Mutual non-disclosure agreement is one of the most effective ways to protect yours and other parties’ trade secrets in an era where data has become so accessible. In Israel and all over the world, the success of large firms has a lot to do with their ability to protect their trade secrets, due to the competitive advantage they provide in the market. In this article, an intellectual property (IP) attorney from our firm will explain how a mutual non-disclosure agreement can ensure the protection of your trade secrets.
The attorneys of the boutique Israeli law firm of Decker & Ofir, specialize in intellectual property law. The firm provides comprehensive legal services to Israeli and international companies. Our services include legal consultancy and representation in various IP matters, including trade secrets, trademarks, copyright, etc.
Trade Secrets in 2021
What is common to Google’s search algorithm, Coca Cola’s recipe, the formula of Listerine and McDonald’s Big Mac sauce? The answer is that they are all protected, or have been protected, as trade secrets. The huge success of each of those products is dependent, to a large extent, on the legal protection which is granted to them. The same applies to many products and services that are being part of our daily life.
In Israel, there is a wide legal protection granted to trade secrets. It derives from the understanding of the importance of using them by entrepreneurs and companies that develop innovative products and tools. Legal protection is crucial for such activities.
Yet, the matter of trade secrets is very complex in legal terms, and there are all sorts of exceptions to their legal protection. Thus, the best way to ensure maximum protection to your trade secrets is to create a mutual non-disclosure agreement (NDA). Below we will elaborate on this topic, as well as on the definition of trade secrets and the protection granted to them.
What is Unique About Trade Secrets, Compared to Other IP Assets?
Unlike other types of IP assets, trade secrets are entitled to protection as long as they are not being published. On the contrary, if we take patents as an example, inventors must reveal their invention when applying for patent protection. Without doing so they will not be entitled to patent protection. Same applies for trademarks. A mark must be included in an application for trademark registration. But when it comes to trade secrets, publishing them might cause the loss of their legal protection.
Another main attribute of trade secrets is that their legal protection is not limited in its period by law. It is different from copyright protection, for instance, which lasts for the life of the artist and 70 years after his/her death. A much shorter term of protection is granted for patents and designs. This is why so many companies and entrepreneurs prefer to protect their inventions and technological developments secretly, in order to enjoy longer protection.
How Trade Secrets are Defined?
The Commercial Torts Law is the Israeli law which defines trade secrets and their protection. The law defines a trade secret very broadly. The definition is: “Commercial information of any kind, which is not publicly known or which cannot easily and legally be discovered by the public, the confidentiality of which grants the owner of the information an advantage over his/her competitors, provided that the owner takes reasonable actions to protect its secrecy.”
This definition may include various types of business information. Data on customers, methods, software algorithms, recipes, designs that are intended to be kept confidentially for a certain period – these and others may be recognized as trade secrets and enjoy the law’s protection.
What are the Requirements for Granting Legal Protection to Trade Secrets?
The law has 3 main requirements for obtaining protection for a trade secret. The first requirement is that information is commercial data which is kept secretly. Information which has been made public cannot generally enjoy legal protection as a confidentiality. The second requirement is that the mere confidentiality of the information gives competitive advantage to the owner of the secret. It can apply for many kinds of information, such as a method to create a formula which is not widely known, for instance.
The third requirement is to use reasonable means in order to preserve the confidentiality of the data. Here as well, the definition of “reasonable means” is broad and dependent on the circumstances of the case. Different means would fit different cases. In some cases it would be sufficient to keep the data in a safe or to use a designated software in order to keep it protected. In other cases, setting office protocols would be required. Different methods would fit to different types of data. Thus, it is highly recommended to get a legal consultancy in order to ensure the secret is fitting the requirements of the law.
What Legal Protections are Granted to Trade Secrets?
