Mutual Confidentiality Agreements - PDF by ajp17054


Mutual Confidentiality Agreements document sample

More Info
									Confidentiality Agreements:
A Very Close Look

Richard Charnov and Helen Curtis
Richard Charnov
is a graduate of Harvard College, B.A. magna cum laude (1976) and Georgetown University Law School, J.D. (1979). He
is admitted to practice in the State of New York (1980). He was formerly associated with Milbank, Tweed, Hadley &
McCloy and Dewey & LeBoeuf (formerly LeBoeuf, Lamb, Green & MacRae LLP). He can be reached at (718) 624-7220
and (802) 326-4489, and by email at

Helen Curtis
is a graduate of Manchester University, LLB honors degree (1994) and London College of Law, LPC Commendation
(1996). She is admitted to practice in the State of New York (2003). She originally qualified as an English solicitor (1998).
She was formerly associated with Shearman & Sterling LLP in New York, London, and Paris. She can be reached at (206)
388-5891 and by email at
     Richard and Helen provide project finance and outside general counsel services to a wide variety of substantial
corporate clients across a broad range of industries.

Be careful what you disclose, to whom you disclose it, and how you disclose it.

AS BUSINESS-ORIENTED COUNSEL, we are convinced that many of the “standard”
documents warrant a close re-examination from both legal and commercial
perspectives. Over the years, we have found that the more thoroughly our
clients understand the nuances of the agreements that are a critical part
of their businesses, the better equipped they are for quickly identifying
issues and efficiently bringing the agreements to closure.
  Most of our clients’ transactions start with a confidentiality or non-
disclosure agreement. These agreements may be titled “confidentiality
agreements,” “nondisclosure agreements,” “NDAs,” or “secrecy agreements.”
Titles aside, these agreements generally cover identical territory: the
rules governing the treatment of either or both parties’ Confidential
Information. For our discussion, we refer to these agreements as
“confidentiality agreements.” As we discuss below, some forms of these
agreements stray from addressing how to protect a disclosing party’s
Confidential Information and wander into the terrain of non-competition
and intellectual property licensing agreements.
   This article is intended as a practical guide, for both lawyers and
their clients, to navigating a confidentiality agreement. However, we do
not presume to set out, in numbered sequence, every issue that may arise.
Without   the   assistance  of    counsel,   a   client  can  analyze  the
confidentiality   agreement  and    conclude   whether  the  agreement  is
commercially acceptable. However, those conclusions may be tempered by the
fact that the draft agreement, generally prepared by counsel to the
disclosing party, slants the playing field in the disclosing party’s
favor. Precisely how the field is slanted often only becomes apparent once
experienced counsel compiles a list of the provisions that have been left
out of the draft — in addition to the more evident shortcomings in the
language that has been inserted in the draft.
   There is an uncanny similarity among the basic forms of confidentiality
agreements, which all seem to derive from nearly identical sources. The
forms fall into three categories:
• The mutual non-disclosure agreement;
• The reasonable one-sided agreement; and
• The unreasonable one-sided agreement.

The limited universe of confidentiality agreement forms makes it likely
that the standard drafting issues addressed in this article will arise in
the agreements that you will review — even down to the order of the
provisions discussed below.

  A confidentiality agreement is a contract setting out legally binding
rules governing how a receiving party must treat a disclosing party’s
Confidential Information. Generally, neither party to a confidentiality
agreement is compelled to disclose any information to the other party and
only discloses information of its choosing. Many forms of confidentiality
agreements are readily accessible on the Internet along with a
considerable volume of commentary. We think that much of this commentary
starts off immediately on the wrong foot by plunging into close textual
analysis when some simple overarching advice should be the initial guide.
We begin and end our discussion of confidentiality agreements with a few
practical questions that we ask our clients and what we believe to be
generally applicable advice.
  First, the questions for our clients are:
• What is the nature of the information you will be disclosing — is it
  comparable to the formula for Coca-Cola or is it simply non-public but
  not particularly sensitive?
• Are you more likely to be on the disclosing end or the receiving end of
  Confidential Information?
The answers to these basic questions will guide the entire discussion,
setting the course for how best to proceed to protect the Confidential
Information and how to shape the confidentiality agreement.

