Cannabis businesses use non-disclosure agreements (NDAs) constantly. This may be due to a combination of factors: 1) the relative hardship of acquiring and protecting intellectual property over marijuana-related processes and products, today and historically; 2) a general modus operandi of “close to the vest” dealings in an industry that historically was pushed underground; and 3) the fact that most cannabis businesses are small businesses which have not taken steps to formally register (registrable) intellectual property.
But none of that is any excuse for having a terrible cannabis NDA, or, more specifically, one terrible clause in your otherwise satisfactory cannabis NDA. Here is the problem clause:
Recipient’s obligations under this Agreement with respect to the Confidential Information will survive for a period of two years.”
That’s it. That’s the whole problem, which, if drafted by an attorney on behalf of a client attempting to protect a trade secret may rise to the level of malpractice. Why? Because trade secrets derive their protection from proof that the owner has taken reasonable efforts to safeguard the secret information. Once they are out, they are out, whether that is two, five or ten years down the line. You can’t un-ring a bell.
That said, the above clause is probably fine for an NDA where the parties are discussing an investment opportunity in a cannabis business and the information is limited to e.g., financial statements or proposed deal terms. It is never OK, though, in the context of one party trying to protect a trade secret as that term is respectively defined under the Defend Trade Secrets Act or the Uniform Trade Secrets Act as adopted in the relevant jurisdiction. Courts have said as much for quite some time.
When a client is thinking about protection of its trade secrets, the advice our cannabis business and intellectual property lawyers give is usually two-fold. First, the best way to protect the secret is never to talk about it (ever). That means withholding confidential information about methods and processes prior to getting signatures on an investment or licensing or other agreement. It also means safeguarding this information even from the businesses’ own employees, to the extent possible. Second, if you simply must share the information with a third party, the confidentiality obligations can never expire and the typical exemption requests (court order, recipient’s advisors, etc.) need to be narrowed and provisioned (under seal, advisors must sign a separate NDA and recipient is liable, etc.)
I anticipate crossing out the “will survive for two years” clause a dozen more times in 2019 on forms that clients send our law firm for tailoring and review. I anticipate seeing it another dozen times on NDAs sent to our clients by other cannabis businesses—businesses that are trade secret holders—at which point our clients can consider whether to politely raise this issue or simply take the favorable term.
We often write on this blog that cannabis agreements are not like other agreements. With trade secrets, though, they sort of are – at least with respect to the consequences of disclosure. So watch out for any survival language if you are trying to safeguard a critical device, method, technique, process, etc. It’s a simple precaution but it could make all the difference for your cannabis business.