Non-disclosure agreements and confidentiality clauses

Confidentiality agreements and confidentiality clauses are common in the ordinary course of business. Although sometimes a lawyer tries to reinvent the wheel and provides for a draft ‘well thought through’ NDA (non-disclosure agreement), or assembles a secrecy agreement from a bunch of examples, I believe there is a common sense and hence good practice. That’s what I discuss in this blog post.

Confidentiality clauses are commonly inserted in any contract. They are quasi-miscellaneous provisions. Still, a drafts­person should establish whether a confidentiality clause is indeed desirable. In contracts for the sale of bulk products a confidentiality provision may well be an overkill. Also, in product development arrangements (sometimes as part of a sales contract), the developer may prefer to remain free to operate making use of the information about the products or product applications of its customer. A confidentiality clause in a patent licence may well obstruct the registration of such licence in the national patent registers (which makes the licence potentially invalid in the event that the patent is sold and transferred to another party or if the patent owner goes bankrupt).

Define the scope of information. The scope of a confidentiality clause requires some care. On the one hand, it is essential to capture the right information. Some parties prefer to have a rather rigorous way of working and require that information is only Confidential Information if it is marked as such (and furthermore, in case of oral information, the confidential information must be put in writing and communicated within 30 days of the oral presentations being made in order to be covered by the confidentiality provision). I believe that a court should be suspicious of whether such a strict approach was indeed intended by the parties. Many companies are less formal. For them, Confidential Information means:

any information of a non‑public, confidential or proprietary nature; whether of a commercial, financial or technical nature; customer, supplier, product or production-related; or otherwise all information exchanged between the parties shall be deemed to be ‘confidential’.

Marking obligations. Of course, the definition can be extended by appropriate examples of confidential information, which would probably include samples, information relating to raw materials, formulae, recipes, specifications, software source code, patent applications, process designs, process models, catalysts and processed materials. The ‘relaxed’ approach is often complemented by an undertaking to mark information as confidential:

Each Party shall use its best efforts to mark the Confidential Information which is disclosed in writing as being confidential. Failure to do so, however, shall leave the other Party’s obligations set forth in this Agreement unaffected.

Scope of use (the “purpose”). On the other hand the scope of use of such confidential information needs to be restricted properly. The two main provisions of a confidentiality agreement or clause address the disclosing party’s right to select or deny a disclosure to the receiving party, and the receiving party’s obligation to use disclosed information for a limited purpose only and furthermore to keep it confidential.

No obligation to disclose. Each Party [in unilateral NDA’s: the Disclosing Party] may furnish Confidential Information to the other [respectively: Receiving] Party as it deems necessary or helpful for the Purpose.

Restrictions on use. A Receiving Party shall not use Confidential Information of the Disclosing Party for purposes other than in direct relation with the Purpose. The Receiving Party shall treat the Disclosing Party’s Confidential Information with at least the same degree of care as it would use in respect of its own confidential information of like importance, but in any event a reasonable level of care.

If a higher level of care would be more appropriate, it may be necessary to provide specific guidelines for protecting know how. A disclosing party should anyhow be entitled to rely on the higher level of care professed by the receiving party. Please note the non-capitalisation of confidential infor­mation in the penultimate line (Compare Common Frame of Reference IV.C. – 2:105(2)).

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