Don’t Miss the Mark When Negotiating Marking Requirements in Non-Disclosure Agreements

When you come across a marking requirement in a Non-Disclosure Agreement (NDA)—and you will—it is imperative that you effectively negotiate and advise your business client of the risks involved. Ultimately, your client’s failure to mark their information “CONFIDENTIAL” could render the information unprotected. Given the fact that most businesses do not properly mark their documents, this is a huge risk to your client’s valuable confidential information. One missed mark and your client could risk losing protection for millions of dollars’ worth of proprietary information. Don’t. Miss. The Mark.

A marking requirement is a clause that creates a duty on the part of the disclosing party to identify (i.e., mark) a document, material, or piece of information as “CONFIDENTIAL” at the time of the disclosure as a condition precedent to receiving confidentiality protections under the NDA. Typically, the marking clause is found in the section defining “Confidential Information.”

In this article, we will review recent U.S. cases on this topic, evaluate pros and cons to marking requirements, and provide tips on how to negotiate a marking clause.

What do U.S. Courts Have to Say About Marking Requirements?

While there are instances when an implied duty of confidentiality can exist, there is no implied duty to mark information “CONFIDENTIAL” in the United States. This duty only exists contractually. That means that if a contract is silent on a marking requirement, then no there is no duty to mark. The issue only arises when an NDA contains an express marking requirement. As shown below, courts will most likely enforce express and clearly defined marking requirements.

In Convolve v. Compaq, the Federal Circuit upheld a marking clause finding that information disclosed during two presentations was not protected by the NDA because the disclosing party did not send written confirmation that the presentations were considered confidential, as required under the NDA.^[1] The NDA contained a very detailed marking clause with explicit cause and effect language, rendering it unambiguous.^[2]  The court held that the terms of a written contract supplant any implied duty of confidentiality that may otherwise exist between contractual parties. As such, a marking requirement expressly written into an NDA overrides any implied duty to hold unmarked information as confidential.^[3]

In Vesta v. Amdocs, the court was unable to rule on the enforceability of the marking clause because it was unclear what effect the failure to mark had on the information’s confidentiality status.^[4]

In PQ Labs v. Yang Qi, the NDA did not contain an express marking requirement.^[5] Nor did it expressly mention that no marking was required. The court held that the disclosing party did not have a contractual duty to mark, rendering the information protectable by the NDA even without a marking.^[6]

To Mark or Not to Mark?

There are pros and cons to using marking requirements in an NDA. It is important to evaluate whether the pros outweigh the cons in each instance and to advise your client accordingly.

Contract Negotiation Tips

The legal requirements of an NDA rarely translate over to the business, leaving a large gap between the contractual requirements and the practical behavior of the parties. Attorneys negotiate NDAs. But the business is responsible for exchanging and handling confidential information. Therefore, if a marking clause exists, it is imperative that in-house counsel take the contract review one step further and notify the business client of the associated risks involved.

If your client is usually the receiving party and wants to have a marking clause in place, then make sure it is drafted clearly and outlines the consequences of non-compliance—like the Convoy NDA above. On the other hand, if your client is more often the disclosing party, then you will likely want to negotiate down, or completely out of, any marking requirements. In that case, here are some contract negotiation tips, in order of most (top) to least desirable (bottom).

To recap, whether or not an NDA contains a marking clause, the best practice is to advise your business clients to adopt a healthy internal marking policy to protect their invaluable proprietary and confidential information. The legal community and our business clients could benefit from legal tech that specifically addresses this issue. In the meantime, Word and Outlook offer some simple marking tools. 

^[1] Convolve, Inc. v. Compaq Comput. Corp., 527 F. App’x 910, 921–22 (Fed. Cir. 2013).

^[2] The Convole NDA included the following language: Confidential Information means (a) written information clearly marked confidential or something comparable and (b) oral or visual information (i) designated confidential at the time of the disclosure and (ii) confirmed in a writing delivered within twenty (20) days to the recipient which provides clear notice of the claim of confidentiality and describes the specific information disclosed. No party shall have any responsibility under this Agreement for any information which is not so marked in writing at the time of disclosure. Id. at 923.

^[3] See id. at 924–25.

^[4] In the Vesta NDA, the definition of “Proprietary Information” made no reference to marking requirements. However, the confidentiality terms stated that “[d]isclosure of the disclosing party’s Proprietary Information to the receiving party may only be made in writing or other tangible or electronic form that is marked as proprietary and/or confidential information of the disclosing party…” Vesta Corp. v. Amdocs Mgmt., Ltd., No. 3:14-CV-01142-HZ, 2018 WL 4354301, at *9 (D. OR Sept. 12, 2018).

^[5] PQ Labs, Inc. v. Yang Qi, No. 12-CV-0450-CW, 2014 WL 334453, at *3 (N.D. CA Jan. 29, 2014).

^[6] Id. at *4.