Referencing Confidential Information When Preparing a NDA

A nondisclosure agreement (NDA) is used to impose confidentiality obligations on one or more parties. A NDA is often used when an inventor or owner desires to disclose details about an invention to another party, such as to obtain engineering or design assistance or to explore a possible business opportunity.

But how is confidential information referenced before an NDA is signed? First, let’s look at a case.

Chris Pritchard alleged that he sought to contract with an engineering firm in order to manufacture his dash cam with AI capabilities.

He reached out to Aaron Thompson at Harman Connected Services. Pritchard and Thompson had a phone call where Thompson allegedly told Prichard that “the correct way to go about sharing information and getting started on a future collaborative effort, would be to work up a Non-Disclosure Agreement (NDA).” Thompson allegedly offered to draft the agreement but allegedly told Pritchard that “the proper wording for the NDA would need to include word specific content related to the product.” Based on the alleged representation, Pritchard allegedly shared “very specific proprietary design, technical and AI operations of the product not revealed in [Pritchard’s] patent(s) so that the NDA . . . would encompass all the necessary details for protection of all parties involved.”

Later communication broke off between Pritchard and Thompson. Then Pritchard visited Harman’s website and allegedly discovered “an exact replica of [Pritchard’s] product” that was “complete with literally every item discussed on the phone calls in December 2021, and mimicked every AI operation listed in the patent pending page on the USPTO website.”

Pritchard sued Thompson and Harman for a number of claims including breach of contract.

Pritchard alleged in his amended complaint that an “oral contract was entered on December 3, 2021, at 1:59 p.m., when Plaintiff and Mr. Thompson engaged in a confidential call upon which Plaintiff sought the correct way to go about sharing information and getting started on a possible, future, collaborative effort regarding Plaintiff’s invention.”

The magistrate judge found that this allegation was not sufficient to plausibly establish the existence of a contract. The judge said, “There are no facts that detail an offer, acceptance, and consideration, nor is it clear what was promised by each party under the terms of this alleged oral contract.” The judge recommended that breach of contract claim be dismissed.

It is not necessary to disclose the invention or the confidential information, and it is not disclosed, to prepare a NDA. How the subject matter of the NDA is described will depend on the circumstances, but without disclosing the confidential information. For example, the NDA may identify the general subject matter at a high level such that no confidential information is disclosed.

If the NDA itself discloses confidential information or if the confidential information is disclosed to be included in the NDA, but the NDA never materializes or the other side refuses to agree to it, then the information will be disclosed to the other party without first obtaining a written commitment of confidentiality, which the NDA is supposed to provide. Perhaps one could rely on an “oral agreement” or another cause of action, but that’s risky, and it is a recipe for expensive disputes about what was allegedly agreed, and it might not work out, as occurred in Pritchard’s amended complaint.

One purpose of an NDA is to define the terms and confidentiality obligations of the parties clearly agreed in writing before a disclosure of confidential information between the parties–avoiding the possibility there is no confidentially obligation or nondisclosure agreement at all.

Case: Pritchard v. Thompson, No. 22-cv-2838-JPM-tmp (W.D. Tenn. Aug. 3, 2023) [order adopting Magistrate Judge’s Report and Recommendation]

Fictitious Name Signups: Controlling Who is a Party to Technology Agreements

Should your customer be able to sign up on behalf of an unnamed third party? Should they be able to assign their rights under the agreement to another party? Should they be able to use fake names and addresses? Should they be able to reverse engineer the software or service? Often the answer to these questions is no. And the applicable agreement should make that clear.

Let’s see what happens when one company allegedly gains access to a competitor’s software by signing up under a fictitious user and company name.

CCC Intelligent Solutions Inc. and Tractable Inc. provide customers with estimates of the cost to repair damaged automobiles using software with purportedly confidential algorithms.

CCC’s lawsuit against Tractable alleges as follows. Tractable had one of its employees obtain a license to use CCC’s software. The employee used a false name, physical address, and email address to sign up purporting to represent “JA Appraisal.” The employee described JA Appraisal, as a small, independent appraiser. CCC issued the requested license.

CCC’s license forbids assignment of the license without CCC’s consent and represents that JA Appraisal is not a front for anyone else. In particular, it provides, “CUSTOMER [JA Appraisal] represents that it is acting on its own behalf and is not acting as an agent for or on behalf of any third party, and further agrees that it may not assign its rights or obligations under this Agreement without the prior written consent of CCC.” Further the license forbids disassembly of the software or its incorporation into another product.

Tractable’s employee gave Tractable CCC’s software package. Tractable disassembled the software and incorporated some of its algorithms and features into Tractable’s product.

CCC filed suit against Tractable alleging the forgoing, and Tractable responded by requesting an order to refer the dispute to arbitration, noting a clause in the agreement between CCC and JA Appraisal.

How could Tractable claim to enforce a term of the license that it was not a named party to? Tractable asserted that (1) “JA Appraisal” is just a name that Tractable uses for itself, so it was a party to the agreement, and (2) if using a pseudonym and describing the business as “independent” is fraud, the arbitrator can consider that defense.

Yet, JA Appraisal was not an assumed name or otherwise publicly used or known to the public as a name that Tractable did business. The court said:

“Asked at oral argument whether CCC could have discovered that Tractable uses the name ‘JA Appraisal,’ counsel for Tractable acknowledged that this was not possible. As Tractable’s own little secret, it does not affect anyone else. Contractual meaning reflects words and signs exchanged between the negotiators, not unilateral and confidential beliefs… In other words, meaning is produced by an objective process. Signing a contract with your fingers crossed behind your back does not add to your rights or subtract from anyone else’s.”

CCC relied on section 163 of the Second Restatement of Contracts, which provides: “If a misrepresentation as to the character or essential terms of a proposed contract induces conduct that appears to be a manifestation of assent by one who neither knows nor has reasonable opportunity to know of the character or essential terms of the proposed contract, his conduct is not effective as a manifestation of assent.”

Tractable relied on the exception in comment a of section 163, which provides, “The mere fact that a party is deceived as to the identity of the other party, as when a buyer of goods obtains credit by impersonating a person of means, does not bring the case within the present Section, unless it affects the very nature of the contract.”

The court said: “The problem for Tractable is not that CCC failed to know ‘the full truth about its trading partner’—the issue that Restatement §163 Comment a covers—but that CCC did not know that Tractable would claim to be its trading partner.”

The general rule of section 163 applied, not the exception of comment a. Therefore, Tractable was not a party to the agreement and could not demand arbitration. The language of CCC’s license prohibiting agency and assignment was helpful in achieving the result.

Cite: CCC Intelligent Solutions Inc. v. Tractable Inc., 36 F.4th 721 (2022)