NON-DISCLOSURE AGREEMENTS: TIPS & TRAPS

NON-DISCLOSURE

AGREEMENTS: TIPS & TRAPS

Amit Singh

Shareholder

Stradling Yocca Carlson & Rauth, P.C.

858.926.3012 | [email protected]

September 19, 2019

Amit is a corporate governance and business transactions expert, with extensive experience in

venture capital and private equity transactions, mergers and acquisitions, joint ventures,

technology transactions and general corporate law.

Amit counsels companies and investors in a broad range of industries, including life sciences,

software, hardware, communications and networking, internet, manufacturing and distribution

and medical devices.

Amit earned an LL.M. (Corporate Law) from New York University School of Law in 1999 and a

J.D. in 1998 from University of California, Hastings College of the Law.

He is a member of the State Bar of California and the State Bar of New York.

Amit is a shareholder in Stradling's corporate and securities law and technology transactions practices.

Amit Singh, Esq.

Corporate Shareholder

Office: San Diego

[email protected]

(858) 926-3012

EDUCATION

New York University School of

Law, LL.M. (Corporate Law)

(1999)

University of California, Hastings

College of Law, J.D. (1998)

PRACTICE AREAS

Corporate Law

Private Equity

Startups and Emerging

Companies

Venture Capital

Mergers and Acquisitions

Technology Transactions

Introduction

• Appear in separate NDAs, Commercial

Agreements, Merger documents, employment

arrangements and other agreements

• Purpose – protect against disclosure/use of

confidential information

• Obligations imposed by law

– e.g., Attorney-client relationship

• Types

– One-Way

– Mutual

– Multi-Party

NDA Strategies

• David vs Goliath

– Even with NDA in place, are you safe?

• Don’t disclose more than necessary

– Must prove violation

– Need money for lawyers to sue and win

– e.g., Waymo vs Google

• One-Way vs Mutual

– Discloser favorable vs Recipient favorable

Parties & Purpose

• Clearly identify Parties

• Obligations

– Keep Confidential

• Only disclose to Representatives with a need to know

and who are subject to confidentiality obligations

– Permitted Purpose

• e.g., merger, financing, license agreement, other

commercial agreements

Parties & Purpose (Cont’d)

This MUTUAL NON-DISCLOSURE AGREEMENT (this “Agreement”) is made

effective as of _____________, 201__ (“Effective Date”), by and between

________, and ________, each of the foregoing, a “Party” and together, the

“Parties”), to safeguard from unauthorized disclosure Confidential

Information that one Party (“Disclosing Party”) or its Representatives may

disclose to the other Party (“Receiving Party”) for the purpose(s) set forth on

Exhibit A attached hereto (the “Permitted Purpose”).

Definition of Confidential

Information

• Discloser wants very broad definition – everything disclosed

– Courts won’t enforce if too broad

• unreasonable restraint on trade

– Receiver cannot be obligated to keep/not use information

that is publicly available

• Receiver wants narrow definition - typical carve-outs from

definition:

– Information Receiver already knew

– Publicly available information

– Information lawfully received from others

– Independently developed information

Definition of Confidential

Information (Cont’d)

“Confidential Information” means any and all technical and non-technical information, data,

agreements, documents, reports, “know-how”, interpretations, plans, studies, forecasts,

projections and records (whether in oral or written form, machine-readable, electronically stored

or otherwise), whether or not proprietary, provided by Disclosing Party or any of its

Representatives to Receiving Party or its Representatives, including, without limitation, (a)

financial information, books and records, cost information, forecasts, bidding information and

strategies, and contracts and agreements; (b) current and proposed products and services,

marketing plans and strategies, customer, client, vendor and supplier contracts and agreements,

information relating to, and lists of, past, current and prospective customers, suppliers, vendors,

business contacts and clients; (c) any information related to corporate structure, corporate

direction, financing, operating procedures, techniques, systems, processes and methods; (d)

employee records and information; (e) all intellectual property, product and service information,

including research and development and proposed products and services; (f) other “know-how”,

trade secrets and any other information not available to the public generally; (g) information

regarding any of the foregoing which Disclosing Party or its Representatives provides to

