Keeping Trade Secrets Confidential

Does your company use non-disclosure agreements to protect your intellectual property and trade secrets? These agreements can help keep inside information from being misused by customers, vendors, employees, independent contractors and joint venture partners.

In one case, a company learned that non-disclosure agreements are enforceable but found out the documents must be carefully worded. The case involved IDX Systems Corporation and Epic Systems Corporation, which both make software for use in managing the financial side of a medical practice including billing, insurance reimbursement and collections.

One of IDX’s customers was the University of Wisconsin Medical Foundation, which is made up of more than 1,000 physicians. The Foundation used IDX software for many years – after signing a non-disclosure agreement with the firm — and then switched to software developed by Epic.

IDX believes that two former Epic employees, who were hired to manage data processing at the Foundation, not only instigated the change but transferred valuable information to Epic.

According to IDX’s complaint, the two employees and others working at the Foundation furnished Epic with details about how IDX software works. This enabled Epic to enhance its own product enough to ultimately take the Foundation’s business – and match up better in the competition for other customers.

IDX filed suit, charging the Foundation and the employees with theft of trade secrets and breach of contractual covenants of confidentiality.

In the non-disclosure contract at issue, the Foundation agreed not to permit the software and related materials created by IDX to be “examined … for the purpose of creating another system” and not to “use or disclose or divulge to others any data or information relating to” IDX’s product or “the technology, ideas, concepts, know-how and techniques embodied therein.”

Lower Court Ruling

The U.S. District Court held that IDX did not properly establish the existence of any trade secrets in the information disclosed to the Foundation. The court attempted to limit the scope of the non-disclosure agreement by drawing analogies to employee non-competition agreements. (Although the case was decided based on Wisconsin law, the concepts are general in scope.)

Confidentiality agreements protecting information that is not a trade secret are “suspect and must incorporate geographic or temporal limitations” the court stated, similar to non-compete agreements signed by employees.

Typically, when an employee challenges a non-compete covenant, courts look at whether the agreement is reasonably limited in terms of time and geographic scope. For example, a one-year agreement prohibiting a former employee from working for competitors within a 50-mile radius might be considered reasonable. A ten-year limit spanning several states may be deemed unreasonable because it inhibits the former employee’s ability to earn a living.

In the case involving IDX, the lower court required these geographic and time limitations to apply to the non-disclosure agreement between a vendor and its customer.

Appeals Court Ruling

On appeal, the Seventh Circuit reversed on several key points. Here are two highlights of its decision:

1. The non-disclosure contract was enforceable despite being unlimited in time and geographic scope. “It is impossible to understand how a non-disclosure agreement could place ‘geographical’ limits on the dissemination of intellectual property comparable to those restricting the locale where a salesman may try to drum up customers for a new employer,” the court stated.

2. The agreement was not specific enough but nonetheless enforceable. IDX “has been both too vague and too inclusive, effectively asserting that all information in or about its software is a trade secret,” according to the court.

It’s understandable that companies are reluctant to include too much information in these agreements because they don’t want to “tip off a business rival,” the court noted. But “unless the plaintiff engages in a serious effort to pin down the secrets, a court cannot do its job.”

However, the Seventh Circuit recognized that because “it is hard to prove that particular information qualifies as a trade secret, many producers of intellectual property negotiate with their customers for additional protection.”

By carefully drafting your company’s non-disclosure agreements, you can increase the chance that they will be upheld and enforced in court. For more information on the proper wording, consult with your attorney.

“To show that particular information is a trade secret, a firm . . . must demonstrate that it is valuable, not known to others who might profit by its use, and has been handled by means reasonably designed to maintain secrecy.”

– U.S. Court of Appeals for the Seventh Circuit, IDX Systems Corp. v. Epic Systems Corp., et al, 285 F.3d 581 (April 1, 2002)