Exclusions from confidential-information status

by Dell C. "D. C." Toedt III on 2009-07-23

Table of Contents

Standard exclusions

The list of exclusions in a typical confidentiality clause is a pretty standard one. [UPDATE 2010-08-26: See the PRECUT nondisclosure agreement form, along with the accompanying Curator’s Notes with additional clauses and commentary, that I posted last week.]

At this writing, the basic exclusion clause is this (extra paragraphing added):

Confidential information does not include information shown to be or to have been:

(1) published or otherwise generally known by relevant segment(s) of the public; or

(2) known by the receiving party before obtaining access to it under this Agreement; or

(3) provided to the receiving party by a third party not under an obligation of confidence benefiting the disclosing party; or

(4) independently developed by the receiving party without use of the disclosing party’s confidential information; or

(5) disclosed by the disclosing party to a third party without confidentiality obligations comparable to those of this Agreement. [“Naked” disclosure of trade-secret information has been held to destroy trade-secret rights — see this note.]

Heads-up: Don’t categorically exclude subpoenaed information

It’s a very bad idea to categorically exclude information subject to subpoena — see this article for additional information.

Specific combinations of excluded items can still be confidential

Some disclosing-party lawyers like to include a clause like the following one, as a signal to the judge that confidential information can consist of a combination of information components that, if considered separately, would not be deemed confidential:

For the avoidance of doubt, no combination or compilation of information will be deemed to be excluded from confidential-information status, even if some or all of its component parts are individually excluded, unless the combination or compilation itself and its economic value and principles of operation are themselves within an exclusion.

Examples of holdings:

Decision Insights, Inc. v. Sentia Group, Inc.,No. 07-1596, at 17-21 (4th Cir. Feb. 12, 2009) (reversing and remanding summary judgment; plaintiff was entitled to try to show that its software as a total compilation was a trade secret) (unpublished).
Herz v. Luzenac Group, Nos. 06-1324, 06-1358 (10th Cir. Aug. 11, 2009) (reversing and remanding summary judgment in relevant part — district court erred in concluding that former employer’s process for manufacturing talc-based product was not a secret merely because some individual elements of the process were publicly known; district court failed to analyze the trade-secret status of the production process as a whole). [ADDED 2009-10-05]

Proof requirements for exclusions

Some disclosing parties like to include a clause like the following in their NDAs:

A party wishing to show that particular information falls within an exclusion from confidential-information status must do so (1) by documentary evidence that amounts to a preponderance of the evidence, or failing that, (2) by clear and convincing evidence.

Some receiving parties may well balk at this:

This clause reverses the usual burden of proof, putting it on the receiving party instead of the disclosing party.
The clause also raises the bar by requiring the disclosing party to put on more evidence than the law would otherwise require.

Of course, as a practical matter, it may not make much difference: In many cases, judges and juries are probably going to be skeptical of a receiving party’s claim, based purely on oral testimony, that particular information is not confidential, unless the testimony is pretty compelling.