In BladeRoom Grp. Ltd. v. Emerson Elec. Co.,1 the Ninth Circuit held under English law that a reasonable person would interpret a nondisclosure agreement (NDA) to end two years after signing because the NDA unambiguously terminated the confidentiality obligations after two years. Accordingly, Emerson was permitted to use confidential information received from BladeRoom after two years in direct competition with BladeRoom. Such a result would likely be the same in most jurisdictions in the United States, as described in detail below.
BladeRoom and Emerson competed against each other in modular data center design. The two companies signed an NDA governed by English law during negotiations for Emerson to buy BladeRoom. The NDA’s second paragraph described Emerson’s confidentiality responsibilities. Its third paragraph specified that the confidentiality requirements did not apply to information that was in the public domain. The NDA’s twelfth paragraph outlined the term as follows:
The parties acknowledge and agree that their respective obligations under this agreement shall be continuing and, in particular, they shall survive the termination of any discussions or negotiations between you and [BladeRoom] regarding the Transaction, provided that this agreement shall terminate on the date 2 years from the date hereof.2
The acquisition was never completed. Around the time the acquisition was being terminated, Facebook decided to construct a data center in Northern Sweden. BladeRoom and Emerson both proposed designs.
Facebook chose Emerson’s proposal, and the two parties executed a design-build contract. BladeRoom sued Facebook and Emerson, asserting that Emerson’s design copied BladeRoom’s technology. BladeRoom settled with Facebook but pursued its case against Emerson. BladeRoom motioned the court to prevent Emerson from asserting that the NDA’s twelfth paragraph permitted Emerson to use BladeRoom’s confidential material two years after the execution of the NDA. The district court granted the motion and decided that the NDA’s confidentiality requirements did not terminate under paragraph twelve.
The jury determined that Emerson violated the NDA and stole BladeRoom’s trade secrets.
Emerson appealed, arguing that the NDA had expired, and the Ninth Circuit, applying English law, agreed. The Ninth Circuit explained that English courts focus on the meaning of the words in the context of the document, facts and commercial situation.
The court interpreted the NDA primarily via textual analysis because it considered the language unambiguous. It held “that paragraph twelve’s natural meaning unambiguously terminated the NDA and its confidentiality obligations two years after it was signed.”3
Emerson asserted that the termination provision in paragraph twelve restricted the whole paragraph, arguing that the NDA’s obligations terminated after two years. The Ninth Circuit determined that “Emerson’s reading best follows the plain text and the whole contract’s natural meaning.”4
According to the court, a reasonable person interpreting the NDA would agree that a textual examination reinforced Emerson’s position.
The court held that under English law, the “NDA should therefore be interpreted principally by textual analysis, because of its sophistication and complexity and because it has been negotiated and prepared with the assistance of skilled professionals.”5
The court concluded: “In all, a reasonable person in the parties’ situation would have read the NDA and understood that the confidentiality obligations terminated after two years.”6 The court ruled, therefore, that the district court was incorrect when it granted BladeRoom’s motion, and it reversed the district court’s order.
Practice Tips:
While this case was decided under English law, there would likely have been a similar result under U.S. law unless there were clear evidence interpreting the meaning of paragraph twelve in a contrary manner. This decision places a premium on clear contract drafting. NDAs should be reviewed carefully to ensure there are no trapdoors that could subvert the intent of the agreement. NDA termination/survival provisions, in particular, should be carefully drafted. Disclosers of confidential information will want to ensure that the NDA requires confidential information be kept confidential after termination of the NDA. That is, the provisions relating to the requirement to keep the information confidential need to survive termination of the agreement.
Disclosers of confidential information need to carefully review NDAs because a poorly drafted NDA might end up enabling a competitor. Disclosers of confidential information should take all efforts to discern the actual interest of the receiving party before sharing the information. In the event the disclosing party is suspicious of the receiving party’s intentions, NDAs should include safeguards, such as direct noncompete and intellectual property ownership provisions. Note that the enforceability of noncompete restrictions will likely vary from state to state in the United States.
Irah Donner is a partner in Manatt’s intellectual property practice and is the author of Patent Prosecution: Law, Practice, and Procedure, Eleventh Edition, and Constructing and Deconstructing Patents, Second Edition, both published by Bloomberg Law.
1 BladeRoom Grp. Ltd. v. Emerson Elec. Co., 11 F.4th 1010, 2021 USPQ2d 901, 2021 WL 3852630 (9th Cir. 2021), amended on other grounds, 20 F.4th 1231 (9th Cir. 2021).
2 Id., 11 F.4th at 1016 (emphasis added by court).
3 Id., 11 F.4th at 1018.
4 Id., 11 F.4th at 1018.
5 Id., 11 F.4th at 1020 (quoting Wood v. Capita Ins. Servs. Ltd., [2017] UKSC 24, [13] (quotations and citations omitted)).
6 Id., 11 F.4th at 1021.