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ARE YOU CONFIDENTIALITY CONFIDENT? - by Andrew Ireland and James Millea - Argyle Lawyers

Although the method of protection of confidential information is a combination of several factors worked into a strategy, one factor which is fundamental to the protection is a properly drafted agreement of confidentiality, which is also referred to as a deed of confidentiality or a non-disclosure agreement or NDA.

8 September 2009

There is no time when a business is more prone to losing confidential information than when it invites other parties into its inner sanctum of intimate knowledge and operational information. If we put aside the day-to-day concerns for security and control of business sensitive information that every business needs to address in a structured manner, then the more obvious events of exposure and therefore potential loss of valuable confidential information are when a business seeks investor capital (which usually requires comprehensive disclosure so that the investor can properly assess the investment), when a senior employee departs (as he or she may have intimate knowledge of all valuable aspects of the business) or a contractor participates in the development of the intellectual capital of the business through research or development of pre-commercialised products or formulations (and consequently has no formal obligation to you other than what is agreed in the contracting agreement). This risk is only magnified for a young business which has not had sufficient time or resources to protect its intellectual property by way of statutory protection via patent, trade mark or the like.

At the same time however, it is a risk most businesses need to prepare for and face, and hopefully navigate with commercial confidence.

Most young business operators are aware of the need for protection of their confidential information and, when necessary, the need to have third parties execute a confidentiality agreement. But most young business operators are not aware of the relevant influences which touch on the interpretation and enforceability of confidentiality agreements and therefore may unwittingly expose their businesses. In this regard it is more than just the written words of the document which are relevant but it is also assessed based on reasonableness and the manner in which the young business typically treats its confidential information which are relevant.

In context, only young businesses with truly valuable sensitive information need to fully understand the issues surrounding the interpretation and enforcement of confidentiality agreements. Those businesses with less sensitive information where the concern of loss is not as great may be quite relaxed with using a simple confidentiality agreement, of which there are many of variable quality which can be found for free on the internet.

For those businesses with valuable sensitive information, they would be surprised to know that some of the more common short comings we often see in confidentiality agreements include the following:

1. wrong parties have executed the document. Although this seems surprising it is not uncommon, particularly when dealing with a person who may be associated with several entities;

2. inadequate description of what is confidential information. It is possible to impose confidences on information which is not really confidential, such as client lists, as long as the agreement is clear and well drafted;

3. reasonableness of exclusion from confidentiality. For example it is not appropriate to impose confidences in respect of information which is readily available in the public domain, this begs the question of what is the public domain and how the information got into the public domain;

4. the obligations of confidence do not tie in related parties to the recipient;

5. derivative disclosures of confidential information by the recipient is not addressed;

6. no or inappropriate references to duration of confidence;

7. inadequate indemnity provisions;

8. no limitation of reliance provision;

9. no adequate severability provisions.

Of course young businesses are challenged by the whole process of insisting that a confidentiality agreement is entered before disclosing sensitive information, for various reasons, including:

a)
a recipient recognises that a confidentiality agreement will restrict or restrain it in some way in the future and will naturally try and water down the consequences of breaching the confidences;

b)
a confidentiality agreement is usually a precursor document to the possible commencement of business dealings. There are 2 influences in this regard, namely, it will be used and should be executed with parties you don't ultimate pursue dealings with (arguably these are the most relevant circumstances in which you want a strong confidentiality agreement to apply) and the document may be seen as a hurdle to the progressing of business dealings and the natural tendency is to avoid placing stress on the relationship before commercial terms are resolved - of course the counter to this position is the perception which the recipient will have as to the value of your confidential information.

In these circumstances it becomes a commercial decision of whether the young business concedes some ground by amending terms of its confidentiality agreement or stands firm. Importantly, by starting with a strong confidentiality agreement, the choice is in the hands of the young business.

We would commend that every young business with valuable sensitive information should seek advice so that they fully understand the influences that the laws have on confidentiality agreements, work up a strategy appropriate for their particular business and create one or more standard confidentiality agreements specifically for their business.

As mentioned above, a good confidentiality agreement is an essential factor, but still only one factor, of a sound strategy of protection which any good business needs to employ. Other factors usually include controlling the disclosure of sensitive information by employing summary documents and disclosing documents as trust and confidence with the recipient increases; enquires to establish the history of the recipient and whether it or its associates are active in the same business space; impress the confidence whenever documents are disclosed; and ensure there is agreement to recover confidential information from the recipient in agreed circumstances.

Being penny wise and pound foolish, particularly with confidential information, should not be a consideration for a young business which attributes great value to its information. They above all others need to be confidentiality confident!

Andrew Ireland aireland@argylelawyers.com.au and James Millea jmillea@argylelawyers.com.au are at Argyle Lawyers specialising in commercial and corporate law with a particular focus on private equity, renewable energy and commercialisation of intellectual property.

www.argylelawyers.com.au

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