Non-Disclosure Agreements, Liquidated Damages, & Trade Secrets

Do you have an idea for a product or service? Have you shared or are you planning on sharing your idea with others? How can you protect yourself and your unique idea from people that may try and copy you? Has someone asked you to sign a Nondisclosure Agreement? GLO consults with business owners to ensure that they have the least amount of liability risk while maximizing investment returns.

What is a non-disclosure agreement?

A non-disclosure agreement (NDA) is an agreement to not disclose specified information gathered in a certain context. Whether the NDA is a provision in a greater contract or a stand-alone contract, it is a legal promise not to reveal to others specific knowledge learned from the holder of that information. In legal jargon, it’s a restrictive covenant.

NDAs are used for protecting confidential information, such as trade secrets, procedures, or other proprietary information.

NDAs commonly are sued in real estate development deals to ensure potential project details remain confidential to protect business opportunities while also affording the opportunity to fully explore funding options.

What is a trade secret?

A trade secret is information, such as a formula, process, device, pattern, compilation, program, technique, or other business information, that is kept confidential to maintain an advantage over competitors.

To be a trade secret, such information must have two components, (1) it must have its own, independent, economic value (i.e., it could make money from the fact that the information is not generally known) and (2) it must be kept secret with reasonable efforts.

This second component is an aspect of intellectual property law—the area of law that protects ideas, from business methods to novels to inventions—and it gets tricky regarding NDAs.

A court is more likely to enforce a trade secret, like a trademark, if the company is both diligent and vigilant about protecting it. For example, McDonald’s “golden arches” are a strong (i.e., enforceable) mark largely because McDonald’s has vehemently sued many companies and organizations over trademark disputes. They have sued (and won) many lawsuits protecting their marks, even against motels and a dentist's office for using the prefix “Mc.”

Similarly, courts have refused to enforce NDAs of trade secrets if the company was not diligent in attempting to maintain secrecy. For example, information readily accessible to many employees is not a diligently kept secret. Accordingly, the Federal District Court of Colorado refused to enforce an NDA because it did not protect the purported secret information from its very inception. 

What about liquidated damages?

Speaking of enforcement issues, NDAs commonly have a liquidated damages provision. A liquidated damages provision provides for an agreed-upon amount for the person who discloses information in violation of the NDA to pay.

These are beneficial to employers because there’s no need to prove actual damages if the employee breaches the contract, a requirement typical in a breach of contract case. However, to be enforceable, a liquidated damages provision must comply with two requirements.

First, the actual damage that the breach would cause must be difficult to estimate. Second, the amount of the liquidated damages must be a reasonable forecast. Both requirements are analyzed at the time the contract is signed.

On that second point, this is why a liquidated damages provision is not a penalty. A penalty would be an overinflated number intended to penalize the other person for such a wrongful disclosure of information. Courts in any state will not enforce a penalty. This is because a liquidated damages provision, like general breach of contract damages, is intended to repair the harm of the breach, not to penalize the breacher.

Is a non-disclosure agreement different than a non-compete agreement?

Yes. Because non-disclosure agreements are often used in the corporate landscape, they are often associated with covenants not to compete. However, they are different in a couple of ways.

First, they protect different interests. As the name suggests, a non-compete agreement restricts the right of a person to be employed by a similar employer. Non-compete agreements are often used in industries where skill and knowledge are vital to the employee’s performance, such as physicians. In contrast, an NDA restricts what information that employee may use during the course of that employment. Thus, although they are different, they do work well in tandem and are often seen together.

Another difference between NDAs and non-compete agreements is their enforceability. Under Colorado statute, a covenant not to compete is void unless it falls under specific exceptions, whereas NDAs aren’t necessarily covered by this same statute. 

How can GLO help?

If you are a exploring a business or real estate development opportunity and want to reach out to investors while protecting your investment ideas, GLO can prepare a NDA to secure your efforts.

If have been approached with a proposed NDA agreement, GLO offers one hour consultations to review and discuss with you to ensure the proposed language fits your situation and you understand and your rights and responsibilities should you agree to it.

For more informamtion, out an Intake Form to inquire about working with GLO.

GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.