competition. Second, the Court found that Wisconsin law allows a much greater scope of restraint in contracts between business parties than between employer and employee. In other words, the public policy reasons for preserving an employee’s right to change employers do not necessarily justify a customer’s disclosure of confidential information obtained from a supplier. Third, the Court found it difficult to understand how a non-disclosure agreement could place “geographical” limits on the dissemination of intellectual property the way that a non-compete agreement can limit the territory in which a salesperson can drum up customers for a new employer. In the words of the Seventh Circuit, “knowledge does not respect borders.”
How to Take Advantage of the IDX Systems Corp. Case
The Seventh Circuit’s decision reinforces the right of a party to bargain for broad protections of its intellectual property, even when that intellectual property does not satisfy the definition of a “trade secret” under the Uniform Trade Secrets Act. In light of the IDX Systems decision:
- Companies should review all non-disclosure agreements entered into with customers, vendors, and employees.
- The non-disclosure agreements should prohibit the disclosure of all commercially valuable information – not simply information that constitutes a “trade secret.” If possible, the agreements should identify clearly the types of information considered “confidential.”
- If the non-disclosure agreements contain temporal and geographic limits on the disclosure of confidential information, such provisions should be reviewed in order to maximize the protection of such information. Some jurisdictions will allow companies to prohibit the disclosure of information for an indefinite or extended period of time, anywhere in the world.
If you have any questions about the IDX Systmes Corp. decision, please contact one of the trade secrets attorneys of Trepanier MacGillis Battina P.A.
About the Author:
Minnesota trade secret attorney Craig W. Trepanier has extensive experience drafting non-disclosure agreements on behalf of businesses, advising companies on how to best protect trade secrets and confidential information, and providing guidance to individuals who have signed, or are thinking about signing, a non-disclosure agreement. Craig may be reached at 612.455.0502 or firstname.lastname@example.org. Trepanier MacGillis Battina P.A. is a Minnesota trade secrets law firm located in Minneapolis, Minnesota.