Non-Disclosure Agreements and Government Contracting

March 23, 2012 at 10:22 PM

This ALG insight addresses the issue of whether a contractor that does business with the Federal Government should attempt, where possible, to get a non-disclosure agreement (NDA) signed before disclosing any trade secrets to the Government and what steps a contractor should take to ensure protection of its trade secrets when contracting with the Government.  When addressing this issue the contractor should keep in mind that they are contracting with the Government, not with the Government employee.  There are Federal laws that apply to the disclosure of trade secrets by Government employees.  In effect, these Federal laws trump the contractors attempt to enforce a NDA against a Government employee.  However, the contractor must take certain actions outside of a proposed NDA to ensure the enforceability of these Federal laws designed to protect the disclosure of trade secrets. 

The Economic Espionage Act of 1996 (18 USC 1831-39) defines trade secrets as all forms and types of financial, business, scientific, technical, economic or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing if:

• The owner thereof has taken reasonable measures to keep such information secret, and;
• The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by the public.

There is no general definition for proprietary information in the U.S. legal code. The Federal Acquisition Regulation (48 CFR 27.402 Policy) does, however, provide a definition.

"…contractors may have a legitimate proprietary interest (e.g., a property right or other valid economic interest) in data resulting from private investment. Protection of such data from unauthorized use and disclosure is necessary in order to prevent the compromise of such property right or economic interest, avoid jeopardizing the contractor’s commercial position, and preclude impairment of the Government’s ability to obtain access to or use of such data."

This regulation is intended to protect from disclosure outside the government proprietary information that is provided to the government during a bidding process.^[1]  In addition, regulations applicable to the agencies of the Department of Defense require the Government to put a NDA in place with third parties before disclosing trade secret information in certain circumstances. 

In order to protect a company's trade secrets when delivering information to the Federal Government, companies must comply fully with the requirements of applicable statutes and regulations found in the FAR and DFARS. The “Data Rights” regulations apply to trade secret or copyrightable material such as a company's technical data, including schematics, diagrams, designs or drawings, or processes as well as computer software.  Generally, companies own the material created by its employees in the course of performing government contracts, including both technical data and computer software.  When technology is developed under a government contract, the Government will typically acquire a license to use the technology.  The scope of the Government's license to use or disclose the contractor's technology to others is generally determined by the source of the funding or can be negotiated for in the contract.

Three Federal laws apply to disclosure of specific types of proprietary information, especially disclosure by government personnel:^[2]

• For knowing disclosure of non-government information to which a government agency has gained access in connection with a procurement action, Title 41 USC 423 - Procurement Integrity, provides both civil and criminal penalties. The criminal penalty is up to five years imprisonment. The civil penalty is a fine up to $100,000. This applies mainly to government employees who receive non-government information, but also to non-government personnel who receive sensitive procurement information from government (for example, if government gives industry a bid package containing information from a potential subcontractor). This procurement integrity law applies only prior to the award of a contract. Once a contract has been awarded, other laws with lesser penalties may apply.

• Title 18 USC 1905 applies to disclosure by a government employee of any information provided to the government by a company or other nongovernment organization, if the provider of the information identified it as proprietary or as being provided to the government in confidence. The penalty is mandatory removal from office (termination of employment), and the offender may be fined not more than $1,000 and imprisoned not more than one year.

• For disclosure of non-government financial information in the custody of the government, civil remedies are allowed under 12 USC 417 Civil Penalties, which also requires the director of the Office of Personnel Management (OPM) to conduct an investigation and recommend disciplinary action on federal employees found culpable.

Effective enforcement of laws governing unauthorized disclosure of proprietary or trade secret information generally requires that the owner of this information must have taken reasonable measures to safeguard it from unauthorized disclosure.  Reasonable measures may include building access controls, escorting visitors, marking sensitive documents, non-disclosure agreements with employees or third-parties, and shredding material when no longer needed. 

For additional information how to implement these protective measures and to insure your valuable information is not disclosed by the Federal Government contact:

Emanuel Anton

Sue Carriere

This information is intended as a general overview and discussion of the subjects dealt with. The information provided here was accurate as of the day it was posted; however, the law may have changed since that date. This information is not intended to be, and should not be used as, a substitute for taking legal advice in any specific situation. ALG|Attorneys is not responsible for any actions taken or not taken on the basis of this information. Please refer to the full terms and conditions on our website.