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Do’s and Dont’s of Confidentialty Agreements

Posted in Trade Secrets

By Todd Wilson

Many growing businesses face the problem of having ideas that will give them a leg up on the competition or new products that will revolutionize their industries but lack the financial or intellectual resources to, without the assistance of partners, bring those ideas to fruition or to bring the products to market. Even more established businesses often find it necessary to supplement their own internal resources with ideas and products from other businesses. These are situations in which confidentiality agreements become an important means of intellectual property protection for such businesses.

Confidentiality agreements create a contractual relationship between the parties whereby one party agrees to disclose otherwise confidential information and the other party, in return, agrees to refrain from further disclosing that confidential information to others. If the party to whom the confidential information is disclosed breaches the contract and makes the confidential information known to others in violation of the terms of the contract, the owner of the information will have an action for breach of contract. This typically means that there is the potential for money damages to help recover the monetary damage caused by wrongful disclosure or even injunctive relief in an effort to stop ongoing disclosure. Usually, the threat of such these remedies is sufficient incentive to discourage wrongful disclosure.

It should be noted, however, that wrongful disclosure results disclosure of the confidential information, nonetheless. Once the cat is out of the bag, so to speak, the confidentiality of the information is lost forever. Therefore, it is of utmost importance to ensure that the parties with whom you enter into confidentiality agreements are credible and have processes in place to maintain the confidentiality of the information that your company discloses to those parties.

Confidentiality agreements are sometimes also called non-disclosure agreements (“NDAs”) or confidential disclosure agreements (“CDAs”). While to some, these terms are used interchangeably and to others they have distinct meanings, there are some general guidelines that should be headed in drafting and executing effective confidentiality agreements. There are many form confidentiality agreements available. However, each confidentiality agreement should be a custom-written creation. Each such agreement should be reviewed closely to determine that it truly protects the interests of your business rather than merely providing a false sense of security.

First, a confidentiality agreement should identify the parties to the agreement. The name the owner of the information to be disclosed (the “disclosing party” or “owner”) and the company or person receiving the information (the “recipient”) should be included in the agreement. The agreement should also include language to restrict the employees and affiliates of the recipient who may receive the confidential information and to require the recipient to require similar confidentiality agreements of those employees and affiliates who will have access to the information.

Second, a description of the confidential information to be disclosed should be described. The disclosing party will want broad coverage of information disclosed so as to protect as much of its information as possible disclosed in the relationship while the recipient will want to limit the definition of confidential information as much as possible so as to avoid the number of opportunities to breach the agreement. Note, however, that the better practice is to specifically define the information to be disclosed and to limit disclosure to the information outlined in the agreement. The receiving party will want to avoid being restricted in its own current or future development efforts for fear of being sued for infringement of the confidentiality agreement. The parties can enter into new confidentiality agreements if the relationship expands or if additional information needs to be disclosed to achieve the original undertaking.

Most confidentiality agreements exclude information obtained other than from the disclosing party as confidential information covered by the agreement. Such exclusions typically include information that (i) is already or comes into the public domain through no fault of the recipient, (ii) is lawfully obtained or available from a third party who is lawfully in possession of the information and free to disclose it, or (iii) was already known to the recipient at the time of disclosure by the disclosing party.

Third, the intended use and limitations on use of the confidential information should be stated in the confidentiality agreement. For example, a confidentiality agreement might state that the recipient can use the confidential information to evaluate or test the disclosing party’s product. It might also explicitly state that the information may not be used by the recipient to develop products of its own by using the information.

Fourth, the agreed means of identifying the confidential information should be set forth in the agreement. The means will often depend on the type of information being disclosed. For example, if drawings and other written materials are handed over, may confidentiality agreements require that such documents be stamped or otherwise marked “CONFIDENTIAL.” Oral disclosure is often required to be followed up within a specified timeframe by a written outline of the discussion identifying the confidential information disclosed during the discussion. In all cases, it is important for both parties to adhere to the means of identifying confidential information; in the case of the disclosing party, to ensure that the recipient understands its obligation to protect the information and, in the case of the recipient, to ensure that it knows what information is confidential and must be protected pursuant to the terms of the confidentiality agreement.

Fifth, the time for disclosure and confidentiality should be set forth in the agreement. Some poorly drafted agreements specify only a single time period. The dates on which disclosure of confidential information will begin and end, the “disclosure period” are important to include simply to avoid any ambiguity. If the confidentiality agreement simply states that the disclosure period will run for two years, it will not be clear when that period begins and ends and, therefore, when the confidentiality period runs. The “confidentiality period” will typically be defined as a longer period of time than the disclosure period. To illustrate the difference in these time periods, note that it is to the disclosing party’s advantage to start the confidentiality period when the confidential information is actually disclosed to ensure the maximum length of protection of the information whereas it is to the recipient’s advantage to start the confidentiality period at the beginning of the disclosure period in order to ensure the shortest timeframe for its obligation of confidentiality.

Two additional points regarding the confidentiality period should be noted. The period of time defined as the confidentiality period may take into account the rate with which technology changes in the industry. A recipient of confidential information may not be willing to agree to a long confidentiality period if the information will be obsolete in a much shorter period of time. Additionally, if a trade secret is being disclosed as part of the confidential information covered by the agreement, the confidentiality period should be significantly long or indefinite in order to protect the information’s status as a trade secret.

Sixth, the standard of protection should be stated. Usually, each party should be expected to treat the other’s confidential information as it would its own. However, a higher standard should be set by the disclosing party if it is not familiar or comfortable with the recipient’s practices regarding the protection of its own confidential information. If the disclosing party finds those practices to be substandard, the confidentiality agreement should contain specific provisions concerning the standard of protection.

Seventh, confidentiality agreement should state that there is no implied license to the confidential information granted to the recipient by disclosure under the agreement. If the relationship between the parties progresses and a working relationship is established, the parties may then enter into licensing agreements as appropriate.

Eighth, there should be an explicit indemnification provision in the confidentiality agreement. Such a provision should protect the disclosing party against wrongful disclosure by the receiving party and the effects that such wrongful disclosure may have on the disclosing party.

Ninth, choose the state law that will apply to the application of the contract. This point may be particularly important for a disclosing party dealing with a recipient on the other side of the country or the other side of the world. The speed with which a particular jurisdiction typically handles injunctive relief for confidentiality agreement infringement cases may also be a deciding factor in choosing which state’s law to apply.

Finally, the confidentiality agreement should be dated and signed by both parties, including the printed name and title of the individuals singing on behalf of the parties. This point might seem trivial. However, it is often the case that the signature on such an agreement is indecipherable or the agreement is undated which makes future use of the agreement very difficult. What good will it be in five or ten years’ time when a five-year confidentiality period is stated but no starting date is indicated on the agreement?

Confidentiality agreements can be an important part of a company’s intellectual property protection portfolio. In addition to such agreements, a company might also file for patent and trademark protection and obtain copyright and trade secret protection as defenses against improper and unauthorized use by other parties. In that regard, it is important to note that the primary defense to a claimed violation of a confidentiality agreement is that the confidential information was not confidential at all but introduced to the public domain by the owner of the information. Therefore, the way that a company protects its confidential information in general is important to the effective application of confidentiality agreements.

  • Patrick Thaney

    Can a confidentiality agreement be voided if employee is told to lie to customers after sighning agreement