Confidentiality Agreements
BUSINESS INFORMATION SERVICE
This guide was written on behalf of Invest NI by Cleaver Fulton Rankin Solicitors
1 Introduction
Confidentiality is extremely important in the modern world, and many contracting parties use confidentiality agreements to ensure that sensitive information disclosed by one party (the donor) to another (the recipient) is kept secret. However, the common law also offers protection, known as equitable remedies, and it is wise to examine this first before considering explicit agreements.
2 Basic Principles
2.1. When is information treated as confidential? Where information is given by the donor to the recipient, and the recipient is either told or ought reasonably to know from the circumstances that it is confidential, the recipient is under a duty not to disclose the information or use the information in an unauthorised manner. 2.2. What types of information are covered? Information may be personal or sensitive non commercial information and may extend to commercial information and trade secrets. 2.3. Does the information have to be written? The information may be communicated orally and does not even have to be in any permanent form. 2.4. When does information cease to be confidential? • Information cannot be confidential if it is already in the public domain or is “common knowledge”. Obviously, it is not a defence if the information only becomes common knowledge because of the disclosure. • If information is disclosed to a limited section of the public, it will be a question of fact and degree whether the information is in the public domain. There is doubt over whether knowledge by a limited section of the public is enough, and it is a question of fact and degree in every case. It is clear that disclosure to an interested section of the public is enough, however – for example publication in an engineering journal. 2.6 How far are ex-employees bound? For the purpose of confidentiality, the same duties apply to an employee as to an independent contracting party. However, there are considered to be two types of confidential information shared between an employer and an employee: • Trade secrets, which are always confidential. • Lesser commercial information, which is only
confidential during the employment and has
been established in law to avoid restraint of trade.
2.7 What is a “trade secret”? A trade secret covers more than a secret formula or a manufacturing process. Sensitive commercial information, even a profit margin or invoice price, may be included. However, the information must be specific and, in the case of ideas, original. 2.8 What if the recipient acquires information for one purpose and later uses part of it for his own purposes? This so called “springboarding”, where one product is used as a starting point for a new and competing design is often treated as a breach of confidentiality. 2.5 What if the donor himself publishes the information? Publication by the donor effectively waives the right to confidentiality. This principle may not however apply to patent application specifications. Publication of a product does not mean publication of information about that product. The release of a car does not result in the “publication” of the inner workings its engine. Any “reverse engineering” may be treated as a breach of confidence.
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FOR FURTHER INFORMATION: CONTACT KATHY McCONVILLE, BUSINESS INFORMATION SERVICES T: 028 9069 8127 E: kathy.mcconville@investni.com
Confidentiality Agreements contd.
2.9 Is the “stealing” of trade secrets considered theft? Theft is only committed if e.g. a document or a disk is permanently removed. However, a remedy may exist for trespass, breaking and entering, breach of copyright (if the item is copied) or under the Computer Misuse Act 1990. 2.10 Is a third party bound if he obtains information imparted in confidence? A third party is indeed bound if he knows or ought to know that the information is confidential. However, there is more room for doubt if he came by the information innocently or did not pay for it. 2.11 What can I do if my confidential information is disclosed? The main legal remedies are: • a temporary injunction pending a full hearing at trial; • a permanent injunction to prevent original or further disclosure, or production of a rival and competing product – compensation awarded by the Courts; • damages based on the “royalties” or sales for the product; • demanding the return of a document or any other embodiment of the information. General commercial information such as company data is often treated like personal information and an injunction is more likely to be granted. On the other hand, there are more trade restraint issues with technical information. Each case is judged on its own facts and an injunction may not always be an inappropriate remedy. A particular difficulty occurs with the “springboard” cases mentioned earlier, and the length of injunctions can vary considerably. A springboard may not last forever but an injunction in a case of pure copying can. Any remedy will also depend on the relative worth of the data and how it was used. Obviously, cases involving fraud will be treated more harshly. 3.2 What is a confidentiality undertaking? A confidentiality undertaking is not a contract. It provides evidence of the information received, the purpose of the transfer and its confidentiality. It merely triggers the equitable remedies described above and has no legal force of its own. 3.3 Why is a confidentiality agreement necessary? A written agreement has a number of advantages: • it offers clearly defined protection and precise
wording, such as definitions of “public domain”,
the confidentiality time period and contracting
parties;
• it is more practical; • it is useful for negligent and inadvertent,
rather than purely intentional disclosure;
• it can be enforced against the recipient’s
employees;
• it can impose ancillary obligations such as
the return of documents.