The main protection the law grants is a protection against unauthorized use of the secret by others. Such use is referred to as theft or misappropriation. It means obtaining the secret by using unlawful measures, or without the owner’s consent and against an obligation by the law or another form of obligation. A common example is an obligation created by virtue of employment relations. Employees who were exposed to a secret and then used it unlawfully might be seen as breaking their obligation to keep the information confidential, even if they haven’t signed a contract which explicitly oblige them to do so.
Exceptions to Legal Protection
Not in every case of stealing a trade secret will the Israeli court recognize legal liability, and rule in favor of the owner of the trade secret. According to the law, the court has the power to discharge a person from liability in cases where the data behind the secret has reached the person as a part of working at the trade secret’s owner and became a part of his skills. This exemption limits to some extent the ability to protect trade secrets that employees were exposed to, although it will not be granted in any given case.
Another case where the court might discharge a person from liability to trade secrets theft occurs when the use in the secret is justified due to the public policy. This legal term refers to various possible cases. For instance, when revealing the secret is necessary for protecting an important public interest, such as the state’s security, the court might discharge a person from liability to a trade secret misappropriation.
How to Share the Secret with Others?
That is literally the million dollar question, which leads us to the main topic of this article. In many cases entrepreneurs develop brilliant ideas that can gain a large financial profit. In order to make products and services out of those ideas, they are required to locate partners and investors. Often there a mutual disclosure of trade secrets is required in such cases.
Yet, there is a built-in lack of trust between the parties in those situations. Each secret owner will tend to fear that the other party will use its secret unlawfully after being exposed to it. How can such a situation be prevented, without harming the protection of the trade secrets?
This is a very complex issue. It requires the creation of obligation to preserve the secret confidential among those who are exposed to it. It is usually done through a confidentiality agreement. Such an agreement is called Non-disclosure Agreement (NDA). It is important that the other party will sign the agreement before being exposed to the secret.
What is Included in a Mutual Non-Disclosure Agreement?
Mutual non-disclosure agreement is a complex kind of agreement in legal terms. It will usually specify the signing parties, the data which is considered as a trade secret, The period within which the agreement will oblige the parties to maintain confidentiality, etc. The agreement will usually also detail the possible sanctions for breach of confidentiality obligation, such as an agreed compensation.
Legal Actions Against Breach of a Mutual Non-Disclosure Agreement
Legal actions are often taken in cases where the conditions of the NDA have been allegedly breached. It is important to note that many of those cases would not end up in court, as the parties tend to settle them in alternative proceedings, such as arbitration or mediation. The reason being the fear of the secret being exposed during the court proceedings. Court proceedings are usually open to the public. Alternative proceedings, however, are mostly held privately.
In many cases where misappropriation allegations are raised, it is common to send a warning letter and to invite the other party to a mediation or arbitration. Mediation proceedings are designed to help reach a compromise that would be acceptable for both parties. A main benefit of mediations is that the information the mediator is exposed will generally remain confidential. It is a big advantage of the proceedings, especially in cases of trade secrets.
Arbitration proceedings are more similar to court proceedings, and they are held by an arbitrator(s), usually appointed by the parties. Here too, the proceedings are usually held privately. Thus, they allow to maintain maximum discretion of the information and prevent public exposure to trade secrets.
An issue which is often discussed in trade secret proceedings is the period of confidentiality. The limitations on the other party to use the data behind the trade secrets should be reasonable. It is especially significant in cases of employees that are exposed to trade secrets during their work.
It is customary to use non-compete agreements. The agreements prevent the employees from using the information they were exposed to after their employment. However, the Israeli courts are authorised to examine whether the period the parties agreed upon is reasonable. It is thus important to consult with an expert intellectual property attorney before signing on those agreements.
As we elaborated above, trade secrets are a form of intellectual property asset. Their legal protection is a very complex issue. A mutual non-disclosure agreement is one of the most ultimate ways to secure this protection. For any further questions or legal assistance, you may contact us and we will be glad to assist. The law firm of Decker & Ofir specializes in IP and has extensive experience in representing Israeli and international clients in trade secret cases and other IP matters.