CONFIDENTIALITY AGREEMENTS AND TAX-SAVING STRATEGIES: HOW CONFIDENT ARE YOU? (WITH FORMS) Victoria Blachly The Internal Revenue Service continues to cast a wide net to deter improper and illegal tax shelters and tax-planning strategies. WITH MORE FREQUENCY, parties to lawsuits are incorporating confidentiality clauses into settlement agreements or using them for other purposes. These are also referred to as nondisclosure agreements or—for those who prefer acronyms—NDAs. Confidentiality agreements may be considered when one litigant may interact with the other litigant’s clients, competitors, or employees, or when publicity is a concern or there is a risk that a precedent may be set for other lawsuits. Such agreements are generally enforceable pursuant Victoria Blachly is an attorney with Lane Powell Spears Lubersky LLP in Portland, Oregon. Ms. Blachly works on a wide range of litigation issues, including civil litigation, employment litigation, insurance litigation, personal injury litigation, premises liability, professional liability, trust and fiduciary litigation, and will contests. Lane Powell has over 170 attorneys located throughout Washington, Oregon, Alaska, and London, England. The Tax Practice Group at Lane Powell provides tax planning and advice to clients on federal, state, local and international tax matters. 39 40 The Practical Tax Lawyer Winter 2005 to contract law in all 50 states. But, when a confidentiality agreement is sought in connection with a tax-savings strategy, the matter becomes troublesome. CONFIDENTIALITY AGREEMENTS—AN OVERVIEW • Confidentiality agreements must be tailored to each situation and, as with many legal documents, less is often more, and simple, straightforward language is preferable to legalese. Generally there are five items that should be included. What Are The Necessary Elements? As with most contracts, the consideration for the agreement should be set forth. Language that clearly states the agreement was read and understood by the person signing the agreement is beneficial, along with a statement that the agreement was signed voluntarily. If any warranties were discussed, identify those warranties and disclaim any reliance on representations made by parties during negotiation and execution of the agreement, as one would with most contracts. If the parties are from different states or countries, a choice-of-law clause should be included. And the ever-popular attorney fees clause should be considered. What Will Be Kept Confidential? Define the parameters of the information that must be kept confidential and delineate how long the information must be kept confidential. The facts will dictate whether one month, two years, or forever is warranted. To Whom May Disclosure Be Made? A statement that the settlement will not be discussed with anyone is not an option if a party needs to disclose to others such as accountants, legal advisors, family members, or a board of directors. Different groups may have different restrictions for disclosure. For example: • Information may be disclosed to an employee on a need-to-know basis. • Information may not be disclosed to a third party without prior written consent. • Information may not be disclosed to a third party unless that party signs a confidentiality agreement. What Penalty Will Be Imposed For Any Unauthorized Disclosure? The parties could agree that forfeiture of the settlement amount be made or include a negotiated liquidated damages clause. The liquidated damages clause must be justified and must not be so severe as to be viewed as a “penalty” and thus unenforceable. When a confidentiality agreement is sought to avoid publicity, be certain that any penalty agreed to will not defeat that goal by generating further publicity, as would be generated if the penalty were seeking injunctive relief through the court. An agreement to settle any disputes regarding the confidentiality agreement through alternative dispute resolution such as an agreed-upon mediator or arbitrator is another option. Does The Agreement Apply If Disclosure Is Compelled? The parties should not be held to be in breach of the confidentiality covenant if a court or government agency compels disclosure. This is particularly applicable if the issue is a tax-savings strategy and there may be a need to disclose the strategy to the Internal Revenue Service, which will be discussed below. CONFIDENTIAL AGREEMENT EXAMPLES • Here are some examples of confidentiality provisions. Confidentiality Agreements 41 Short Version As further consideration for the settlement, Party B agrees never to disclose to any other person or entity any of the alleged facts giving rise to or forming the basis for the Claim, and further agrees not to disclose to any other person or entity any of the terms and conditions, including the amount paid by Party A, of this Release unless compelled to do so by court order or instructed to do so in writing by Party A. Somewhat Longer Version The undersigned agrees to keep the terms, conditions, and amount of the settlement and this Settlement Agreement confidential, except that the information may be disclosed as necessary to his lawyers and any advisors he may retain, provided that he advise them upon disclosure that the terms and the amount of the settlement and this Agreement are confidential. The undersigned may disclose to family members and close personal friends that the litigation has been resolved and may also disclose that the terms, the amount of the settlement, and this Agreement are confidential. Still Within Easy Comprehension Version No party to this agreement will disclose any of the terms of this settlement agreement unless compelled to do so pursuant to legal process, and then only after providing the other party with notice of legal process so that the other party may, at its own expense, intercede to do so as deemed appropriate. This confidentiality provision is a material term, a violation of which shall constitute a material breach of this contract. In the event confidentiality is breached by Party A, Party A shall pay Party B the sum of One Thousand and No/100 Dollars ($1,000.00) as liquidated damages for each violation of this confidentiality provision, which the parties agree is reasonably related to the disruption and inconvenience expected to result to Party B by any such disclosure. Party B may also collect from Party A actual damages to the extent that they are reasonably ascertainable. Dot Those “I’s” and Cross Those “T’s” Long Version Party A (Business) and Party B (Individual) agree that the terms of this Agreement are confidential and that neither party, without the prior written consent of the other, shall individually, jointly, or through their agents or other representatives or those acting on their behalf, in any manner, publish, publicize, disclose, or otherwise make known or permit or cause to be made known to any third person the terms and conditions of this Agreement. For purposes of this paragraph, “any third person” includes but is not limited to members of Party B’s non-immediate family, any past or present employees of Party A and any member of such employee’s family, any organization, association, or group, and the news and communication media or any agents thereof. Nothing in this paragraph shall be construed to prohibit the disclosure by either party of such information as may be required by law, or by judicial or administrative process or order, or as is necessary to enforce the provisions of this Agreement. Nothing in this paragraph shall be construed to prohibit the disclosure of such information by Party A or Party B to any legal, tax, or financial consultant retained by it or him/her, provided the persons to whom the disclosure is being made agree to be bound by the confidentiality provisions in this paragraph. Nothing in this paragraph shall be construed to prohibit Party B from disclosing the terms of this Agreement to members of his/her immediate family, provided the persons to whom the disclosure is being made agree to be bound by the confidentiality provisions of this paragraph. Nothing in this paragraph shall be construed to prohibit disclosure of the terms of this Agreement by or within Party A in the ordinary course of its business to those persons or entities with a need to know, as reasonably determined by Party A. If asked, the parties may state that the lawsuit has been resolved and that they cannot discuss the actual terms of this Agreement. In the event that Party B breaches the confidentiality provisions recited in the paragraph above, he/she will pay Party A liquidated dam-
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