October 2006

Confidentiality agreements and the standard salad sandwich: issues to consider in drafting confidentiality agreements

We are often asked to prepare a standard confidentiality agreement.

There is really no such thing. Confidentiality agreements are often treated as relatively low-grade documents that do not require much thought.

But, as one partner of this firm has been heard to say from time to time: "There is no such thing as a standard salad sandwich ? why should there be such a thing as a standard contract?"

Confidentiality is becoming an increasingly important issue in commercial dealings. In this Bartier Bulletin we'll look at some of the issues that arise in relation to obligations of confidentiality.

Ownership of information?

Information is not property. The paper or computer disk on which the information is recorded or stored is most definitely property (a chattel), but the information itself, as a set of ideas, is not property. Copyright laws, also, do not protect the ideas themselves, but merely prevent unauthorised copying of the physical manifestation, or expression of those ideas.

The outcome of all this is that a person does not own information - but in some cases others will owe that person a duty of confidentiality. At its core, this is a duty not to make disclosure of the information to third parties without the consent of the person who controls it.

Sources of confidentiality obligations

There are three ways in which an obligation of confidentiality can arise: 

  • In certain special relationships, usually referred to as giving rise to fiduciary obligations, an obligation of confidentiality will be implied. Examples are, lawyer/ client, doctor/patient, and employee/employer. In each of these cases the first- mentioned party will have an implied obligation of confidentiality as part of a broader set of obligations owed to the second-mentioned party.

  • If the circumstances as a whole indicate that the information is confidential and was to be kept secret by the recipient, the courts may imply an obligation of confidentiality. Clearly, as a matter of evidence and to create certainty, it is always best not to leave confidentiality to the courts to imply ? it will always be preferable to have a confidentiality agreement in writing, signed by the parties.

  • If the parties agree, by confidentiality agreement, that the recipient is to keep the information secret. This will almost always be the best approach.

 When will a confidentiality agreement be useful?

In almost every commercial arrangement of any complexity - in any case where your organisation is giving the other party access to your secrets - a confidentiality agreement is worth having.

One particular context is R&D and technology contracts. If information about your new technology is allowed to leak into the public domain, this can be fatal to patent rights. To be successful in a patent application you essentially must prove that the invention you are disclosing to the Patent Office is new ? that (among other things) it hasn't been publicly disclosed by sale or other publication (although there are limited duration exceptions for academic publications).

Some owners of technology now use confidentiality as a means of protecting their intellectual property ? as an alternative to patenting, which can be expensive and uncertain. Famously, the recipe for Coca Cola was never patented, but was kept as a trade secret and thus kept alive indefintely, whereas a patent would have expired long ago.

Some issues for consideration

The following is a (far from exhaustive) list of some of the relevant matters that need to be considered in deploying confidentiality agreements:

  • Identify the information that is to be governed by the agreement and ask "Is the information actually confidential?" Recent cases indicate that the courts may not enforce contractual non-disclosure obligations when the information itself is found (as a matter of fact) not to be confidential. The courts have struck confidentiality agreements down in such cases as unreasonable restraints of trade. Information can "leak" into the public domain very easily. Any unrestricted disclosure of the information may cause the information to lose its confidential status - and great care is thus needed to consistently preserve the secrecy of the information.

  • Should the confidentiality obligation be created by a deed? In some cases a deed will be necessary to create a binding agreement, particularly where consideration may not be present. Asking a contracting partner to agree to confidentiality as an after-thought after the contract is signed (while not ideal, for obvious reasons) is a good example.

  • Employees create a special set of issues. It is difficult for an employer to unilaterally force an existing employee to sign a confidentiality agreement - since the terms of the employment contact have already been struck. Although a confidentiality provision is worth considering in an organisation's employment contracts, it is essential to properly identify what information is to be protected and to distinguish such information from the knowledge and skill that a worker acquires naturally as part of performing his/her work - which the worker is entitled to take and use anywhere.

  • As a recipient of information beware clauses that state that the giver of the information denies any warranty as to accuracy of the information or that you do not rely on it. Such clauses are fair enough if they only apply to the "courting period" during which the parties are considering whether to engage with each other. If a deal is actually done, however, the fact is that you may need to rely on the information that induced you to enter into the deal.

There are numerous other issues that can arise, depending on the nature of the information and the potential deal that is to be done. Just as there is an infinite variety of circumstances, there is an infinite variety of confidentiality agreements. There really is no such thing as a standard salad sandwich...

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