Receiving Party or its Representatives regarding third persons; and (h) all notes, summaries,

reports, analyses, compilations, studies, legal opinions and interpretations of any of the items

described in (a) through (g), above, whether prepared by or on behalf of Disclosing Party or

Receiving Party;

Carve-Outs from Definition

provided, however, that Confidential Information shall not include information

that [Receiving Party can demonstrate]

: (i) was in Receiving Party’s, or its

Representatives’, possession before receipt from Disclosing Party or its

Representatives[, as shown by written or other tangible evidence and which was

not acquired or obtained from a source that Receiving Party or its Representatives

had reason to believe was bound by confidentiality obligations with respect to

such information]

; (ii) is or becomes generally available to the public, other than

as a result of a disclosure by Receiving Party or its Representatives in violation of

this Agreement [or by disclosure by any other person or entity in violation of any

contractual, legal or fiduciary obligation]

; (iii) was or is lawfully received by

Receiving Party or its Representatives from a source other than Disclosing Party

or its Representatives[, unless Receiving Party or one or more of its

Representatives has or had reason to believe that such source is prohibited from

transmitting the information to Receiving Party or its Representatives by a

contractual, legal or fiduciary obligation]

; or (iv) was or is independently

developed by Receiving Party or its Representatives[, without use of, or reference

to, Confidential Information, as shown by written or other tangible evidence]

Marking Requirement

• Receiver may want information to be marked

“Confidential” to be protected

• Trap for Unwary

– Risk of noncompliance – forgetting to mark

• Savings clauses for unmarked disclosures

– Information Recipient reasonably should know is

confidential

– Information marked later than deadline

• Only applies to improper disclosures after marking

Marking Requirement (Cont’d)

[Notwithstanding anything to the Contrary in this Agreement,

information shall be deemed Confidential Information only if

it is: (a) marked as Disclosing Party’s Confidential Information

(or with an equivalent legend) at the time of disclosure, if

disclosed in tangible or retainable form; or (b) identified as

Disclosing Party’s Confidential Information at the time of

disclosure and summarized and designated as confidential in

a writing delivered to a Receiving Party’s authorized

representative within thirty (30) days after disclosure is made,

if disclosed in any other manner. Information disclosed

pursuant to clause (b) of the preceding sentence shall be

treated as Confidential Information under this Agreement

during the period permitted for providing written

confirmation.]

Treatment of Confidential

Information

• Standard of Care – at least reasonable degree

of care

• Notify Discloser of any prohibited disclosures

Treatment of Confidential

Information (Cont’d)

Except as specifically permitted in this Agreement, Receiving Party shall, and shall

cause its Representatives to, hold all Confidential Information in strict confidence

and not disclose Disclosing Party’s Confidential Information to any third party, except

as approved in writing by Disclosing Party, and will use such Confidential Information

for no purpose other than the Permitted Purpose. Receiving Party will use the same

degree of care, but no less than a reasonable degree of care, that Receiving Party

uses to protect its own confidential information of a like importance to protect

Disclosing Party’s Confidential Information. Receiving Party may disclose Disclosing

Party’s Confidential Information to its Representatives who have a need to know and

are directly concerned with furthering the Permitted Purpose, so long as such

Representatives are bound by confidentiality obligations at least as protective of

Disclosing Party’s Confidential Information as Receiving Party’s obligations under this

Agreement. Receiving Party will notify Disclosing Party, in writing, immediately upon

learning of any prohibited disclosure, misuse or misappropriation of Disclosing Party’s

Confidential Information.

Compelled Disclosure

• No violation if Confidential Information is

disclosed:

– As required by law

– Pursuant to valid order of court of competent

jurisdiction

– As necessary to establish the rights of the parties in a

dispute

• Requirements

– Notice to Discloser

– Cooperation at Discloser’s cost

Compelled Disclosure (Cont’d)

Notwithstanding the provisions of Section 3, Receiving Party shall not

be in breach of this Agreement if it, or any of its Representatives

disclose Confidential Information (i) in response to a valid order by a

court or other governmental body of competent jurisdiction; (ii) as

required by law; or (iii) if such disclosure was necessary to establish

the relative rights of the Parties in a legal proceeding; provided, that

Receiving Party promptly notifies Disclosing Party in writing of any

such requirement so that Disclosing Party may seek an appropriate

protective order or other appropriate remedy or waive compliance

with the provisions of this Agreement. Receiving Party will

reasonably cooperate with Disclosing Party so that it can seek a

protective order or other appropriate remedy or limitation, and

Disclosing Party will reimburse all reasonable costs (including

reasonable attorneys’ fees and expenses) incurred by Receiving Party

in connection with a written request for specified assistance and

cooperation by Disclosing Party.

