In Canada, exclusive rights in trade secrets and confidential information may be owned indefinitely by a business unless publicly disclosed or independently discovered by a third party. So why do so many non-disclosure agreements (NDA’s) in circulation have expiration dates or time limits?
Frankly, this was an issue that I identified many years ago, but for which I could not find a ready answer in Canadian law. Until now. It turns out that the answer is found in US law and represents a potentially dangerous trap for the unwary Canadian business trying to enter into a relationship with a US business.
Apparently, some US states view perpetual NDA’s as unreasonable restraints on trade if the information disclosed is only “confidential” and does not qualify as a genuine “trade secret”. In these states, such an agreement may be considered wholly unenforceable. To avoid this result, it is not uncommon for standard non-disclosure agreements in these US states to have an expiration date. And, of course, these agreements often circulate up into Canada where they may be signed by Canadian businesses without understanding the purposes of that expiration date or the potential consequences.
For trade secrets, legal protection depends on maintaining their confidential nature. Any disclosure outside of a confidential relationship may destroy all proprietary rights in the trade secret. For this reason, the choice to either include OR omit an expiration date from an NDA can be problematic:
- If a business discloses both trade secrets and confidential information under an NDA that has no expiry date, their proprietary rights in the trade secrets may be lost if the NDA is later determined to be wholly unenforceable as an unreasonable restraint on trade with respect to the confidential information.
- If a business discloses both trade secrets and confidential information under an NDA that has an expiry date, their proprietary rights in the confidential information and the trade secrets may be lost when the NDA expires.
The answer to this situation may be to try to define “confidential information” and “trade secrets” in the NDA and specify that the NDA will only expire with respect to the “confidential information”. Of course, distinguishing between confidential information and trade secrets is a legal question to which an answer may not be readily available. When a business deal crosses international boundaries, it may be even more difficult for the parties to agree upon acceptable definitions.
Another simpler answer to this situation may be to ensure that all NDA’s include a governing law clause that designates a CDN or US jurisdiction that is known to recognize the enforceability of perpetual NDA’s for both confidential information and trade secrets. This may also be a better option if the disclosing party wants to ensure that both its confidential information and its trade secrets will be protected indefinitely by the NDA.
In sum, the lesson is that if a CDN business proposes to sign an NDA for the purposes of an international business deal, it may be well worth the time and effort to ensure that the NDA: (a) has an appropriate governing law clause and no expiration date; or (b) excludes trade secrets from any specified expiration date.