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NDAs and Sunsets

September 28, 2010

By: A. Lee Lundy, Jr.

This is a time of joint ventures and partnerships.  With commercial financing still difficult to come by, business owners are entertaining loans and investments from private parties and joint ventures/partnerships with other businesses.  So, lots of Non-Disclosure Agreements ("NDAs") are being used.  The typical NDA is an agreement that provides that information that the discloser (a person or an entity) considers confidential and that it gives to the recipient so that the recipient can perform due diligence on the opportunity will be kept confidential by the recipient.  This confidential information often consists of financial information and/or internal company operating information of the discloser that the discloser considers proprietary (i.e., trade secret information).  The information may consist of customer lists, business processes, marketing strategies and technological developments.  If the parties do not proceed with the investment, loan or partnership, the recipient is required to give back the confidential information and promises not to use any of the information it has received or learned, until the information is no longer kept confidential by the discloser.

This is where it gets interesting.  The recipient will often not want its confidentiality obligations to last forever.  So, the recipient will ask / require that its confidentiality obligations expire (i.e., "sunset") a couple years after it returns the information.  The discloser may think this is reasonable, or may simply agree to it because it needs to participation of the recipient in these challenging financial times.  But, is the sunset provision really reasonable?

As long as the discloser makes reasonable efforts at keeping its trade secret information secret, the discloser has protections under the Maryland Uniform Trade Secret Act.  The recipient can't use the trade secret information it has learned from the discloser for its own advantage while the discloser continues to treat the information as confidential.  The discloser has a variety of statutory remedies available if the recipient misuses the confidential information, including, in certain circumstances, statutory damages of two times actual damages and its attorneys fees.

But if the recipient is no longer required to treat the discloser’s confidential information as confidential after a certain date, the discloser has the very real risk that its trade secret information may no longer be a trade secret after that date.  The customer lists and marketing strategies disclosed may then be used to the discloser’s disadvantage.  The documents may have been returned and the electronic information may have been deleted, but the secret information can't really be "unlearned" by the individuals who were exposed to it.

If you are the discloser, and the recipient asks for or requires a sunset date, consider carefully whether your trade secrets will need to be kept secret after the proposed sunset date.

However, maybe on the sunset date, the information disclosed a couple years back won't be valuable or worthy of confidentiality...maybe – think about it.

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