Gordon, Arata, McCollam, Duplantis & Eagan, LLC
October 6, 2011 Duck Lunch
Issues to Consider When Entering into
Confidentiality and Non-Disclosure Agreements
Marion Welborn Weinstock
It has been my experience that many companies have a standard form of joint nondisclosure agreement that they try to use each time they need such an agreement by just
changing the parties names. Actually, such an agreement should be revised and tailored
for each use depending on (1) whether your company will be providing all, most or very
little of the confidential information; (2) the purpose of the information exchange; and (3)
the nature of the confidential information.
These materials discuss certain provisions
that should be considered and possibly revised each time a non-disclosure agreement is
entered into.
Purpose of the Information Exchange
Each agreement should state and define the purpose of the information exchange.
If your Company is providing information, you will want the purpose to be stated as
narrowly as possible.
You do not want to define "Purpose" as "the consideration of
current and future business activities". It should be defined as "the consideration of a
possible agreement to jointly produce ......."
or "the consideration of the possible
purchase and sale of ......." You will want a narrow, precisely defined purpose because
your agreement should also should contain a provision that states "Each Party agrees that
any Information disclosed hereunder shall be used solely for the Purpose."
Similarly,
the provision outlining which employees may be provided the information (to be
discussed below) should be limited to those employees to whom "disclosure is necessary
for the Purpose of this Agreement".
Keep in mind, however, that if you do state a
narrow, precise purpose, you will not be able to rely on that agreement down the road if
you are providing information to the same party for a different purpose. In looking back
to see if you can use a previously executed non-disclosure agreement with the same
party, be sure to examine not only the term, but the definition of the purpose as well.
Will the Information Need to be Marked "Confidential" to be Protected?
The next issue to consider is whether you want to provide that the information
disclosed has to be marked "confidential" in order to be protected.
Some agreements
define "Information" as "all information of a technical, commercial, manufacturing or
business nature (including but not limited to samples, formula, procedures, technology,
equipment configurations and test procedures) which is presented by Disclosing Party to
Receiving Party in writing, other tangible forms or verbally" and then require the
receiving party to keep all Information confidential, whether or not marked
"confidential".
Some agreements further define "Confidential Information" as "(i)
written or other tangible Information that is marked “Confidential” or “Proprietary” (or
similarly identified) at the time it is first delivered by the Disclosing Party to the
Receiving Party and (ii) Information that is not in written or tangible form at the time of
its initial disclosure hereunder but is identified as confidential by the Disclosing Party at
the time of its initial disclosure to the Receiving Party" and then only protect Confidential
Information. What you choose to do here will depend on the volume of the information
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and its nature. Obviously it is better for you if you are receiving information to required
that it be marked confidential.
If you are disclosing information pursuant to an
agreement that requires it be marked, you will need to put in place strict procedures for
anyone in your company providing information to ensure they comply with this
requirement.
Non-Disclosure Provision and Employees to Whom Information May be Disclosed
At a minimum, you will want to state in the non-disclosure provision certain
general requirements on disclosure to employees.
So for example, you could provide:
"the Receiving Party shall keep Information received from the Disclosing Party
hereunder strictly secret and confidential and shall refrain from disclosing it to parties
other than its employees, who are acting in furtherance of this Agreement; provided,
however, that Confidential Information will be disclosed to employees (i) only to the
extent necessary for the Purpose of this Agreement; (ii) only if such employees have been
informed of Receiving Party’s obligations under this Agreement and have a clear
understanding of such obligations; and (iii) only if such employees are legally obligated
to comply with this Agreement." Another option is to specifically identify by name the
employees to whom the information may be disclosed and require them to sign onto the
agreement.
Duty of Care
Typical language regarding the Receiving Party's duty of care is to provide that
"The Receiving Party and its employees shall use not less than the same degree of care to
avoid disclosure of Confidential Information as that which is used for its own
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confidential information of like importance." This standard of care only works if the
Receiving Party actually has standards in place for handling confidential information
such as limiting access or other methods of preserving secrecy. If you have never dealth
with the other party before or if they are a start up or unsophisticated party, you should
investigate their practices regarding maintaining secrecy of their own information.
If
those practices are not existent or substandard, you should be sure to contain very
specific provisions about the receiving party limiting access to the information and may
want to clearly mark everything you disclose as confidential no matter how voluminous.
Exclusions from the Confidentiality Requirement
Typical exclusions from the obligation to keep the Information confidential are
Information which:
(a)
the Receiving Party can demonstrate was known to it prior to disclosure by
the Disclosing Party [as shown by written records existing prior to such disclosure]; or
(b)
is, or later becomes, public knowledge without breach of this Agreement by
the Receiving Party ; or
(c)
is disclosed to the Receiving Party by a third person not in violation of any
obligations of confidentiality to the Disclosing Party; or
[(d)
is developed by the Receiving Party independently from Information
received from the Disclosing Party, as evidenced by appropriate documentation. The
Receiving Party shall bear the burden of proving that its employees who developed the
information have not had access to the Information.]
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Depending on the nature of the information, you may or may not want to include the
bracketed language in your exclusions.
Term and Survival of Confidentiality Obligations
It is important to remember here that there are two different time periods that need
to be specified. Some non-disturbance agreements don't distinguish between these two
periods which can lead to ambiguity and lawsuits. The first one can be referred to as the
"disclosure period." It describes the time period during which disclosures are going to be
made. It answers the question how long do we want this agreement to govern our
respective obligations regarding disclosure? Or said another way, how long of a period
are we going to be exchanging information for this purpose? This disclosure period
could be stated as "This Agreement shall terminate on ____________" or "Either Party
may terminate this Agreement by written notice to the other."
