An NDA Is Not a ‘Magic Talisman’ for Trade Secret Protection

By Stephen M. Kramarsky

Say you’re a small technology company with a great idea for your clients, but you lack the in-house expertise to make it happen. There are a couple of ways you could try to move forward. You could hire technical staff, build out a new department with the required capabilities, and develop the entire solution internally. That has the advantage of creating new, proprietary intellectual property that unambiguously belongs exclusively to the company, and if there is already a known market for the product it can be a great way to grow. But building new capabilities internally is often expensive and risky, and it can take a long time to find and hire the right people.
One alternative is to find another company that has the necessary expertise and hire them, or partner with them, to develop the technical side of the product for your clients. That inter-company relationship might be embodied in a joint venture, a partnership, an independent contractor or supplier relationship, or in any number of other common business forms. But no matter how the relationship between the companies is structured, they will likely have to share sensitive business information to get the job done, and that information will have to be protected.
That protection typically comes from a non-disclosure agreement (NDA), which may be a standalone agreement, or a part of the broader business arrangement between the parties such as an independent contractor or joint venture agreement. NDAs are extremely common when businesses need to exchange sensitive information for a limited context, such as a specific project or the evaluation or a potential transaction. They tend to be drafted broadly to cover any information that the disclosing party considers confidential or sensitive, and they place contractual limits on how the receiving party can use and disclose that information.
An NDA can thus cover information that would not qualify as a trade secret under state or federal law, and it can provide limited contractual protection to that information. But it is not a “magic talisman” for the protection of intellectual property, and it cannot create trade secret protection where it would not otherwise exist. This can be a difficult concept to convey to clients who may rely on NDAs in their business and attempts to overreach in NDA litigation are thus common.
One example arose recently in a litigation between two technology companies in the Southern District of New York. In litigation that was fundamentally over a purported breach of an NDA, plaintiff brought at least 16 claims, including what Magistrate Judge Ona Wang called “what would appear to be every conceivable claim stemming from the failed business relationship.” Converged Compliance Solutions, Inc. v. XOP Networks, Inc., No. 21-CV-5482 (PGG) (OTW), 2024 WL 4665114, at *4 (S.D.N.Y. Sept. 25, 2024). The court’s detailed analysis of those claims provides a good roadmap for practitioners considering the protective scope of an NDA.
The CCS Lawsuit
Converged Compliance Solutions (CCS) presents a fairly typical use-case for an NDA. Plaintiff CCS, a communications technology company, brought various claims against defendant XOP Networks (XOP) and some related individuals arising from a failed business relationship in 2016. CCS’s founders developed a multimedia communications suite for financial institution trading floors and created a detailed set of hardware and software specifications for their solution.
Notably, according to the complaint, CCS identified a set of industry needs (including the need to replace a specific piece of discontinued legacy hardware), and a large client for its solution. Lacking technical know-how, CCS sought a partner to help “create the software and hardware needed” for the solution it developed and settled on XOP.
The parties signed a mutual NDA in early 2016 and exchanged multiple drafts of marketing materials, business plans, requirements, and specifications with the goal of negotiating a deal to develop the CCS product. But by August 2016 the conversations fell apart, and the parties never signed the original equipment manufacturer (OEM) agreement that would have formalized their relationship. In 2018, XOP announced that it was developing a similar product with a competitor (and one-time potential client) of CCS; a year later, XOP announced that it had developed a replacement for the legacy hardware that was part of the CCS specification; and in 2020, CCS learned that XOP was awarded a contract with the major investment bank that had been CCS’s primary customer target.
In 2021, CCS sued XOP, essentially alleging (in 16 different statutory and common law clams) that XOP “tricked” it into handing over its secrets in the guise of negotiating the OEM Agreement, only to use those secrets to build a similar product for a competitor. In its complaint, CCS asserted that XOP’s later commercial success arose from its misappropriation of “trade secrets” (including technical specifications and client information) shared under the NDA in 2016. XOP moved to dismiss, and after a close analysis of the allegations, Magistrate Judge Wang recommended that all claims against XOP be dismissed without leave to replead.
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The Court’s Analysis: The Limits of NDA Protection

Breach of Contact