Non-Solicitation

• BPC 16600 - “every contract by which anyone is

restrained from engaging in a lawful profession,

trade, or business of any kind is to that extent

void.”

• Non-solicitation of Customers/Suppliers is

Unenforceable Non-compete

– OK to extent confidential information/trade secrets are

used

• Non-solicitation of Employees No Longer Enforceable

– May be OK to extent confidential

information/trade secrets are used

Non-Solicitation

• Prior Law

– Loral v. Moyes (1985) - prohibiting defendant

from “raiding” the plaintiffs’ employees was a

“reasonable” restraint

– Edwards - no “rule of reasonableness” under

Section 16600 (didn’t address EE non-solicitation,

so didn’t overrule Loral)

Non-Solicitation (Cont’d)

• AMN Healthcare v. Aya Healthcare Services

– Can’t prohibit travel nurse recruiters from soliciting nurses

working at former employer (improperly restrains them

from engaging in their profession)

– EE non-solicitation clause invalid under Edward

– Involved nurse recruiters, was it limited to its facts?

• No, AMN not Limited to its Facts (not Cal SCt)

– Barker v. Insight Global - “former employer

[cannot restrain] a former employee from

engaging in his or her lawful profession, trade, or

business of any kind”

– WeRide v. Huang

Non-Solicitation (Cont’d)

During and after the termination of Employee’s employment with Company, Employee will not,

directly or indirectly, solicit or otherwise take away customers or suppliers of Company [and will

not, directly or indirectly, encourage or solicit any employee or consultant of Company to leave

Company for any reason] if, in so doing, Employee would use or disclose any trade secrets or

proprietary or confidential information of Company. Employee agrees that the non-public

names and addresses of Company’s customers and suppliers [and non-public information

about employees], including such customers’ and suppliers’ buying and selling habits and special

needs[, and non-public information about employee skills and compensation,] created or

obtained by Employee during Employee’s employment with Company, constitute trade secrets

or proprietary and confidential information of Company.

* Bracketed language not litigated with respect to EE non-solicitation, but likely enforceable (in

my personal opinion only).

Termination; Survival

• Term of Agreement

– Should it survive execution of definitive

agreements (e.g., Merger Agreement)?

– Limited duration of confidentiality obligations

• 2/3/5 years

• Trade secrets trap – may lose trade secret protection

• Survival

– Perpetuity

• Some states – unreasonable restraints on trade –

unenforceable

Survival - Trade Secrets

– Trade secret

• Information

• Economic value from secrecy

• Not generally known

• Reasonable efforts to maintain secrecy

– “[A]dvising employees of the existence of a trade secret,

limiting access to the information on a ‘need to know basis,’

requiring employees to sign confidentiality agreements, and

keeping secret documents under lock.”

– Solution to protect trade secrets

• If there is a fixed duration, trade secrets survive so long

as they qualify as trade secrets

Survival - Trade Secret (Cont’d)

This Agreement may be terminated at any time by either

Party upon thirty (30) calendar days’ written notice to the

other. A Receiving Party’s obligations of confidentiality with

respect to any Confidential Information received prior to the

effective date of termination shall survive any such

termination [for a period of 3 years thereafter]

[; provided,

however, that, with respect to any trade secret, such

obligations shall remain in effect for as long as the trade

secret remains a trade secret under applicable law relating

to trade secrets]

IP Rights; Reps & Warranties

• Discloser retains all IP Rights in its Confidential

Information

• Discloser represents it has the right to disclose

• Discloser makes no warranties re the

information itself

– Provided “AS IS”

– Make sure definitive agreement overcomes this so

it doesn’t eliminate value of representations and

warranties re Confidential Information

Intellectual Property Rights

Disclosing Party retains all right, title and interest

in and to its Confidential Information. No Receiving

Party acquires any intellectual property or licensing

rights in Confidential Information it receives under

this Agreement, by implication, estoppel or

otherwise, except for the Permitted Purpose. Unless

included in the Permitted Purpose, not by way of

limitation of the foregoing, Receiving Party shall not

make, have made, use, loan or sell for any purpose

any product or other item using, incorporating or

derived from Disclosing Party’s Confidential

Information.