The more important period is the second period which can be referred to as the
"obligation of confidentiality" period.
How long will the obligation to keep the
information confidential survive after the termination of this agreement? This provision
can be stated in the agreement as "Notwithstanding any such termination, the obligations
of confidentiality herein shall survive for a period of _____ years from the date of
termination of this agreement." The number of years that you choose to specify here
must be long enough to protect the interests of the disclosing party, but not unduly burden
the recipient. Ultimately, it is a judgment call on your part based on which party is
providing more information and how sensitive the information is.
In a situation where
all (or almost all) of the confidential info is being disclosed by you, then the longer the
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confidentiality obligation, probably the better. Where the information coming from you
is extremely sensitive like trade secrets, formulas, etc., you may want to provide that the
obligations of confidentially last forever.
In such a case, you could provide
"Notwithstanding the termination of this Agreement, the obligations of confidentiality
shall survive indefinitely." (Of course from a practical perspective, once all of the
information falls into one of the exceptions (ie. public knowledge without breach of the
agreement, the obligation of confidentiality would not exist anymore)). In a situation
where the information is coming only from the other side (or primarily from the other
side and your information is not that sensitive), then a shorter period for the obligations
of confidentiality is what you will want.
Be careful of language that says "from the date hereof" such as at the end of
"Notwithstanding any such termination, the obligations of confidentiality herein shall
survive for a period of _________ years from the date hereof." Depending on the
length of your term or particularly if you provide for termination by notice, this language
could prove to be problematic. You could end up disclosing information after the period
of confidentiality has already expires. It is easier and safer to use "from the date of
termination" instead.
Choice of Law
You should try to select Louisiana or Texas (depending on where you are located)
but if you cannot agree on that, at least try to get a neutral law such as Delaware.
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Arbitration Provision if Dispute Involves Intellectual Property
You may want to provide for arbitration for any dispute, but you should definitely
consider including a provision such as this if intellectual property is being disclosed: "To
the extent any dispute or claim which arises in connection with this Agreement involves
intellectual property, such dispute will be finally settled by binding arbitration conducted
before an independent patent attorney arbitrator residing in the United States who has
been registered to practice before the United States Patent and Trademark Office for not
less than 10 years. The decision by such arbitrator shall be subject to the Federal
Arbitration Act, Title 9, Sections 1-16, inclusive."
Notice So You Can Attempt to Get a Protective Order
If you are the disclosing party, you will want to require prior notice in the event
the other party becomes legally compelled to disclose the Information so you will have
the opportunity to try to obtain a protective order. Such a provision would read: "In the
event that Receiving Party or anyone to whom Receiving Party transmits Information
pursuant to this Agreement becomes legally compelled (by oral questions, interrogatories,
requests for information or documents, subpoena, civil investigative demand or similar
process) to disclose any Information, Receiving Party shall provide the Disclosing Party
with prompt written notice so that the Disclosing Party may seek a protective order or
other appropriate remedy and/or waive compliance with the provisions of this
Agreement. In the event that such protective order or other remedy is not obtained, or
that the Disclosing Party waives compliance with the provisions of this Agreement,
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Receiving Party or its representatives shall furnish only that portion of the Information
which is legally required and shall exercise its best efforts to obtain reliable assurance
that such Information shall be treated as confidential in accordance with the provisions of
this Agreement."
Provisions Concerning Injunctive Relief
If you are the disclosing party, you will want a provision that says "The Parties
agree that, in the event of breach or threatened unauthorized disclosure of Information,
the Disclosing Party shall be entitled to an injunction prohibiting any such disclosure
without proof of actual damages caused to the Disclosing Party by such breach or
threatened breach and without posting of bond. For the purpose of the Disclosing
Party’s obtaining equitable relief only, the Receiving Party acknowledges that the
Confidential Information is unique and valuable and its disclosure will result in
irreparable harm to the Disclosing Party."
No Consequential Damages
If you are the receiving party, you will want to limit potential damages for
accidental or inadvertent disclosure. A provision to achieve this could read "IN NO
EVENT
SHALL
EITHER
PARTY
BE
LIABLE
TO
THE
OTHER
FOR
CONSEQUENTIAL, INDIRECT OR PUNITIVE DAMAGES WHETHER BASED IN
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY OR
OTHERWISE ARISING OUT OF A BREACH OF THIS AGREEMENT."
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Disclaimer Regarding Information
If you are the disclosing party, you may want to consider a disclaimer regarding
the information being disclosed. Such a provision would read "Each Party represents and
agrees that it is a sophisticated merchant, knowledgeable and experienced in the financial
and business risks attendant to such Party’s business interests, shall not rely on any
conclusions contained in, or discerned from, Information provided by the other Party and
shall consider any possible transaction independently of the conclusions contained in any
Information furnished hereunder and that (except as may be expressly provided otherwise
in a separate, definitive written agreement that each Party may hereafter elect in its sole
discretion to enter into) the other Party makes no representation or warranty regarding the
accuracy, truthfulness or completeness of any Information provided by or through such
other Party or its Representatives."
Provisions to Clarify No License is Being Granted and Return of Information
If you are the disclosing party, you may want to make sure your agreement
includes a provision such as this "No implied license to the Information (or any technology
comprising a part thereo) is granted hereby to the Receiving Party. All Information shall remain
the exclusive property of the Disclosing Party. All Information disclosed shall be returned to
Disclosing Party or destroyed promptly upon written request (and in any event no later than the
end of the term of this Agreement) and shall not thereafter be retained in any form by Receiving
Party."
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