Convolve, Inc. v. Compaq

Earlier this month the Federal Circuit issued its opinion in Convolve, Inc., et al. v. Compaq Computer Corporation, et al. Convolve sued Compaq and Seagate Technology for, among other things, misappropriation of trade secrets. In its ruling, the Federal Circuit affirmed an earlier district court dismissal of the misappropriation claim as it related to most of the information that Convolve argued was its trade secrets.

According to the opinion, during business meetings held in 1998 and 1999, Convolve verbally disclosed to defendants information that it argued included trade secrets. The meetings were held under a written Non-Disclosure Agreement (NDA) that called for a party who wished to disclose trade secrets to mark or otherwise designate the disclosed information as confidential. For example, if disclosed in writing, by stamping it “CONFIDENTIAL” or, if disclosed verbally, by following up the verbal disclosure with a separate letter identifying the information as confidential. Under the terms of the NDA, information that is marked or designated as confidential must then be kept secret by the receiving party. Conversely, the receiving party assumes no obligation of secrecy or non-use over information that is not marked or designated as confidential.

The Federal Circuit concurred with district court’s earlier finding of fact that Convolve had not designated as confidential the information it verbally disclosed during its meetings with the defendants. According to the court, after disclosure of the information and failure to designate it as confidential, the information immediately lost its legal status as trade secret. Convolve lost its ability to sue for misappropriation of that information.

In the most interesting portion of the opinion, the court held that Convolve lost its claim not only under California contract law, but also under the statutory framework of the California Uniform Trade Secrets Act (CUTSA). Both its breach of contract claim and its CUTSA claim hinge upon its satisfaction of the requirements of the NDA.

The opinion did not precisely address whether, or not, the information at issue remains classified as trade secret for purposes of later misappropriation claims against different parties. Arguably, the right to sue other parties also evaporated at the time of disclosure to Compaq and Seagate.

It is worth noting that the confidentiality designation language used in the Convolve-Seagate NDA is of a type commonly used in Silicon Valley practice. Lawyers write protective documents, often requiring process that is not, and realistically cannot be, followed by business executives in the rough and tumble real world. That’s the tension.

But the opinion of the court in the trade secret portion of the case is straightforward. When technology companies sign non-disclosure agreements that define the contours of their intellectual property in trade secrets, they need to be prepared to take the protective measures called for under those agreements. Failure to do so can lead to a loss of rights.