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Most contracts between a manufacturer and a sales representative contain a trade secret and confidential information provision. Typically, this provision is one-sided — it protects the trade secrets and confidential information of the manufacturer and fails to address any such information for the sales representative — generically describes categories of information, is overly broad and includes all or almost all the information of the manufacturer’s business and not just its true trade secrets and confidential information. It also has the sales representative admit that all categories of information are true trade secrets and confidential information, and that the sales representative is going to be provided all this highly valuable information, as if he were an inside executive of the manufacturer, even though these “admissions” are not entirely true.

Such provisions can be legitimate, if properly drafted, but in many cases such provisions are drafted to create a trap for the unwary sales representative. In these cases, the provision is written to protect more information than the manufacturer’s true trade secrets and confidential information and, even worse in some cases, to create a non-compete obligation that may constrict the business activities of the sales representative, even after the contract and relationship have ended.

Sometimes a sales representative is more focused on other provisions in the contract, most especially on commissions during and after the term of the contract, and less focused on some confidentiality provision, which, as written in dense legalese, makes one’s eyes glass over. At the same time, it gives the impression that this provision is something that the manufacturer is entitled to — after all, the manufacturer is just trying to protect its own trade secrets and confidential information.

Limiting Information

With that said, a sales representative should thoughtfully consider what is being proposed in this provision and try to make sure that this provision is limited to information that receives trade secret protection under the law and no other; identifies what information is to be protected; what protected information is to be provided to the sales representative; and, how long it is protected. I would also suggest that a sales representative should try to make this provision mutual, so that his or her trade secret or confidential information, if any, is also protected.

One way to accomplish this is to agree to a provision that basically defines confidential information as information that meets the appropriate test in the jurisdiction, requires both parties to mark information as confidential before providing it to the other party, and then to keep the designated confidential information of the other confidential, sets forth when the confidential information ceases to be confidential and protected and requires its return at the end of the contract. Of course, an attorney may be required to draft this provision and make other provisions in the contract consistent and should be used.

A trade secret is information that the owner of the information has developed or acquired that provides an economic or competitive advantage over the competitors of the business and whose secrecy is vigilantly guarded. The owner of the information must take steps to keep this information a secret and out of the hands of its competitors or the public domain. One important step the owner takes to keep the information secret is to have confidentiality agreements with all persons who will be provided or have access to the information, including the owner’s employee, the sales representative and everyone else, including the owner’s customers.

Breach of Contract

A contract that says that all information of the manufacturer and its customers are trade secrets or confidential information exposes the sales representative to liability for breach of contract, even if the information is not a trade secret or particularly confidential. A manufacturer can sue a sales representative who has agreed to hold its secrets and confidential information and does not do so for breach of contract. This is one reason why the sales representative should not accept a provision that identifies all the information of the manufacturer and its customers as trade secrets and confidential information. Sometimes courts make a party prove that the information is a trade secret to enforce this provision under a breach of contract claim and sometimes they do not. Therefore, to avoid this potential trap, the sales representative should make sure that the information identified in the contract as a trade secret or confidential information is treated as a necessary secret of the manufacturer’s business and its relationship with the sales representative.

For example, the provision protecting the manufacturer’s trade secrets and confidential information may reference the prices of the manufacturer’s products, which, on its face, may seem reasonable. However, the sales representative should determine whether these prices are confidential and secret, especially in the circumstance where they are provided to the customer (and/or its consultant) without first requiring a non-disclosure agreement (“NDA”). Nonetheless, although the customer and its consultant are free to disclose and use the “secret and confidential” pricing information, some judges may still hold that, although the information is not a trade secret under the law, the information is still protected as confidential information under the contract, and permit the lawsuit for breach of contract to proceed. The same may be true for other information, such as information about the customer, such as its needs and purchasing habits, even though competitors and consultants may have knowledge of similar information, a customer is not required to keep this information confidential and secret and may provide to others, including a competitor of the manufacturer or consultants, and the sales representative may have had knowledge of all or some of this information before entering into a relationship with the manufacturer.

Equally important, a manufacturer is not limited to a breach of contract claim. It might also bring a federal claim for misappropriation of a trade secret under the Defense of Trade Secrets Act (which has been in effect since 2016) and a state claim for misappropriation of a trade secret under its trade secret law (many of which are based on the Uniform Trade Secrets Act and are therefore similar).

Trade Secrets

While these claims require proof that the information “misappropriated” is a trade secret under the law, there can be a costly dispute as to whether it is a trade secret under the law, and courts can reach different conclusions about this issue. Returning to the price example above, many courts “presume” that the information listed as a trade secret or as confidential information in the contract probably deserves some protection, as it appears that the parties agreed to its status. At a minimum, the sales representative will have to explain why the status of the information referenced in the contract is different from the position on the status of such information then being advanced to the court and why he or she “admitted” this information was a trade secret and confidential information in the contract. It has been my experience that some judges are persuaded that no information can be a trade secret if people who are provided it have not executed an NDA, some judges are not, and some judges are inclined to let the jury decide. In any event, the sales representative has been put in the position of escaping a trap the wording in the contract set.

There are other concerns involving these types of provisions, especially where they include information that is not really a trade secret or true confidential information. The manufacturer might ask the court for an injunction prohibiting the sales representative from working for a competitor after the manufacturer and sales representative have terminated their relationship or set limitations on such work. In other words, some businesses try to use trade secret and confidential information clauses to bolster their claim to enforce a non-compete post-termination provision in the contract or to persuade a court to enforce a non-compete in a state that generally does not enforce non-competes. In both circumstances, the manufacturer will attempt to use the simple trade secret and confidentiality clause to convince a court to limit what post-termination activities the sales representative may engage in, especially with respect to the manufacturer’s competitors, and to justify its failure to pay the sales representative all commissions due and to support a claim for damages against the sales representative.

Creating a Non-Compete

In addition, a manufacturer can attempt to use the trade secret and confidentiality provision in the contract to “create” a non-compete that is not in the contract. Some courts have refused to permit a manufacturer to create a non-compete in this way and then enforce it, but others have not. It remains a clear and present risk that the unwary sales representative incurs when he or she permits the trade secret and confidential information provision to be overly expansive and inaccurate.

This risk is especially true in jurisdictions where a doctrine called “inevitable disclosure” is recognized. As I recall it, this doctrine applies in 12-15 states and the issue as to whether it applies in federal trade secret claims is undecided. Some courts have recognized it, some have rejected it and some have not addressed it. Where it is applied, the inevitable disclosure doctrine indicates that, based upon some factors, it is inevitable that the person will disclose and use the trade secret information he or she gained in prior work in his or her new work. The court then may enjoin the person not only from disclosing or using the trade secret information, but also from performing similar duties in his or her new work and, in some cases, from even accepting a new business relationship, where the “inevitable” disclosure and use will occur.

Negotiating a properly drafted trade secret and confidential information provision in a contract is just good common sense. A poorly drafted provision can spring a trap resulting in costly litigation, liability for damages to the manufacturer, a loss of commissions due, and a limitation on the sales representative’s ability to conduct and build his or her business after termination of a relationship with a manufacturer. The sales representative should take great care, in consultation with his or her attorney, to properly negotiate this provision.

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