NYLJ “Not All Secrets Are Trade Secrets: SDNY Examines the Limits of NDA Protection”
By Steve Kramarsky
Say you’re a small technology company with a great idea for your clients, but you lack the in-house expertise to make it happen. There are a couple of ways you could try to move forward. You could hire technical staff, build out a new department with the required capabilities, and develop the entire solution internally. That has the advantage of creating new, proprietary intellectual property that unambiguously belongs exclusively to the company, and if there is already a known market for the product it can be a great way to grow. But building new capabilities internally is often expensive and risky, and it can take a long time to find and hire the right people.
One alternative is to find another company that has the necessary expertise and hire them, or partner with them, to develop the technical side of the product for your clients. That inter-company relationship might be embodied in a joint venture, a partnership, an independent contractor or supplier relationship, or in any number of other common business forms. But no matter how the relationship between the companies is structured, they will likely have to share sensitive business information to get the job done, and that information will have to be protected.
That protection typically comes from a non-disclosure agreement (or “NDA”), which may be a standalone agreement, or a part of the broader business arrangement between the parties such as an independent contractor or joint venture agreement. NDAs are extremely common when businesses need to exchange sensitive information for a limited context, such as a specific project or the evaluation or a potential transaction. They tend to be drafted broadly to cover any information that the disclosing party considers confidential or sensitive, and they place contractual limits on how the receiving party can use and disclose that information.
An NDA can thus cover information that would not qualify as a trade secret under state or federal law, and it can provide limited contractual protection to that information. But it is not a “magic talisman” for the protection of intellectual property, and it cannot create trade secret protection where it would not otherwise exist. This can be a difficult concept to convey to clients who may rely on NDAs in their business and attempts to overreach in NDA litigation are thus common.
One example arose recently in a litigation between two technology companies in the Southern District of New York. In litigation that was fundamentally over a purported breach of an NDA, plaintiff brought at least 16 claims, including what Magistrate Judge Ona Wang called “what would appear to be every conceivable claim stemming from the failed business relationship.” Converged Compliance Solutions, Inc. v. XOP Networks, Inc., No. 21-CV-5482 (PGG) (OTW), 2024 WL 4665114, at *4 (S.D.N.Y. Sept. 25, 2024). The Court’s detailed analysis of those claims provides a good roadmap for practitioners considering the protective scope of an NDA.
This article first appeared in the New York Law Journal on November 18, 2024. Stephen M. Kramarsky, a member of Dewey Pegno & Kramarsky, focuses on complex commercial and intellectual property litigation.
