Confidentiality Clause or Non-Disclosure Agreement
During the performance of a contract, a party may receive from the other party information that is not public knowledge or that is not readily available through other sources. Perhaps this information is important to the business livelihood of the party providing the information (the holding party). For instance, under contracts for employment, consultancy, licensing or distribution, the receiving party might obtain the holding party’s customers list, marketing plans, or R&D information. In an acquisition, merger or joint-venture, the type of information that is shared may include financial information, business plans and budgets. In all these cases, the holding party will likely want to restrict the receiving party from disclosing the information to others, except in limited defined circumstances. A confidentiality clause included in the commercial agreement directly addresses this issue.
On the other hand, if the parties have not defined the content of the commercial transaction or they have not entered into an agreement yet, the parties may want to negotiate and enter into separate standalone non-disclosure agreement that regulate the unilateral or mutual obligation to keep information confidential in this preliminary negotiation phase.
In both cases, it should be noted that the purpose of a confidentiality clause and a non-disclosure agreement is to protect the holding party against the disclosure of confidential information, rather than to grant ownership of developments, which may occur following the cooperation between parties and that should be regulated in a separate agreement.
Key Points of a Confidentiality Clause
The parties may negotiate the content of a confidentiality clause, but it is crucial that the following points are included:
• A clear and precise definition of “Confidential Information”;
• A list, or definition, of information excepted from confidential information;
• Receiving party’s standard of conduct in preventing misappropriation or impermissible disclosures of confidential information;
• When the information can be shared and with whom;
• When and how information will be returned to the holding party or destroyed;
• The holding party’s remedies if the receiving party breaches its obligations; and
• The duration of the confidentiality obligation (a term of three up to five years is normally deemed reasonable, with the exception of trade secrets, which should be treated and kept as confidential until they lose their trade secret nature).
Definition
The confidentiality clause typically begins with the definition of what is “Confidential Information”, followed by what is excluded from that definition. What is included in the definition will depend, in part, on the underlying business transaction and the purpose of the transaction. Trade secrets might have broader protections available under the governing trade secret law and therefore it may be convenient to exclude them from the definition and address them in a separate clause. The definition of confidential information is often the focus of negotiations between the parties.
Receiving Party’s Restrictive Obligation
This can be prefaced by the receiving party’s acknowledgements that it has or will receive confidential information and that violating the confidentiality clause might result in damages to the holding party. How broadly or narrowly the nondisclosure obligation is expressed depends on the parties’ negotiations, and it is often regulated or moderated by qualifiers such as “best efforts” or “reasonable efforts”.
Receiving Party’s Duty to Return Information
Confidentiality clauses should also include the receiving party’s obligation to return or destroy, at holding party’s discretion, all information upon termination of the agreement or at the holding party’s request.
The Holding Party’s Remedies
The holding party’s remedies for the receiving party breaching an obligation as to non-trade secret confidential information can be included as part of the confidentiality clause. Alternatively, the applicable remedies provision is included in the exit provisions section of the contract, especially if the remedies not only apply to breaches of the confidentiality clause but also to breaches of other obligations in the agreement. Typically, equitable remedies are made available to the holding party in addition to monetary damages. In such case, a specific provision should expressly state that the holding party’s pursuit of equitable remedies is in addition to other remedies at law.
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Requests for information or insights on the issue discussed in this article may be addressed to marco.giovine@vallalaw.com. This article is for information purposes only and does not constitute legal advice. The information contained herein may be outdated or incomplete, and shall in no way be taken as an indication of future results. The transmission of this article is not intended to create, nor does its receipt constitute, an attorney-client relationship between preparer and reader. You should not act on the information contained in this article without first seeking the advice of an attorney.