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Words matter - NDA language doesn’t protect trade secrets indefinitely

February / March 2022 IP Newsletter

You’d think that the owner of a trade secret would want to keep it, well, secret. But the wording in a nondisclosure agreement (NDA) can inadvertently undermine that goal. That’s the hard — and potentially very costly — lesson a company recently learned from the U.S. Court of Appeals for the Ninth Circuit in BladeRoom Group Ltd. v. Emerson Electric Co.

Friendship fail

BladeRoom Group Limited and Emerson Electric Company were competitors in the data center design and build industry. In August 2011, they began negotiating a sale of the former to the latter. At the beginning of the process, which ultimately fell through, they signed an NDA. The 12th paragraph of the NDA stated (emphasis added):

“The parties acknowledge and agree that their respective obligations under this agreement shall be continuing and, in particular, they shall survive the termination of any discussions or negotiations between you and the Company regarding the Transaction, provided that this agreement shall terminate on the date 2 years from the date hereof.”

The following year, Facebook began plans to build a data center in northern Sweden, and BladeRoom and Emerson both pitched designs. After Facebook selected Emerson in November 2013 and the companies signed a contract in March 2014, BladeRoom learned about the design Emerson had proposed and sued both Emerson and Facebook. BladeRoom alleged that Emerson had breached the NDA and misappropriated its trade secrets.

BladeRoom and Facebook settled while the trial was in process, but the case continued against Emerson. During the trial, BladeRoom asked the court to block Emerson from arguing that the NDA’s 12th paragraph allowed Emerson to use BladeRoom’s confidential information two years after signing the NDA. The trial court agreed that the confidentiality obligations didn’t expire under that paragraph.

The jury found Emerson had breached the NDA and willfully and maliciously misappropriated BladeRoom’s trade secrets. It awarded $30 million in damages, and the district court added $30 million in punitive damages.

Language limits

Emerson appealed, and the Ninth Circuit focused on the lower court’s interpretation of paragraph 12 — particularly the “proviso” regarding termination. Both BladeRoom and the trial court reasoned that it limited only the “discussions or negotiations” clause in the paragraph.

Specifically, they asserted that information disclosed by BladeRoom during the two-year lifespan was confidential and subject to a continuing obligation against disclosure or use. It was only information BladeRoom disclosed after the two years that wasn’t subject to the restriction.

Emerson countered that the proviso limited all of paragraph 12. In other words, the parties’ obligations under the NDA continued through any negotiations but ended after two years.

The Ninth Circuit found that Emerson’s interpretation best followed the plain text and the entire contract’s natural meaning for several reasons. For example, the court said, the term “provided” naturally means “on the condition, supposition, or understanding (that).” Thus, the paragraph plainly mandated that the parties’ obligations created by the agreement were continuing and didn’t terminate just because negotiations ended — with the condition that the agreement terminated in two years.

BladeRoom’s textual analysis, the court found, “not only twisted the ordinary meaning of words, but it also spawned absurdity.” The plaintiff proposed that paragraph 12 mandated that only the actual “discussions or negotiations” terminated after two years, not the confidentiality obligations.

By that reading, the court said, if either party stopped negotiating within two years, it would have breached the NDA. Or, if negotiations continued after two years, both parties would have breached it.

The Ninth Circuit concluded that a reasonable person in the parties’ situation would have understood that the confidentiality obligations in the NDA terminated after two years. That meant the trial court erred in prohibiting Emerson from arguing at trial that it could use confidential information after two years because the NDA had expired.

Back to the beginning

The appellate court found that the trial court’s error prevented the jury from hearing Emerson’s chief defense. As a result, it vacated the jury’s findings related to breach of contract, misappropriation and damages and ordered a new trial on those issues.

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