Establishes requirements for secure storage, handling, destruction, and return of tangible confidential items such as prototypes, samples, documents, and equipment.
Medium Complexity
What This Clause Does
A physical materials handling clause governs how the Receiving Party must treat tangible items containing or embodying confidential information. Unlike digital data that can be transmitted and copied invisibly, physical materials such as product prototypes, engineering samples, printed documents, equipment, molds, dies, and biological specimens require specific handling protocols. This clause typically addresses secure storage requirements, access restrictions, chain of custody documentation, destruction methods, and return procedures. It ensures that physical manifestations of trade secrets receive the same level of protection as their digital counterparts.
Why This Clause Matters
Tangible Trade Secrets: Many trade secrets exist in physical form - manufacturing equipment configurations, material samples, chemical formulations, and prototype devices that cannot be adequately protected by digital security alone.
Chain of Custody: Physical materials can be lost, stolen, or mishandled. Clear handling requirements establish accountability and enable investigation if materials go missing.
Destruction Verification: Unlike digital files that can be deleted remotely, physical materials require affirmative destruction actions. Without clear requirements, materials may linger indefinitely in warehouses or filing cabinets.
Regulatory Compliance: Certain industries (pharmaceuticals, defense, nuclear) have specific regulatory requirements for handling and destroying physical materials containing sensitive information.
Evidence Preservation: Proper handling documentation creates a defensible record if litigation arises regarding how materials were treated during the business relationship.
Legal Context
Courts evaluating trade secret misappropriation claims examine whether the owner took reasonable measures to maintain secrecy of physical materials. Documented handling, storage, and destruction procedures demonstrate diligence. In industries subject to export controls (ITAR, EAR), physical materials containing controlled technical data have specific handling requirements that may supersede contractual provisions. The Defend Trade Secrets Act and state equivalents recognize that physical embodiments of trade secrets merit protection, and inadequate handling procedures can undermine claims of secrecy.
Physical Materials
Any physical materials containing Confidential Information provided by the Disclosing Party shall be stored securely by the Receiving Party. Upon termination of this Agreement or upon the Disclosing Party's written request, the Receiving Party shall promptly return all such materials or, at the Disclosing Party's option, destroy them and provide written certification of destruction.
Basic Version: Simple secure storage and return/destroy requirement. Suitable for ordinary business documents and non-sensitive physical materials. Relies on reasonable interpretation of "securely."
Physical Materials Handling
1. Definition. "Physical Materials" means all tangible items containing, embodying, or revealing Confidential Information, including but not limited to: printed documents, prototypes, samples, models, equipment, tools, molds, dies, biological materials, chemical compounds, and any other physical embodiments of Confidential Information.
2. Secure Storage. The Receiving Party shall store all Physical Materials in a secure location with access limited to authorized personnel who have a need to know. At minimum, Physical Materials shall be stored in locked cabinets, rooms, or facilities with controlled access.
3. Inventory and Tracking. The Receiving Party shall maintain an inventory of all Physical Materials received from the Disclosing Party, including date received, description, quantity, storage location, and personnel with access.
4. Handling Restrictions. Physical Materials shall not be:
(a) Removed from the Receiving Party's secure facilities without prior written authorization;
(b) Copied, photographed, scanned, or otherwise reproduced without prior written authorization;
(c) Disassembled, reverse-engineered, or subjected to any form of analysis beyond that expressly authorized; or
(d) Transferred to any third party.
5. Return of Materials. Upon termination or expiration of this Agreement, or upon the Disclosing Party's written request, the Receiving Party shall, within fifteen (15) days:
(a) Return all Physical Materials to the Disclosing Party via secure courier with tracking and signature confirmation; or
(b) If directed by the Disclosing Party, destroy all Physical Materials using methods appropriate to the material type (shredding for documents, physical destruction for samples and prototypes).
6. Certification. Within five (5) days of completing return or destruction, the Receiving Party shall provide written certification signed by an authorized officer confirming that all Physical Materials have been returned or destroyed in accordance with this Agreement.
Standard Version: Comprehensive handling requirements with inventory tracking, specific restrictions, and certification requirements. Appropriate for prototypes, product samples, and engineering materials in technology and manufacturing contexts.
Physical Materials Handling, Security, and Disposition
1. Comprehensive Definition. "Physical Materials" includes any and all tangible items that contain, embody, reference, derive from, or could reveal any Confidential Information, including without limitation: documents, prototypes, pre-production units, samples, specimens, biological materials, chemical substances, equipment, machinery, tools, dies, molds, fixtures, test results, measurement data in physical form, packaging, labels, and any item that has come into contact with or been created using Confidential Information.
