Reinventing Manufacturing

INSIGHT
Decoding the DNA for an Effective NDA
Joshua Cohen, Wendel, Rosen, Black & Dean, LLP
Collaboration across industries in manufacturing sectors
creates opportunities for spurring innovation within
companies, industries and regional economies, but collaboration
can also pose substantial risks. Enthusiastic
about new business opportunities, manufacturers often
begin sharing their proprietary information before taking
the necessary precautions. Just as one would not share
one’s social security number on a first date, manufacturers
need to be cautious about what they share with
potential business partners.
Most companies are familiar with non-disclosure agreements
(NDAs), but unfortunately many companies simply
pull an NDA off the Internet—which is akin to buying
a wedding dress on Craig’s List: it isn’t going to fit. Still
worse, companies often begin disclosing proprietary
information before the NDA is fully executed.
Who Needs an NDA? Whether producing potato chips
or microchips, manufacturers often have trade secrets
that give them a competitive advantage. Customer
lists, vendor lists, pricing, salaries, five-year business
plans and the techniques developed to manufacture
products faster, cheaper and better than competitors
are all proprietary information that companies want to
remain secret.
Under the Uniform Trade Secrets Act, there are two
prongs to a trade secret:
(1) the information must provide the owner with
independent economic value by not being generally
known to the public or those in the relevant
industry; and
(2) the owner must have taken reasonable efforts to
keep the information secret.
Sharing propriety information with a potential business
partner, a manufacturer exposes a company to two risks.
The obvious first risk is that the potential partner uses
that information to compete or leaks that information
to a competitor. The less obvious risk is that the partner
fails to make reasonable efforts to keep the information
secret. When a company shares its secrets with a potential
partner without an NDA and a competitor obtains
the secrets, even from an independent source, the
courts are unlikely to enforce the company’s rights in a
lawsuit against the competitor because the company’s
failure to obtain an NDA from a potential partner will
be used as evidence that the company failed to make
“reasonable efforts” to secure its secret.
What Is in an NDA? Manufacturers need to be consistent.
To protect its secrets, a company needs to obtain
NDAs from everyone with access to the company’s information,
including employees, existing business partners
and potential business partners. The company needs
to be explicit. An NDA that provides that “Company B
acknowledges that Company A’s widget testing process
has economic value and is not generally known” is much
stronger than a boilerplate NDA that merely provides
that “Company B acknowledges that Company A has
proprietary information that constitutes trade secrets.”
If a potential partner is in the same industry, a manufacturer
may want to include an anti-solicitation provision,
which prevents the partner from actively poaching the
company’s employees. The NDA should also require the
potential business partner to return all proprietary information
to the company at the end of the partnership.
Finally, an NDA needs to have teeth. The NDA should
include language saying that a potential breach could
result in irreparable harm and that the company is entitled
to seek injunctive relief, i.e., it has the right to seek
immediate court intervention rather than wait months or
years for a trial. The NDA should also identify the venue
and jurisdiction (e.g., “the Los Angeles Superior Court”)
where any dispute shall be resolved so valuable time is
not wasted arguing over the proper forum.
Whether manufacturers are meeting with potential
investors, technology companies or vendors, they
can benefit from developing an appropriate NDA and
ensuring that it is fully executed before sharing any
proprietary information.