   Second, and most important, our advice to our clients is simple: Do not
put misplaced confidence in a confidentiality agreement — even a good one.
We do our best to tailor a solid agreement or to push back an over-
reaching agreement in order that it will make good commercial sense for
both parties. However, the judicious disclosure (or non-disclosure) of
Confidential   Information  is   far  more   important  than   whether  the
confidentiality agreement is watertight. The easiest way not to have to
worry about damages and the consequences of a receiving party’s improper
release of Confidential Information is not to release the information in
the first place. Once a receiving party breaches the confidentiality
agreement by improperly disclosing the Confidential Information, the
toothpaste is out of the tube and is not going back in. The disclosing
party may then, at best, be left with a solid confidentiality agreement
and legal rights that will be expensive and time consuming to assert. Once
the Confidential Information is out of the bag, the disclosing party’s
troubles have begun with developing the case that the disclosed
information was “confidential,” that the information was not subject to an
exclusion from the definition of “Confidential Information,” that the
alleged behavior constituted a breach of the agreement and, perhaps most
difficult of all, that the disclosing party was harmed by the alleged
disclosure (including quantifying the amount of those damages).
   Third, and following on the heels of our advice about carefully
considering what information a client should disclose, as the receiving
party, you need to pay particularly close attention to what “Confidential
Information” you are willing to receive and you need to be selective about
the disclosing parties with whom you will execute a confidentiality
agreement. Consider whether the disclosing party is simply trying to set
you up for a lawsuit and is not focused on protecting legitimate
Confidential Information from disclosure. The confidentiality agreement,
in the hands of an unscrupulous disclosing party, can be used as an
offensive weapon. The disclosing party may try to sow the seeds for the
case it will bring one day against the receiving party when months or
years later the disclosing party surfaces to allege that the long
forgotten and stale information has been, or is about to be, improperly
used by the receiving party. These actions may materialize long after the
proposed transaction with the disclosing party evaporated and when the
allegedly “Confidential Information” is no longer of any current use and
its release is unlikely to cause competitive harm to the disclosing party.
   A variation on this theme is that the disclosing party may not be
unscrupulous but may propose protecting information that is little more
than generic. By signing up to a confidentiality agreement in this
context, the receiving party inadvertently shuts the door to pursuing
technical or process innovations without first reaching a financial
settlement with the putative disclosing party. Some years ago a client of
ours was approached by an inventor who claimed to have an idea that would
revolutionize the client’s manufacturing process. On a number of occasions
during the negotiation of the confidentiality agreement, the inventor
said: “When this agreement is signed and I give you the Confidential
Information, you will be shocked at the simplicity and obviousness of my
solution.    You could have figured this out so easily.” Ultimately, the
client did not execute a confidentiality agreement with this individual
since the client concluded that the potentially “gotcha” nature of the
Confidential Information outweighed the likelihood that it contained a
valuable breakthrough.
   This is not to suggest that a nefarious motivation by the disclosing
party is common. However, you will need to decide whether the best
approach may be to decline the tender of allegedly Confidential
Information and never to formalize an agreement with the potential
disclosing party. (As noted below, Confidential Information may be subject
to protection even in the absence of a written agreement. Therefore, you
will need to be careful not to receive the allegedly Confidential
Information. Just as you want to document the Confidential Information you
receive under a confidentiality agreement, you will want to document, with
potentially unscrupulous disclosing parties, that you have not received
any    Confidential   Information.)   Although   in   many  respects   the
confidentiality agreement is the initial step to a potential business
relationship, it is never too early to run for the exit when the potential
arrangement seems fraught with peril.
   Fourth, the absence of a confidentiality agreement does not mean that
the improper disclosure of Confidential Information will be without legal
remedy. A confidentiality agreement is not the only means for protecting
the disclosing parties’ Confidential Information. Protections may be
afforded to holders of Confidential Information under common law, laws
applicable to trade secrets and other applicable statutes.

DATE • The confidentiality agreement is generally the first legal document
you will enter into with an entity you would like to do business with in
the future. The negotiation sets the tone for future business dealings and
is a preview of what it will be like doing business with you and your
   Like a first date, if confidentiality agreement discussions go poorly
that is likely to be the end of it. Although junior counsel for both sides
are often assigned the task of handling the confidentiality agreement, the
negotiation is generally better covered by seasoned counsel who can
quickly identify the few significant issues and horse-trade the rest,
without sending the counterparty’s counsel running to the client with the
conclusion that dealing with you will be nearly impossible.
   Confidentiality agreement discussions move quickly. The agreements run
on average four pages. With experienced counsel, a confidentiality
agreement can be wrapped up in one or two turns of the document. If your
counterparty is interested in concluding an agreement, the agreement can
usually be finished as soon as the same day you receive the initial draft
and up to approximately one week later.

MUTUAL                         CONFIDENTIALITY                      AGREE-
MENTS VS. ONE WAY STREETS    •   Confidentiality agreements fall into two
general categories: mutual and one-way agreements. Mutual confidentiality
agreements contemplate that each party may be sharing its Confidential
Information with the other party. These forms of agreement tend to be
reasonable since each party is required to abide by identical rules. It is
more unusual for the draftsperson to bury some “gotcha” zingers in the
mutual agreement, whereas the one-way agreement is more fertile ground for
lopsided and, potentially, deal-killer provisions. If there is any chance
that both parties may be disclosing Confidential Information, our initial
advice to our clients who have received a one-way confidentiality
agreement (in which only your client will be receiving Confidential
Information) is that they request their counterparty’s form of mutual
confidentiality agreement. This change in form, alone, solves most of the
drafting issues.

NAMING THE PARTIES AND GETTING IT RIGHT • Here is the opening paragraph:

This CONFIDENTIALITY AGREEMENT (the “Agreement”) is by and between Disclosing Company
(hereinafter “Disclosing Party”), and Receiving Company (hereinafter “Receiving Party”).

The opening paragraph of the confidentiality agreement may have little
more than the name and address of your company that will be party to the
agreement along with the same information for the counterparty. You need
to confirm that you or the attorney for the counterparty named the proper
entity in your corporate chain. If you are the receiving party, the
disclosing party will frequently insert the name of your upper-tier parent
company. However, you may have no intention of making that entity a party
to the confidentiality agreement.
   Even if the proper entity has been named, be on your guard for another,
indirect, way your counterparty may try to pull your parent company into
the confidentiality agreement. The proper entity in your corporate chain
may be identified but, in the same breath, “Receiving Party” may be
defined to include “any other affiliates, subsidiaries and parent
companies.” This may have the effect of unwittingly dragging upper-tier
entities into a confidentiality agreement. You need to be wary of these

To top