The Pitfalls of Informal Confidentiality Arrangements

NiedsBy:  Mark Nieds, Esquire

Business relationships often lead to the exchange of sensitive information or access to highly confidential matter. When faced with this situation, is it enough to merely tell your business partner that something is confidential? According to a recent decision, it appears the answer is no.

Trade secrets are those things that provide your business with a competitive advantage over others. Classic examples of trade secrets are the recipe for Coca-Cola or Colonel Sanders’ blend of herbs and spices. Many different types of information can be protected as a trade secret. However, in order to maintain a trade secret and protection for it, the owner of a trade secret must take “reasonable steps” to protect the information from disclosure to others.

Lessons from the WSI Decision

In Warehouse Solutions, Inc. (“WSI”) v. Integrated Logistics, LLC (“Integrated”), WSI developed some proprietary software that aided package tracking. Integrated was hired to resell this software to third-parties. The third-parties were subject to confidentiality obligations under the software license between them and WSI. However, Integrated Logistics was never required to execute any sort of non-disclosure agreement. Instead, WSI simply told Integrated that the software and its features and functions were “highly confidential.”

Ultimately, Integrated hired its own software developer to create a program similar to the WSI program. This developer built the new program by reviewing the different features and functions of the WSI software to create something that accomplished the same tasks. Code was not accessed or copied and the WSI software was not otherwise hacked. Integrated then began selling its version of the software.

WSI sued, claiming Integrated pirated its trade secrets by reverse engineering the software. The court disagreed. First, the court noted there is a significant difference between “features and functions” of software (i.e., the visible interface, output and purpose of software) and the underlying code. Because the features and functions were readily visible to anyone who used the software, in order to safeguard it as a trade secret, WSI was required to take reasonable steps to preserve the secrecy of same. Here, WSI never required Integrated to enter into any confidentiality agreement, rather, the only step WSI took was to verbally state the information was confidential. According to the court, this simple step was not enough, as the law requires a trade secret owner to take all reasonable steps available to protect its confidential information. This might include specifically identifying the features and functions of proprietary software such as this.

Non-Disclosure Agreements

In light of the WSI case, clear, concise, specific and written non-disclosure agreements are a necessity. Verbally identifying confidential information is not enough and additional steps are necessary. This is especially true where the confidential information at stake might be something so easily replicated as features or functions of software or other non-traditional proprietary items.

All businesses should use this warning to review their policies concerning sharing and disclosure of confidential information and to revisit language of any written agreements to ensure they are adequate to protect what is most sensitive to your business. If you would like more information or to discuss how we might be able to help review and shape your policies, please contact us.

If you would like to discuss your own particular concerns regarding social media and how it impacts your business, please contact us.

Disclaimer:  The contents of this article do not create an attorney-client relationship. Should you have any legal questions you should consult with your attorney. The hiring of a lawyer is an important decision that should not be based solely on advertisements. Before you decide, ask us to send you free written information about our qualifications and experience.

About the Author:  Mark Nieds concentrates his practice on intellectual property and internet matters with specific emphasis on trademark selection, registration, enforcement and litigation, copyright, and trade secret protection. He can be reached at 239-344-1153 or via email at mark.nieds@henlaw.com.

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