US Court of Appeals for the Federal Circuit Affirms that Contractual Terms Override Trade Secret Law

In Convolve and MIT v Compaq and Seagate, Convolve, Inc and the Massachusetts Institute of Technology sued Compaq Computer Corp (“Compaq”), Seagate Technology, LLC, and Seagate Technology, Inc (collectively “Seagate”) for, among other things, trade secret misappropriation. Earlier, the US District Court for the Southern District of New York granted summary judgment in favour of the defendants and found that Compaq and Seagate did not misappropriate Convolve’s trade secrets. The plaintiffs appealed to the Court of Appeals for the Federal Circuit (“CAFC”). The CAFC has now affirmed the district court’s ruling on the trade secret issue. In 1998, Convolve and Compaq began licensing negotiations regarding Convolve’s technology and signed a non-disclosure agreement (“NDA”) to facilitate sharing of their respective confidential information. The NDA stated that, to trigger either party’s obligations, the disclosed information must be: (1) marked as confidential at the time of disclosure; or (2) unmarked, but treated as confidential at the time of disclosure, and later designated confidential in a written memorandum summarizing and identifying the confidential information. After the NDA was in place, Compaq, Seagate and Convolve had a meeting, during which Convolve gave a presentation regarding its input shaping technology and its application to computer disk drives. Notably, the parties acknowledged in writing after the meeting that any oral disclosure of confidential information during that meeting was covered by the NDA. However, Convolve gave two other presentations to Compaq and Seagate in 1999, but did not state in writing that any of the disclosures during or in connection with those later meetings were confidential. Convolve failed to reach a licensing deal with Compaq and Seagate regarding the signal shaping technology. The CAFC concluded that Seagate did not breach the NDA to the extent it may have appropriated the information disclosed because the information was disclosed without the written confidentiality follow-up memorandum mandated by the NDA. Convolve argued that, even if it failed to disclose or confirm the confidentiality of its trade secrets in writing, its tort claims should succeed as they pled misappropriation under the California Uniform Trade Secrets Act (“CUTSA”), which does not require trade secrets to be identified as such in writing. According to Convolve, CUTSA provides that confidential relationships can be express or implied, and can depend on whether the defendant knew or should have known that disclosures were made in circumstances that compelled the receiving party to maintain confidentiality. The CAFC found that the written NDA supplanted any other duty of confidentiality that may have existed between the parties. Since the parties had contracted the limits of their confidential relationship through the NDA, one party should not be able to impose new obligations on the other party via some implied duty of confidentiality. Further, CUTSA states that misappropriation occurs when a trade secret is acquired under circumstances giving rise to a duty to maintain its secrecy. Such duty never arose in this case since Convolve disclosed its alleged trade secrets to Seagate pursuant to the provisions of the NDA but failed to follow procedures to protect the shared confidential information. Summary by: Sumaiya Sharmeen