CHAPTER 5 USE AND MISUSE OF CONFIDENTIALITY AND NONDISCLOSURE AGREEMENTS 1
| Jurisdiction | United States |
(May 2004)
USE AND MISUSE OF CONFIDENTIALITY AND NONDISCLOSURE AGREEMENTS 1
Holme Roberts & Owen LLP
Denver, Colorado
Lynn P. Hendrix is a partner in the Denver law firm of Holme Roberts & Owen LLP. His practice emphasizes energy and natural resource law and intellectual property law.
Lynn graduated from the University of Nebraska in 1973 with a Bachelor of Science Degree in Electrical Engineering, and graduated with distinction from the University of Nebraska College of Law in 1978. During law school he served first as Executive Editor and later as Editor-In-Chief of the Nebraska Law Review.
Lynn authored "Covenants Not to Compete and Confidentiality Agreements in the Natural Resources Industry," 38 Rocky Mt. Min. Law Inst. (Rocky Mountain Mineral Law Foundation, 1992); "Internethics: Ethical Considerations of the Internet and Other Modern Communication Technologies," 43 Rocky Mt. Min. Law Inst. (Rocky Mountain Mineral Law Foundation, 1997); and "The New Model Operating Agreement Forms: Why Change the Rules in the Ninth Inning," Special Institute on Onshore Pooling and Unitization (Rocky Mountain Mineral Law Foundation, 1997). He co-authored "Dealing with Intellectual Property in Mergers and Acquisitions," 47 Rocky Mt. Min. Law Inst. (Rocky Mountain Mineral Law Foundation, 2001); "Nethics: Lawyers in Cyberspace," Special Institute on Ethics in the New Millennium (Rocky Mountain Mineral Law Foundation, 2000); "Employee vs. Independent Contractor: The Distinctions and Consequences to the Natural Resources Industry," 35 Rocky Mt. Min. Law Inst. (Rocky Mountain Mineral Law Foundation, 1989); and "The Standard of Care in the Operation of Oil and Gas Properties: Does the Operator Owe a Fiduciary Duty to the Nonoperators?" 44th Annual Institute on Oil and Gas Law and Taxation (Southwestern Legal Foundation).
Lynn co-chaired the RMMLF committee that redrafted the Rocky Mountain Unit Operating Agreement - Form 2 (Divided Interest) (1994), and chaired the RMMLF committee that drafted the Confidentiality and Nondisclosure Agreement - Form 7 (1996). He also co-chaired RMMLF's Special Institute Oil and Natural Gas Pipelines: Wellhead to End User (1995). Lynn served as Program Chair of the 45th Annual Rocky Mountain Mineral Law Institute, and was Landmen's Chair of the 43rd Annual Rocky Mountain Mineral Law Institute. Lynn is the Treasurer and on the Executive Committee of the RMMLF and a member of the Special Institutes Committee and Publications Committee. Lynn is past Chair of the Natural Resources and Energy Law Section of the Colorado Bar Association, and served as Chair of the Oil and Natural Gas Exploration and Production Committee of the American Bar Association.
Lynn is also active in many intellectual property law organizations, including the American Intellectual Property Law Association (Committee on Electronic and Computer Law and Committee on Licensing), ABA Section of Intellectual Property Law (Chair of Special Committee on UCITA), Computer Law Association, Licensing Executives Society and the International Trademark Association. Lynn served as ABA Advisor to the National Conference of Commissioners on Uniform State Laws committee that drafted the Uniform Computer Information Transactions Act, also known as UCITA (formerly known as Article 2B of the Uniform Commercial Code).
Lynn is licensed in the States of Colorado, Montana, Nebraska, New York and Wyoming and is a registered patent attorney with the United States Patent and Trademark Office. He is a member of the American, Colorado, Montana, Nebraska, New York and Wyoming Bar Associations. He is also a member of the American Association of Professional Landmen and the Denver Association of Petroleum Landmen.