Representations; Warranties

Each Disclosing Party represents and warrants that it has the right

and authority to disclose the Confidential Information it discloses to

Receiving Party. Each individual executing this Agreement on behalf

of a Party represents and warrants that he or she is duly authorized

to execute and deliver this Agreement on behalf of such Party and

agrees to deliver competent evidence of his or her authority to the

other Party if requested by the other Party. EXCEPT AS SPECIFICALLY

PROVIDED IN THIS AGREEMENT, ALL CONFIDENTIAL INFORMATION

IS PROVIDED “AS IS”, AND EACH PARTY EXPRESSLY DISCLAIMS ANY

WARRANTY, WHETHER EXPRESS OR IMPLIED OR STATUTORY, AS TO

THE DESCRIPTION, QUALITY, TITLE, NON-INFRINGEMENT,

MERCHANTABILITY, ADEQUACY, SUFFICIENCY, ACCURACY, FREEDOM

FROM DEFECT OF ANY KIND, COMPLETENESS OR FITNESS FOR A

PARTICULAR USE OR PURPOSE OF ANY CONFIDENTIAL

INFORMATION.

Termination – Disposal/Return

• Upon request or termination – return/destroy

Confidential Information

• Receiver’s retention right

– Compliance requirements

– Ability to prove compliance with confidentiality

obligations

Termination – Disposal/Return

(Cont’d)

Within fifteen (15) days after receiving a written request from

Disclosing Party, Receiving Party shall: (a) erase all Confidential

Information (including whole or partial copies and derivations) stored

on electronic media, and (b) return or, at the written request of

Disclosing Party, destroy all Confidential Information provided by

Disclosing Party in any tangible form, including all copies and

derivations, and all summaries, analyses, studies, and other material

whatsoever relating in any way to the Confidential Information which

was prepared by Receiving Party or any of its Representatives[;

provided, however, that Receiving Party may retain one copy of the

Confidential Information for its legal files for compliance purposes

subject to its obligations set forth in this Agreement]

. An officer of

Receiving Party shall then provide Disclosing Party with written

notice that Receiving Party has fully complied with all of its

obligations under this Section 8.

Remedies for Breach

• Damages

– Trap – exclusions against consequential damages

in contracts (need to carve-out NDA)

– Attorneys’ fees

– Responsibility for breaches by Representatives

• Injunction

Remedies for Breach-Damages

Each Party shall be responsible for any breach of this

Agreement by any of its employees, agents or other

Representatives. If any arbitration, litigation or other

legal proceeding arising out of or relating to this

Agreement occurs, the prevailing Party shall be entitled

to recover from the other Party in addition to other

relief awarded or granted, its reasonable costs and

expenses, including (without limitation) attorneys’

fees, incurred in the arbitration, litigation or other

proceeding, or in any appeal thereof, in the amount

determined by the appropriate arbitrator, trial court or

appellate court.

Remedies for Breach-DTSA

• Defend Trade Secrets Act of 2016

– Federal civil cause of action for trade secrets “related to a

product or service used in, or intended for use in,

interstate or foreign commerce.”

– Injunction and 2x damages (plus attorneys’ fees) if willful

and malicious

– Immunity for whistleblower who discloses trade secret

information to a government official or attorney for the

purposes of reporting violation of the law

• Exempts someone who discloses the information under seal in

a lawsuit

• After 5.11.16, immunity must be disclosed to employees,

contractors and consultants that “governs the use of a trade

secret or other confidential information.”

