Marking Requirements in NDAs

Most companies want to minimize negotiations and just get their NDAs signed with minimal time spent on back and forth. It often boils down to the nature of the information and the identity of the party on the other side. Is the other side a competitor? Is the information going to be announced through a press release or at an industry trade show? Is it technical information that may continue to underpin products and services where most of the value derives from secrecy?

Let’s look at the most common issue people tend to debate in the definition of Confidential Information.

With apologies to the Bard, to mark or not mark, that is the question. If information must be marked to meet the definition of “Confidential Information,” then inadvertent failure to mark takes the information outside the protective blanket of the NDA. Compare the following two clauses:

“Confidential Information” means any proprietary information, technical data, trade secrets, or know-how disclosed or made available by the Disclosing Party, whether provided orally or in written, electronic, or other form or media, and whether or not marked or otherwise identified as “confidential” ...

“Confidential Information” means all non-public proprietary and confidential information of Disclosing Party that, if disclosed in writing or other tangible form is clearly labeled as "confidential," or if disclosed orally, is identified as confidential when disclosed and within 30 days thereafter, is summarized in writing and confirmed as confidential​...

The italicized portions are in opposition. A party that does not want a “marking requirement” is more concerned about ensuring that the discussions do not end up in the public domain. A party that wants a marking requirement, on the other hand, is more worried about being accused of breach of contract or trade secret misappropriation.

At the risk of overgeneralizing, large enterprises may be concerned that a counterparty will sue if the enterprise launches a competitive product or service. From the enterprise’s perspective, this could be despite the reasonable likelihood that the enterprise already knows the information or may develop the same information independently. The large enterprise, therefore, may decide to include strong marking requirements in its mutual NDA template.

Startups and other small- to mid-sized technology companies are more likely to dislike marking requirements because they create a potential loophole in confidentiality and limited use obligations. Such companies may also not have robust written policies and training that would help ensure all proprietary information is marked or identified as confidential.

How much can you trust your employees to be careful about marking everything? In our experience, companies with in-house lawyers and larger, more established companies tend to be more cautious. They may have document and presentation templates that automatically place "Confidential" in headers or footers.

And what about oral disclosures? Strong marking requirements typically require oral disclosures to be followed with a summary of the information and a statement that the oral disclosure was confidential. How likely are companies to remember to do that? Not very.

If you are the disclosing party and fail to follow up, does that mean the orally disclosed information is free of obligations of confidentiality? Most NDAs include an exception to obligations of confidentiality for information that "was in the Recipient's possession free of any obligation of confidence at the time of disclosure." Taking this exception literally, if the disclosing party orally discloses the information 10 minutes before providing a document marked as Confidential, there is a logical argument that the exception applies. If true, then none of the information would qualify for protection. A scary thought. The result might be different if the requirement of a summary only applied to information "solely disclosed orally or visually."

Now, taking a step back, the reason the "strong marking" camp has not necessarily re-drafted those clauses probably has to do with a balancing of risks. For a plaintiff trying to rely on this logical argument, there would be problems of proof about what exactly was disclosed orally without follow up. A court also may be unlikely to interpret the contract in a way that blows a hole in confidentiality protection. Litigators would be arguing about the "meaning as a whole" and "course of dealing" or "course of trade.”

One Silicon Valley tech company we know of had an in-house attorney write a letter on its letterhead summarizing an oral discussion just once. After that, they tended to resist marking requirements more forcefully, especially when it came to oral disclosures.

Recipients, on the other hand, can reasonably point out that they may have difficulty tracking information they receive if it is not marked or, if orally disclosed, followed up with a summary identifying it as confidential. Moreover, according to our cautious recipient, if the discloser cared about the information, it would mark it as "Confidential" and send written summaries. The risk of inadvertent use of another party's confidential information is undoubtedly higher if that party did not mark it with a conspicuous legend or otherwise document the information disclosed.

Under the U.S. Defend Trade Secrets Act and the Uniform Trade Secrets Act, adopted in some form in most U.S. states, one of the elements to prove trade secret misappropriation is reasonable measures or reasonable precautions to protect the information. Depending on the circumstances, failure to mark may sink the plaintiff's case.

Consider the following middle-ground approach:

“Confidential Information” means all proprietary information, technical data, trade secrets, or know-how disclosed or made available by the Disclosing Party that is either marked or otherwise identified as confidential or proprietary or that a reasonable person would understand to be considered confidential, proprietary or otherwise sensitive information of the Disclosing Party.

There are a couple of potential downsides to the approach above despite the Goldie Locks appeal. For starters, it could create a "he said, she said" debate about whether someone orally identified something as confidential. Or parties could be debating what a reasonable person would have understood. Or more likely both. Those debates get expensive quickly if judge and jury are involved.

Despite the potential downsides, more often than not, parties with opposing views on marking and similar negotiation leverage compromise on something like the middle ground above. And some companies decide to adopt something like the middle ground approach in their standard NDA template to reduce potential back and forth. Or at least it is approved language in the NDA negotiation playbook.

So which approach should you take in your mutual NDA template? And should you accept, reject, or offer compromise language on marking requirements when presented with them? Any good lawyer likely will start the answer with "it depends" and then ask some questions such as the following:

• Which party is likely to provide more information?
• What kind of information is each party likely to disclose?
• What is the relative leverage of the parties?
• What is your own company's ability to mark proprietary documents as "Confidential" and to identify oral disclosures as confidential?
• What controls does your company have to protect third party confidential information?

When adopting a standard mutual NDA template, consider whether you want everything protected, only those things marked as confidential, or those things that fall into the middle ground of marked or reasonably understood as confidential. And when reviewing third party NDAs, consider the specific facts and circumstances. In both cases, there is typically enough at stake to make it worthwhile to seek legal advice from an attorney.