It’s an agreement in which a party (individuals or companies) undertakes not to release or disclose certain information received from another party (usually siting at the other side of the negotiation table). The release of sensitive information will usually occur during a negotiation process or during a business relation between 2 or more parties.

Anything that has a value for the business of the releasing party can be considered confidential information as the business plan, business model, design plans of a new product, blueprints, prototypes, the description of a productive process etc.

Non-Disclosure can be an independent contract (generally before the negotiation begins) or can be a clause or a group of clauses inside a larger contract. Service Agreements, Funding Agreements, Labor Contracts, Joint Ventures are some types of contracts that commonly include confidentiality provisions.

What Non-Disclosure protects is not the use of the information itself; but that the use of that information does not affect his proprietor or that the information is not release to third parties.

In the world of Startups there are certain agents that will not be willing to sign a Non-Disclosure Agreement when sitting at the negotiation table. This is generally the case with investors (private equity) who are taking their investment decisions based in the market knowledge they have.

Non-Disclosure and Labor Contracts in Chile.

When we talk about Non-Disclosure, the question about it being exigible for workers in the organization usually arises. For a Startup the concern of protect the sensitive information of the company can be very important, this information may be the only thing (besides the team) generating competitive advantages, so avoiding loosing it together with employees who come and go is relevant. On the matter the Labor Authority in Chile (Dirección del Trabajo) has ruled as following:

“It adjusted to legislation to agree in an employment contract a confidentiality clause, even to govern beyond the time of its duration, to the extent that respects the necessary suitability, necessity and proportionality of the obligation, which is, at least, that confidentiality falls over the knowledge of materials whose reserves provide an advantage to the employer for business competition and that reasonable measures are used to keep them in such a condition, and the requirement that it is information that is not generally known or readily accessible by people linked to the area in which such information is normally used, also should be acknowledged the confidential nature of the information. “ (ORD. Nº4731 / 081)

An Illustrative Case

RRK Holding Company vs. Sears, Roebuck & Co. (case presented by Lisa Fleming, Partner of Bromberg and Sunstein LLP, http://www.sunsteinlaw.com/media/JUN-Sears.pdf)

Companies often ask: Are non-disclosure agreements worth the paper they are written on? In a case decided on May 27, 2008, Sears, Roebuck & Co. found out just how costly it can be to ignore NDA obligations, getting hit with a $25 million judgment for misappropriating trade secret and confidential information belonging to another company.

In RRK Holding Company v. Sears, Roebuck & Co., the federal district court in the Northern District of Illinois upheld a jury verdict awarding $25 million to the owners of a small tool company because of breach of an NDA. The award included $8 million in punitive damages.  

RRK Holding Company was the manufacturer of a spiral saw sold under the “Roto Zip” brand, which gained a national following in the 1990s. RRK sold its product to Sears, Home Depot, Lowe’s and other home improvement and hardware stores, as well as on cable television’s Home Shopping Network.

Recognizing the product as a major breakthrough in the tool industry, Sears approached RRK in 1997 about manufacturing a next-generation spiral saw under the Sears private label brand, Craftsman.

In 1999, RRK entered into a non-disclosure agreement with Sears to produce a spiral saw to be sold exclusively at Sears. The NDA prohibited the unauthorized use of any confidential information by the other party. During negotiations, RRK disclosed the prototype of a next-generation spiral saw, which included the concept of placing the saw in a plunge base router, an innovation that vastly improved performance.

Negotiations soon broke down over price, and RRK never manufactured the saw for Sears. RRK continued, however, to sell its existing product to retailers and on television but kept secret its plans for its next-generation spiral saw until it introduced the product in 2001 on a QVC television show.

Within two weeks of RRK’s product introduction, Sears introduced a new spiral saw under its Craftsman brand. The new tool combined the spiral saw and plunge base router that RRK had confidentially disclosed to Sears in 1999. Adding insult to injury, Sears’s lower prices diverted sales from RRK to Sears.

RRK’s suit claimed that the information it provided to Sears, including demonstrative exhibits, working prototypes and marketing plans, were all trade secrets subject to protection under the NDA and the Illinois Trade Secrets Act. RRK claimed that it had secured the trade secret status of its information through company confidentiality polices, marking key documents as “confidential” and obtaining protective agreements with third parties like Sears.

Although Sears argued that RRK’s saw/router combination fell within the general knowledge of the power-tool industry and thus did not qualify as a trade secret, the jury found that it was indeed innovative, and that Sears’s disclosure of the combination tool to its manufacturer breached the NDA.

The jury’s verdict supports the old saw: The goal of protecting your trade secrets is worth the often tedious effort of establishing and enforcing confidentiality polices, restricting access to company files, marking relevant documents as “confidential” and seeking appropriate agreements with third parties.

As we can see, the main effect that generates a breach of the Non-Disclosure Agreement is that the affected party can claim for the punitive damages produced by the infringement. Considering that damages can be difficult to measure and prove is advisable to include clauses that include fine in cases where a divulgation have occurred. This only will be an estimated, but will have two positive effects for the affected party: a) will not have to prove the damages if he don’t want to, only the infringement, b) if the fine is substantial, will encourage the other party to comply with the agreement.

At last, is necessary to have in mind that there are some other agreement that tend to produce the same effects or avoid similar problems that the NDA. These are the Non-Compete agreement or clause regarding labor contracts, and the Non-Solicitation in the case of service or collaboration contracts.

Santiago Henríquez C., Lawyer

Picture: Olivier Miche (CC0)