Remedies for Breach-DTSA

(Cont’d)

Pursuant to the Defend Trade Secrets Act of 2016,

[Employee/Consultant] acknowledges that he or she shall not have

criminal or civil liability under any Federal or State trade secret law

for the disclosure of a trade secret that is made (i) in confidence to

a Federal, State or local government official, either directly or

indirectly, or to an attorney, solely for the purpose of reporting or

investigating a suspected violation of law or (ii) in a complaint or

other document filed in a lawsuit or other proceeding, if such filing is

made under seal. In addition, if [Employee/Contractor] files a

lawsuit for retaliation by the Company for reporting a suspected

violation of law, [Employee/Contractor] may disclose the trade

secret to his or her attorney and may use the trade secret

information in the court proceeding if [Employee/Contractor] (x)

files any document containing the trade secret under seal and (y)

does not disclose the trade secret, except pursuant to court order.

Equitable Relief - Injunctions

Each Receiving Party acknowledges and agrees that the breach

by it of any of its confidentiality obligations hereunder will

cause serious and irreparable harm to Disclosing Party that

could not adequately be compensated by monetary damages.

Each Receiving Party therefore agrees that, in addition to any

of the remedies to which a Disclosing Party may be entitled at

law or in equity, a Disclosing Party will be entitled to an

injunction or injunctions (without the posting of any bond and

without proof of actual damages) to prevent breaches or

threatened breaches of this Agreement and to compel

specific performance of this Agreement. Such remedies shall

not be deemed to be the exclusive remedies for a breach of

this Agreement, but shall be in addition to all other remedies

available at law or equity.

Relationship of the Parties

Each Party is an independent contractor and no agency, partnership, joint

venture or other business relationship is created between the Parties by this

Agreement. Neither Party, by virtue of this Agreement, is authorized to be

an agent, employee or legal representative of the other Party. Except as

provided herein otherwise, each Party shall bear all costs and expenses it

incurs in connection with this Agreement or its use of the information

furnished pursuant to this Agreement.

Nothing in this Agreement requires a Party to enter into any further

agreement with the other Party regarding the Confidential Information or any

other subject, whatsoever. Each Party reserves the right in its sole discretion

to (a) provide or not provide Confidential Information; (b) reject any and all

proposals made by the other Party or its Representatives regarding any

proposed transaction; and (c) terminate discussions and negotiations at any

time.

Assignment

Neither Party shall assign or transfer any of its rights or obligations hereunder

without the prior written consent of the other Party[; provided, however, that each

Party may assign its rights under this Agreement [with respect to the protection of its

Confidential Information disclosed prior to such assignment] without such consent

within the context of any merger, consolidation, sale of all or substantially all of such

Party’s assets or any transaction in which more than 50% of such Party’s voting

securities are transferred (a “Change of Control”). The Party undergoing such Change

of Control shall provide notice thereof to the other Party within ninety (90) days of

the closing of the Change of Control]

. Any attempted assignment or transfer of this

Agreement in violation of this Agreement shall be void ab initio. This Agreement shall

be binding on and inure to the benefit of the successors and permitted assigns of the

respective Parties. Nothing in this Agreement, express or implied, is intended to

confer upon any person, other than the Parties and their successors or permitted

assigns, any rights or remedies under or by reason of this Agreement.

Exporting Confidential Information

• Bureau of Industry and Security (BIS) - “Export Administration Regulations” (EAR),

which regulates the export and re-export of most commercial items.

• Directorate of Defense Trade Controls - defense articles and defense services

• Office of Foreign Assets Control – prohibits/restricts trade with a list of countries

and individuals

• Nuclear Regulatory Commission - export of nuclear materials, nuclear technology

and technical data for nuclear power

No Party shall directly or indirectly export any other Party’s Confidential Information

(including whole or partial copies or derivations) except in compliance with all

applicable laws, rules and regulations relating to the export or re-export of technical

data and information from the United States and other applicable countries.

Governing Law

• Governing law is key to knowing rights

– e.g., term of confidentiality obligations

• Venue

This Agreement shall be governed and construed in

accordance with the internal laws of the State of California,

without reference to its conflicts of laws and choice of laws

rules or principles. Any disputes based on this Agreement

shall be adjudicated solely in the state or federal courts

located in San Diego County, California. The Parties hereby

consent to the personal jurisdiction and venue of such courts

and also hereby irrevocably waive any defense of improper

venue or forum non conveniens.

FIN

Amit Singh

Shareholder

Stradling Yocca Carlson & Rauth, P.C.

858.926.3012 | [email protected]