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When Trade Secrets Cannot Be Protected By an NDA

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There are some situations when even a signed NDA will not allow you to stop the disclosure or use of your secret business information. Your information will not be protected as a trade secret if:

We have already discussed the first two standards. Here we discuss independent discovery and reverse engineering. In both cases, trade secret protection is lost because the information has been discovered through legal means.

Independent Discovery

Anyone who creates the same secret information independently—even if it is identical to your business’ trade secret—is free to use and disclose that information. In other words, creating a trade secret, by itself, does not grant you exclusive rights to use that secret.

EXAMPLE: Dudely Company and Manly Company sell competing after-shave products. Dudely creates a database that compares different brands of after-shave advertising and resulting annual sales. Dudely uses this trade secret information to determine how to allocate its advertising budget. Manly’s president independently creates a similar database and publishes it in a business book. Dudely will be unable to protect its formula under existing NDAs because its database is no longer a trade secret.

To preserve a possible claim of independent discovery, many companies will not look at materials furnished by an outsider who wants to sell something to the company. By refusing to consider unsolicited materials, the company has a better argument for its independent creation of similar products. One method of proving independent creation is to use clean room techniques (see “Clean Rooms” below)

If yolightbulbu want the exclusive right to use and sell a secret process or invention, patent law may be a more effective means of protection. Click to learn more.

Clean Rooms

To create evidence that a company independently developed trade secrets, the company may employ clean room techniques, most of which involve isolating engineers or designers and filtering information to them. The engineers or designers are usually given an objective (for example, to create a software program that sends information from a wireless device to a computer) and are then presented with publicly available materials, tools and documents. The progress of the development team is carefully monitored and documented, and a technical expert or legal monitor reviews any requests for further information by the team. Records of the clean room development are saved to demonstrate that trade secrets were independently developed and to refute any claims that the work was copied.

Reverse Engineering

It is not a violation of trade secret law to disassemble and examine products that are available to the public. Trade secrets that are learned in this manner can be freely used, and the trade secret protection is lost once the information becomes publicly known.

EXAMPLE: Dudely and Manly sell competing after-shave products. Manly creates a new Macho cologne with an odor of cigarettes and gasoline. The formula for Macho cologne is a trade secret. Dudely purchases a bottle of Macho; one of its chemists examines the product, learns its formula and publishes it on the Internet. Manly will be unable to protect its formula under existing NDAs because the formula is no longer a trade secret.

Trade secret protection is not lost simply because a trade secret could be discovered by reverse engineering. For example, it’s not enough to claim that anyone could easily reverse engineer the trade secret material.

EXAMPLE: The Food and Drug Administration (FDA) made a determination that a secret ingredient in a product was not a trade secret because it could easily be discovered by reverse engineering. A federal court later overruled the FDA determination because despite the fact that the secret could have been discovered, no competitor had ever discovered the ingredient. Zotos Int’l, Inc. v. Young, 830 F.2d 350 (D.C. Cir. 1987).

To some extent, an NDA can be used to prevent reverse engineering, at least among those parties who sign an NDA. For example, if you enter into a nondisclosure agreement with a contractor, the contractor cannot reverse engineer the trade secret in order to circumvent the agreement. However, anyone who has not signed an NDA can freely reverse engineer the information.

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