NON-DISCLOSURE AND CONFIDENTIALITY AGREEMENTS: THE IMPORTANCE OF REMEDIES

Non-disclosure, confidentiality, and/or proprietary information agreements are one of the most frequently used agreements in business today.  Businesses entering into a new relationship or extending the scope of an ongoing relationship with clients, vendors or customers will often require a formal agreement between the parties outlining the use and further disclosure of confidential information.

Confidential information can include a myriad of information from intellectual property, source code, financial information, trade secrets, employee names and/or salary data, client names, methodologies or any information which is not publicly available.  These agreements are widely required prior to the disclosure of such information by a disclosing party, and can be one-sided or mutual.   The term usually extends for some period of years beyond the end of the relationship.

Customary provisions include:

  1. the purpose of the disclosure of confidential information;
  2. the type of information being disclosed;
  3. restrictions regarding onward disclosures;
  4. permitted use of information disclosed;
  5. restatement of ownership and whether disclosure grants a license;
  6. standard of care;
  7. disclaimer as to the accuracy;
  8. term and termination;
  9. return or destruction of confidential information in tangible form; and deletion if disclosure was in intangible form;
  10. consequences for breach;
  11. general clauses regarding assignment, choice of law etc.

Among the most controversial provisions is what happens in the event of a breach.  What happens when, for example, confidential information is made public or misused by a receiving company?  First, here’s an example of a typical provision regarding breach:

  ” A breach of any of the promises or agreements contained herein will result in  irreparable and continuing damage to Discloser for which there will be no adequate remedy at law, and Discloser shall be entitled to injunctive relief and/or a decree for specific performance, and such other relief as may be proper (including monetary damages if appropriate).”[1]

The purpose of injunctive relief and/or specific performance is to halt further disclosures or misuse of confidential information.  Monetary damages, on the other hand, go to the heart of the harm, the purpose of which is to compensate the disclosing company for the loss suffered by any prohibited disclosure.  There are two types of monetary damages, direct and indirect.  Direct damages are reasonable and ordinary damages that may be expected from a breach; while indirect damages compensates for the unexpected damages, including lost profits, lost use, reduction in value of the confidential information, loss of goodwill or customer business.  The indirect or consequential damages represents a much higher value damage since they are difficult to predict and, more importantly, to quantify.

Disclosing parties want to keep indirect damage provisions in the non-disclosure agreement and receiving parties want them out.  Best practice would be to define “direct damages” to include some of the types of damages that a disclosing party might expect from a prohibited disclosure or misuse.  This way some indirect damages might be re-characterized as direct damages.  The more closely damages can be quantified the more likely an agreement will be reached.  In addition, a receiving party may insist on a shorter term by which it is bound to hold the information confidential, or waive the need for a bond if seeking injunctive relief.

In the current business climate, non-disclosure agreements are frequently used, but standard versions no longer adequately protect both parties, each use should be reviewed and tweaked to suit the purpose.  As this is one of the most important agreements used every day by many businesses it deserves a bit more attention to the detail.

 

[1] This is a very general example, and the language will vary depending on the parties, the information disclosed and a number of other factors.

TwitterLinkedInFacebookGoogle+RedditStumbleUponDiggEmail