3.4 What should be included in a confidentiality agreement? The agreement should be drafted to suit the individual circumstances, but the following should usually be included: • parties - the parties bound by the agreement,
stating clearly the donor and the recipient;
• purpose - the purpose of the information
exchange, and limits on the use of the
information;
• project - The subject matter of the information; • confidential information - A definition of
confidential information, including its format
and any degrees of confidentiality – this is the
most important part of the agreement and it
is best to make it as wide as possible;
• disclosure provisions - since the agreement is
a contract, there must be obligations on both
sides. The donor has a duty to disclose the
information;
• where possible, precise details of the
information disclosed and acknowledgement
of its receipt;
• time limits - A start date and time limit; • public domain - A definition of common
knowledge or public domain, and the level of
proof required before information loses its
confidentiality;
• whether the agreement itself is confidential; • provisions for the return and
copying/reproduction of materials;
• whether inadvertent or negligent disclosures
are to be tolerated;
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3 How do I protect my Commercial Information when dealing with a third party?
3.1 What is a confidentiality agreement? A confidentiality agreement should be entered into prior to any disclosure of confidential information. A confidentiality agreement (also known as a non disclosure agreement) is a written contract covering the disclosure of technical or commercial information for specific limited purposes.
Confidentiality Agreements contd.
• provisions for information already known; • provisions for information obtained by independent development – by people without access to the confidential data so that it is clearly independent; • provisions for exposure to a third party by the donor; • provisions for information actively searched for based on the confidential information – e.g. it may have helped to decide where to look in a public database; • provisions to cover the springboard scenario (see above); • provisions for disclosure with consent – this is especially important where the information is owned by more than one owner; • a provision stating that the remainder is valid if part of the agreement is found to be unenforceable; • a disclaimer renouncing liability on the part of the donor for damage caused to the recipient as a result of using the information; • a statement that no intellectual property rights, such as patents, or copyrights are transferred to the recipient (see also ‘Intellectual Property in Research and Development Projects’); • provisions for remedies, e.g. the right to seek an injunction if the agreement is breached; Many agreements also contain an exception for orally communicated information that is not written down after a certain time, for practical reasons. However, the inclusion of oral information in an agreement may provide an important safeguard. 3.5 What about pre-contractual negotiations? In pre-contractual negotiations, the circumstances may give rise to confidentiality. In the absence of an express statement, the case will be judged on its facts. Factors to be taken into account would include the view of a reasonable third party, the intention of the parties and their usual business practice. However, it is always best to make a formal statement. 3.6 When should information become confidential? The agreement should cater for long term disclosure
of information.
The best policy is to make the information confidential
upon receipt. This means that the date of receipt must
be carefully recorded.
3.7 When should the agreement end? The agreement could last indefinitely, and this may be necessary for particularly sensitive or valuable information. However, it is important not to burden the recipient unnecessarily as an unfair term may be struck out by the Courts. The agreement should also include a deadline date by which all materials must be either destroyed or returned to the donor. 3.8 What is the situation where the advice or information is unwanted or unsolicited? Obligations of confidentiality may still arise here. It is best to avoid accepting unsolicited advice or information unless the donor signs a waiver disclaiming his confidentiality rights.
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This guide is provided to give an overview of the principal areas when considering Confidentiality Agreements. Detailed legal advice should always be sought.
FOR FURTHER INFORMATION: CONTACT KATHY McCONVILLE, BUSINESS INFORMATION SERVICES T: 028 9069 8127 E: kathy.mcconville@investni.com