2. Security Requirements. The Receiving Party shall:
(a) Store all Physical Materials in a dedicated secure facility with restricted access controlled by electronic key cards, biometric authentication, or equivalent security;
(b) Maintain 24/7 video surveillance of all storage areas with recordings retained for a minimum of ninety (90) days;
(c) Limit access to specifically named individuals who have been pre-approved in writing by the Disclosing Party;
(d) Maintain a detailed access log showing every instance of access to Physical Materials, including date, time, individual, and purpose;
(e) Conduct quarterly physical inventory audits and provide reports to the Disclosing Party.
3. Chain of Custody. The Receiving Party shall implement and maintain a documented chain of custody protocol for all Physical Materials, tracking every transfer, movement, or handling event. The Disclosing Party shall have the right, upon reasonable notice, to inspect the Receiving Party's storage facilities and review chain of custody records.
4. Absolute Prohibitions. The Receiving Party shall not, under any circumstances:
(a) Remove Physical Materials from approved storage locations except for authorized use;
(b) Reproduce, copy, photograph, scan, x-ray, or create any image or representation of Physical Materials;
(c) Conduct any testing, analysis, measurement, or examination beyond that expressly authorized in writing;
(d) Disassemble, deconstruct, or separate any component of Physical Materials;
(e) Allow any third party, including contractors, consultants, or service providers, to access Physical Materials without the Disclosing Party's prior written consent.
5. Mandatory Return and Verified Destruction. Upon expiration, termination, or the Disclosing Party's demand:
(a) All Physical Materials shall be returned within seven (7) days via bonded secure courier selected or approved by the Disclosing Party;
(b) If destruction is required, Physical Materials shall be destroyed only by a certified destruction vendor approved by the Disclosing Party, using destruction methods specified by the Disclosing Party;
(c) The Receiving Party shall provide a Certificate of Destruction from the destruction vendor, along with video documentation of the destruction process;
(d) The Receiving Party shall certify that no copies, reproductions, or derivatives of Physical Materials remain in its possession.
6. Cost Allocation. All costs associated with secure storage, return shipping, certified destruction, and compliance with these requirements shall be borne solely by the Receiving Party.
7. Liquidated Damages. The Receiving Party acknowledges that loss, unauthorized disclosure, or improper handling of Physical Materials would cause irreparable harm. Any breach of this section shall result in liquidated damages of $100,000 per incident, in addition to actual damages and injunctive relief.
Warning - Extremely Burdensome: This version imposes extensive security infrastructure requirements, inspection rights, video-documented destruction, and significant liquidated damages. Appropriate for highly valuable prototypes, defense materials, or pharmaceuticals. Receiving Party should negotiate to remove liquidated damages, limit inspection frequency, and share costs for extraordinary security measures.
1
Clarify What Constitutes Physical Materials: Overly broad definitions can include ordinary business correspondence. Negotiate for specific categories or require the Disclosing Party to mark materials that require special handling.
2
Negotiate Reasonable Storage Standards: Requirements for dedicated secure facilities with video surveillance may exceed your infrastructure. Push for standards like "commercially reasonable" or equivalent to how you protect your own confidential materials.
3
Address Cost Allocation: If extraordinary security measures are required (bonded couriers, certified destruction vendors, video documentation), negotiate for the Disclosing Party to bear these costs or share them.
4
Extend Return/Destruction Timelines: Seven days may be insufficient to coordinate secure destruction or return of materials scattered across multiple locations. Negotiate for 30 days or a reasonable period given the volume of materials.
5
Limit Inspection Rights: Broad facility inspection rights can be disruptive. Negotiate for advance notice requirements, limited frequency (e.g., once per year), and restriction to relevant storage areas only.
6
Remove or Cap Liquidated Damages: Pre-set damages for materials handling violations are often excessive and may be unenforceable penalties. Push for actual damages or reasonable caps tied to the value of materials.
Unrealistic Security Infrastructure Requirements
Provisions requiring biometric access, 24/7 video surveillance, and dedicated secure facilities may be impossible or prohibitively expensive to implement. Ensure requirements match your actual capabilities or negotiate alternatives.
Excessive Liquidated Damages
Liquidated damages of $100,000+ per incident for materials handling violations may be unenforceable penalties and create disproportionate risk for minor procedural infractions.
Unlimited Inspection Rights
Provisions allowing the Disclosing Party to inspect your facilities at any time, without notice, create operational disruption and potential exposure of your own confidential information to a business counterparty.
All Costs on Receiving Party
Provisions placing all costs for secure storage, certified destruction, and bonded shipping on the Receiving Party may create unexpected expenses, especially when the Disclosing Party specifies expensive vendors or methods.
Overly Short Return Deadlines
Requirements to return or destroy materials within 7 days may be impossible if materials are distributed across multiple locations or if certified destruction vendors require scheduling lead time.
Physical materials handling is critical for prototypes, samples, and tangible trade secrets. Consider the practical burden of compliance requirements before signing.