Confidentiality agreements of various sorts are legion in the startup world. There are lots of things to watch out for when your startup is asked to enter into a non-disclosure agreement. Today I want to call out one pernicious problem with too many non-disclosure agreements: the premature loss of trade secret protection on account of common “sunset” clauses in NDAs.
Let’s start with a hypothetical. Startup and BigCo want to explore a potential technical and business collaboration. Both sides will disclose proprietary information to the other side as part of the discussions. Startup’s disclosures will include confidential general business and technical information (say customer lists and manufacturing yields); as-yet unpublished patent applications; and trade secrets (say a secret manufacturing process).
Trade secrets are special for several reasons. Here are a few. First, they can last as long as they are kept secret. Second, federal and state laws give owners of trade secrets special rights to defend them and stop third parties from using them. Third, if an owner of a trade secret does not take reasonable steps to maintain secrecy, trade secret status is lost.
It’s that third factor that leads to the “sunset” clause problem in NDAs.
The sunset clause of an NDA is the one that provides that after some set period of time after the parties to an NDA conclude their discussions, each party is released from its confidentiality obligations under the NDA. The time is commonly somewhere between three and ten years.
The problem is that if the sunset provision does not make an exception for trade secrets – that is, if the sunset provision does not specifically provide that it does not apply to trade secrets – merely entering into the NDA can be used, by a third party, as evidence that the owner of the trade secret is not adequately protecting its trade secrets. And if it is not adequately protecting its trade secrets, they are no longer considered trade secrets under federal or state law.
Let that sink in for a minute. It’s not just that, as per the two parties to the NDA, the trade secret is no longer a trade secret with the expiration of the sunset period (bad as that is), it’s that a third party can claim that what was a trade secret before the applicable NDA was entered into loses its trade secret status as to the entire universe of potential competitors the instant the NDA was entered into. Talk about a serious “gotcha.”
So, here’s the answer to the “so-what” question. If you believe you have any trade secrets, approach every NDA you might enter into with a close eye on any sunset provision, making sure that any such provision explicitly calls out that it does not apply to trade secrets, and makes it clear that trade secrets remain as such even after the sunset provision tolls. If you can’t get the other party to agree to that, you should not disclose any information that you might want to protect as a trade secret after the sunset period ends.
Or you can just let the sun set on your trade secrets sooner rather than later.