Confidential Information vs. Trade Secrets
Business moves the world.
And at the root of every successful business is the proprietary information that makes your company unique. It’s what gives your company the competitive edge and the ability to sell or serve your clients better than the competition.
Protecting that proprietary information with a Non-Disclosure or Confidentiality Agreement is critical. But how do you know what to put in the agreement?
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It’s too easy to get lost in the sea of legal jargon, assorted agreements and overlapping definitions.
One of the most common misunderstandings is the difference between confidential information and trade secrets. If there even is a difference.
Here, we’ll break it down step-by-step and term-by-term so you can wrap your head around these intersecting concepts and use them to their fullest potential.
Breakdown of the Non-disclosure
First of all, let’s make sure you’ve got the basics of a NDA down.
Also known as a Confidentiality Agreement, a Non-Disclosure Agreement (NDA) is a covenant not to disclose specific confidential information.
With its roots in the common law, the concept is steeped in ethics and revolves around the idea that businesses need to be able to keep secrets in order to stay relevant. Anyone who is privy to the confidential information is morally obligated to maintain it.
While it would be wonderful if ethics alone was enough to seal a deal, realistically we know that it’s not.
So, the law and this type of agreement can fill the gap. By signing a non-disclosure, the parties agree that the Disclosing Party can disclose their confidential information in trust, because the Receiver (the Recipient Party) promises to maintain the confidentiality of the information.
Failing to uphold your end of the bargain (especially if you’re the Receiver) could result in a costly legal battle, wasted time and resources, lost business or a severely damaged reputation.
Types of Non-Disclosure/Confidentiality Agreements vary and each and every agreement will be unique to the parties and situation, although their function never changes.
No matter what you put in your the non-disclosure agreement, make sure that the language is clear, the parameters defined, the timeframes laid out, and the clauses fair and realistic.
An agreement that’s too vague, too broad, too narrow or too restrictive may not hold up in court. Not meant to confuse or dishearten you, the point is that a non-disclosure agreement needs to be carefully drafted. The stakes are high and courts don’t take that lightly.
Today, especially, because so much of our business is done electronically, wirelessly, remotely and “in the clouds”, confidentiality is more and more difficult to maintain.
Not to mention the fact that most employees are likely to change jobs and companies at least half a dozen times before retirement, always leaving the last company with more information than they came with. This can trigger a confidentiality breach that’s just as damaging as a hacked network or stolen patent.
The important take-away here is that Non-Disclosure/Confidentiality Agreements are recognized around the globe as an essential part of 21st century business.
Confidential information is often the most valuable asset a business has and the legal world has taken great strides to honor, respect and protect that information, particularly with the advent and improvement of these type of agreements.
But you must draft the agreement properly lest it can cause even more harm than what it was intended to prevent in the first place – which includes having a clear understanding of what kind of confidential information you’re protecting.
Confidential Information defined
Confidential Information should be thought of as an umbrella with many varied types of information underneath. There’s no one clearly outlined definition because confidential information is so many things, ranging from secret recipes to client contact information, and nearly everything in between.
To help break it up, confidential information can be divided into two categories: competitive advantage and personal.
Some examples of competitive-advantage confidential information include:
- Sales or Marketing Strategy
- Research Data
- Profit & Loss Data
- Business Plan
Examples of personal confidential information include:
- Customer Profiles
- Driver’s License Information
- Customer Bank Account Details
The following clip exhibits a fairly detailed definition of ‘Confidential Information‘ within a non-disclosure agreement.
The drafter of this agreement made sure to cover the gamut so the Recipient knows that their obligation to maintain confidentiality covers any and all types of confidential information that may be disclosed during the course of the business relationship.
Some agreements require a broad definition like this one. Others will have a more narrowly defined version. it’s entirely dependent on the parties and business relationship as well as the specific purpose and goal of the agreement.
It’s also important to understand that the law is slightly different depending on which country and/or state has jurisdiction over your Non-Disclosure/Confidentiality Agreement.
Australia, for example, does not consider confidential information to be property the way that the United States does so the verbiage and process is a bit different, although the agreements are still very much valid there and confidential information is protected and valued.
Many of the United States’ have their own take on confidential information within this type of agreement, as well; including Texas, California and New York, among others.
When drafting and preparing a Non-Disclosure Agreement, be sure to familiarize yourself with the jurisdictional rules and preferences.
Trade Secrets as Confidential Information
Trade secrets are a type of confidential information. (Remember the umbrella?) True to form, the law does not specifically define what is and is not a trade secret, but thankfully there are some general guidelines to help you figure it out case-by-case.
Confidential information is generally defined specifically as a ‘trade secret’ if:
- The information is not known or available to the public and is used by the company directly for business
- The information provides the company with an economic advantage
- The company takes reasonable efforts to protect the secrecy of the information
Furthermore, trade secrets are separate and apart from intellectual property. (This is an important differentiation.) Intellectual property is specifically defined and has special protections through the filing of a patent, trademark or copyright.
Trade secrets, on the other hand, have no filing requirement and no statute of limitations, like IP does. Just to make it a bit more confusing, though; some trade secrets can become IP, but not all trade secrets do.
For example, a restaurant may not fully meet the requirements to patent their secret sauce recipe, but they can treat it like a trade secret and keep it confidential through their own precautions.
Despite the fact that it can’t be patented, it may still provide an economic advantage and would therefore be worthy of a trade secret label.
Some examples of possible trade secrets include:
- Marketing Strategies
- Computer Algorithms
- Test Data
- Blueprints and Plans
- Unpatented Recipes or Formulas
The following is a standard ‘Trade Secret’ definition within a NDA agreement:
The New U.S. Trade Secrets Law
In May 2016, the United States Congress passed the Defend Trade Secrets Act (DTSA). DTSA is a game-changer and fully represents the changing face of business confidentiality.
For the first time in history, U.S. businesses and companies that do business in the U.S. can file claims in federal court for breaches of confidentiality. The significance of this bill is that trade secret and confidential information protection is now uniform with one standard, instead of several across the country.
While it won’t solve all of the problems, because states will still have some jurisdiction, it will eliminate many of the problems that business owners have experienced in the past, like unpredictable rules and scattered or unfair damage awards.
The DTSA is definitely something to read up on before drafting your agreement.
What it All Means
The most important concept to take away from this is that trade secrets are simply a form of confidential information. Neither term has a specific definition, so the lines are sometimes blurred, but there are ways to differentiate the two.
As an example, Google’s search algorithm is a well-sought after trade secret but their business plan would likely fall under the broader category of confidential information.
The algorithm is marketable and gives them a clear economic advantage. Business plans, on the other hand, don’t contain competitive-advantage information; just details about the company’s goals and how to achieve them.
Therefore, the business plan would likely be a confidential document but not a qualifying trade secret.
When drafting your Non-Disclosure/Confidentiality Agreements, be sure to identify exactly what information you’re attempting to protect and determine if it’s a trade secret or other form of confidential information.
While this type of agreement will protect both, the language in the agreement should be clear and definitions on-point with the specific information you’re disclosing in confidence.
This can make a tremendous difference in court.