Developing the Right Mindset Toward Information Disclosure
“Nothing ventured, nothing gained.” These sage words, slightly paraphrased from John Heywood centuries ago, have been uttered countless times across inestimable contexts. Most emerging entrepreneurs recognize that even the potential for success requires a significant investment of time, money, and courage. However, we should also add a degree of trust to that mix. At some point, every entrepreneur must convey certain information about his or her proposed business venture to another party, whether a potential investor, lender, supplier, manufacturer, designer, or other strategic partner in the entrepreneurial progression.
One distressing challenge that entrepreneurs face early in – and throughout – a venture’s life is sharing information for purposes of exploring opportunities, while still protecting the information. In my legal career, I routinely observe similar apprehension among emerging songwriters concerned about “shopping” their musical compositions to music publishers or other parties, fearing that a recipient might infringe their songs.1 Acknowledging the issue demonstrates an appreciation for the potential commercial viability of one’s creation, whether a business model, invention, design, or song catalog (yes, songwriters are entrepreneurs too), and this is a good thing.
When confronted with the need to disclose confidential business information, a good starting point is to consider what protections might exist under state or federal law for the information to be conveyed. Although an examination of potential intellectual property protection is beyond the scope of this article, the information to be disclosed might be deemed a protectable “trade secret” under the Uniform Trade Secrets Act (“UTSA”), which West Virginia and many other states have adopted.2 The statutory definition of a trade secret in West Virginia (and other states that have adopted the UTSA) is expansive:
“Trade secret” means information, including, but not limited to, a formula, pattern, compilation, program, device, method, technique or process, that:
(1) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
(2) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.3
As the first two italicized portions above indicate, much of the information an entrepreneur might disclose to another party likely falls within the definition of a trade secret.4 However, as the final italicized portion suggests, one who wishes to protect that information as a trade secret must take steps that are “reasonable under the circumstances” to preserve such protection. What, exactly, are reasonable steps, you ask? The short answer is “it depends.” The circumstances surrounding disclosure and the information, itself, can differ significantly (e.g., Colonel Sanders’s original “eleven herbs and spices” vs. a nominal improvement on an existing invention). The not-so-short answer is it is always advisable to consult with legal counsel when devising steps to protect any potential trade secret.
Whether or not certain information fits the definition of a trade secret, it is also advisable to put in place a nondisclosure agreement (“NDA”) before disclosing proprietary information. Indeed, the consistent use of NDAs is usually one of the “reasonable steps” a trade secret owner takes to preserve trade secret protection. Essentially, an NDA is a written agreement between the discloser and recipient of confidential information that governs the information to be disclosed and the steps the recipient must take to preserve confidentiality after disclosure, including limiting access to employees and the ultimate disposition of the information after the recipient no longer needs it.
Many entrepreneurs are uncomfortable asking other parties to sign NDAs, often out of concern for offending potential strategic business partners. However, most experienced business people recognize that protecting core business information is necessary and are happy to oblige. Frankly, potential investors should appreciate an entrepreneur taking such steps, as this should bolster the value of the investment. However, unlike many other private investors (e.g., angel investors) a growing number of venture capital firms refuse to sign NDAs, as they expect entrepreneurs to have taken steps to protect the core intellectual property (e.g., filing patent, trademark, and/or copyright applications) before the pitch meeting stage.
One common characteristic of entrepreneurs is an unbridled enthusiasm for their ideas. This too, is a good thing, as no one feels the same connection to a new idea as its creator. However, this often translates into sharing more information than necessary. When considering sharing information with other parties, it is helpful is to ask, “what and how much information do I really need to share?” Although sometimes challenging, one should attempt to tailor the disclosure to the specific circumstances and purpose, and supplement the initial disclosure at a later time if necessary.
The information in this article is not a substitute for seeking legal advice from counsel; again, circumstances can differ significantly. Most entrepreneurs consult counsel on a variety of issues early in the life of a new venture. Counsel should be able to guide the entrepreneur on specific information disclosures, as well.
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Kevin Levine, a native of Huntington, West Virginia, is the founding member of L. Kevin Levine, PLLC in Nashville, Tennessee; an adjunct instructor in the Marshall University Lewis College of Business; and a member of the Board of Advisors for the iCenter.
1 Certainly, copyright infringement occurs sometimes. However, not as often as many people suspect, particularly when dealing with reputable music publishers.
2 Codified at W. Va. Code § 47-22-1, et seq. West Virginia is one of many states that have adopted the Uniform Trade Secrets Act, in whole or in part. Thus, information disclosed might also receive similar protection in states other than West Virginia.
3 W. Va. Code § 47-22-1 (LexisNexis, Lexis Advance through enacted legislation effective April 30, 2021, with the exception of H.B. 2916) (emphasis added).
4 It is important to understand that this is merely one portion of the UTSA definitions section and one must consider other provisions of the act to determine what, if any protection, might apply under specific circumstances.