I. %sIntroduction%s
II. %sContract Right or Property Interest%s
III. %sTrade Secrets%s
A. %sBasic Attributes of Trade Secrets%s
B. %sCreation and Protection of Trade Secrets%s
C. %sOwnership and Transfer of Trade Secrets%s
D. %sInfringement of Trade Secrets%s
E. %sRemedies Under the UTSA%s
F. %sAdditional UTSA Provisions%s
G. %sTrade Secrets in the Oil and Gas Industry%s
IV. %sConfidentiality and Nondisclosure Agreements%s
A. %sScope of Confidentiality and Nondisclosure Agreements%s
1. %sDefinition of Confidential Information%s
2. %sUse and Disclosure Restrictions%s
3. %sParties Entitled to Enforce Agreement%s
B. %sKey Concerns With Confidentiality and Nondisclosure Agreements%s
1. %sPreservation of Trade Secret Protection%s
2. %sOwnership of Intellectual Property Rights%s
3. %sDisclaimer of Representations and Warranties%s
4. %sAuthority%s
5. %sProcedural Controls on Disclosure and Distribution of Confidential Information%s
6. %sNo Obligation to Enter Into Other Agreements%s
7. %sNonsolicitation of Employees%s
8. %sStandstill%s
9. %sGoverning Law and Choice of Jurisdiction and Venue%s
10. %sSeverability%s
11. %sRecent IRS Regulations%s
C. %sProblematic Provisions Under Confidentiality and Nondisclosure Agreements%s
1. %sTerm%s
2. %sAlternative Dispute Resolution%s
3. %sArea of Mutual Interest%s
4. %sIntegration Clause%s
V. %sForms Currently in Use%s
VI. %sConclusion%s
%sAppendices%s
A. %sUniform Trade Secrets Act%s
B. %sCurrent Forms%s
1. %sRocky Mountain Mineral Law Foundation%s
2. %sAmerican Association of Professional Landmen%s
3. %sAssociation of Independent Petroleum Negotiators%s
4. %sAmerican Association of Petroleum Geologists and Society of Independent Professional Earth Scientists%s
5. %stax shelter provision%s
I. Introduction.
Confidential and proprietary information and data ("confidential information") can be an oil and gas company's most valuable asset. Processes, procedures, methods, information and data can all be confidential and proprietary and subject to protection under applicable trade secret law. During the exploration phase, parties invariably disclose to other parties confidential information relating to the exploration project. Often such disclosure is pursuant to one of the many types of exploration agreements used in the oil and gas industry. But even more often such disclosure is made prior to entering into the applicable exploration agreement in an effort to entice another party to join in the project.
Confidential information can be owned, or it can be licensed. Licensing is the procedure by which the owner of property allows another party to use the property to a limited extent. A confidentiality and nondisclosure agreement ("CNDA") is a type of license that allows one party to use and disclose certain information of another party to the extent authorized in the CNDA. CNDAs are contracts between parties and, to a great extent, are governed by general state contract law; but CNDAs are also subject to the overlay of the laws establishing the different types of intellectual property, particularly trade secret law. Trade secrets are classified as intangible personal property and are a type of intellectual property. Like other property, trade secrets can be possessed, owned, used, licensed and transferred. CNDAs can place a variety of restrictions on the use and disclosure of information and data. Restrictions can be placed on where, when, for how long, how, and by whom the information and data can be used or disclosed.
This paper addresses the laws of the United States. Unlike the United States, some foreign countries do not recognize trade secrets as a property interest. Foreign counsel should always be consulted when dealing with confidential information in foreign jurisdictions.
II. Contract Right or Property Interest.
Confidential information can be protected as a property interest under applicable trade secret law, contractually through the use of CNDAs, or through a combination thereof. Far too often parties enter into CNDAs without an understanding of applicable trade secret law, and how that law and the parties rights and obligations thereunder are modified by the CNDA. It is important that parties understand that confidential information is a protectable property interest. Parties need to be aware of the interrelation between applicable trade secret law and the contractual rights established by CNDAs. CNDAs can expand, limit or otherwise affect the rights, duties, and obligations provided or imposed by applicable trade secret law.
III. Trade Secrets.2
A. Basic Attributes of Trade Secrets.
Every oil and gas company has trade secrets in one form or another. Know-how, processes, procedures, information and data can all constitute trade secrets. Specifically, a "trade secret" consists of information, including a formula, pattern, compilation, program, device, method, technique, or process that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy. 3 Generally, this means that any know-how, process, procedure, information or data can be a trade secret provided it (a) is not generally known and not readily ascertainable, (b) has independent economic value, and (c) is subject to reasonable efforts to maintain secrecy.
Trade secrets arise as a property interest under state law pursuant to the Uniform Trade Secrets Act ("UTSA"), 4 Section 757 of the Restatement of Torts, 5 or Sections 39-45 of the Restatement (Third) of Unfair Competition. 6 The UTSA has been adopted in 45 states and the District of Columbia. 7 Those states that have not adopted the UTSA generally follow the Restatement. In addition, several states have specific criminal statutes covering the theft of trade secrets. 8
B. Creation and Protection of Trade Secrets.
Trade secrets arise as a matter of law if secrecy...
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