Confidentiality Agreements

copyright 1997 Donald M. Cameron , Aird & Berlis

Contents

• Introduction
• 1. Ownership of Trade Secret or Confidential Information
• Acknowledgement of Confidentiality
• 2. Communication in Confidence
• 3. Limited Use of the Confidential Information

For introductory reading on Trade Secrets law, see Trade Secrets Law: Reading Outline

Trade secrets and confidential information begin with their creator: the employee. That is why Employee Agreements should deal with confidential information created or received by employees during the course of their employment. A properly drafted Employee Agreement will deal both with the ownership of the intellectual property and the restrictions on the use of it in the Employee Agreement.

In most cases of custom software development, a confidential relationship will be established between the licensor and licensee. The licensee may allow the licensor access to its confidential data. The licensor may provide confidential source code to the licensee to allow it to modify the software. In both cases, each party will want to have its trade secrets and confidential information protected.

Although the relationships are mere images of one another, for purposes of example, the situation of a Licensor disclosing confidential information to a Licensee will be used as an example.

Trade secrets can be enforced only if three elements are present:

1. ownership of trade secret or confidential information;

2. communication of trade secrets or confidential information in circumstances of confidence; and

3. a defined, limited use of the trade secrets or confidential information. Any other use constitutes mis-use and a breach of the obligation of confidence.

Each of these parts of a confidentiality agreement will be discussed separately below:

Most litigation in the area of trade secrets or confidential information arises in situations where neither party is clear as to what was the trade secret or confidential information. Therefore, to avoid litigation, it is in the interests of the Licensee to have the trade secret clearly defined and identified. The licensor, on the other hand, often wants protection of what it is entitled to and more and will sometimes favour a vague definition of the trade secret or confidential information. In litigation, such uncertainty usually favours the licensor.

DEFINITION: CONFIDENTIAL INFORMATION:

The Confidential Information includes the source code, the data file structure, and the structure, sequence and organization of the computer program.

The Confidential Information does not include:

• information which is already in the possession of the licensee, received from third parties without restrictions as to use;
• information already publicly available;
• information provided to the licensee in the future, from third parties who are not under any obligation of confidence to the licensor.

All Confidential Information communicated by the licensor to the licensee in documents shall bear a "confidential" notice. The confidentiality of any information communicated orally to the licensee will be confirmed as being confidential in writing by the licensor within seven business days of its oral disclosure.

The requirement that the Licensor mark its information as confidential reinforces the obligation imposed upon the Licensor by the jurisprudence that it treat its information as confidential. The written "confidential" notice on either the documentation or the confirmatory letter will give notice to the Licensee as to what information is to be considered confidential. Later, the Licensee might dispute the confidentiality of the information, it being information excluded by the definition (for example — information already in the public domain).

Even though the definition section states that the information is confidential, the Licensor may wish to have an acknowledgement within the agreement whereby the Licensee acknowledges that the information is confidential and is owned by the Licensor. A Licensee may not wish to acknowledge the confidentiality of the information since it may currently have no knowledge that this information is not already on the public record.

The Licensee acknowledges that the Confidential Information is confidential and is the property of the Licensor.

Instead of acknowledging the confidentiality of the information, the Licensor may be satisfied with having the Licensee agree not to contest the confidentiality or ownership of the information during the term of the agreement.

The Licensee will not contest the ownership or confidentiality of the Confidential Information during the term of this agreement.

The Confidentiality Agreement or Non-Disclosure Agreement constitutes evidence of an explicit written contract between the parties and also the disclosure and use of a trade secret or confidential information. The Grant clause of the Confidentiality Agreement reflects that communication.

The Licensor hereby agrees to disclose to the Licensee the Confidential Information. The Licensee agrees to use the Confidential Information only for the purpose of evaluating it to consider purchasing the ownership in it. The Licensee will make no other use of the Confidential Information. After evaluating the Confidential Information, the Licensee shall return all copies of it to the Licensor together with any copies of the Confidential Information made by the Licensee during the evaluation.

It is critical to the long-term protection of the Licensor's Confidential Information that its Licensees not destroy the Confidential Information by making it public. From the Licensor's perspective, the best protection is a promise of absolute confidentiality.

The Licensee agrees to keep the Confidential Information confidential and will not disclose it to any other party without the prior written permission of the Licensor.

In practice, the Licensee will only treat the Confidential Information as securely as its internal systems provide.

The Licensee agrees to maintain the Confidential Information to the same level of confidence as it protects its own confidential information.

More realistically, the Licensor should expect the Licensee to treat the information as carefully as does the Licensor. It is up to the Licensor to ensure that systems of confidentiality, up to its standards, are in place at the Licensee's business.

The Licensee agrees to maintain the Confidential Information to the same level of confidence as defined by the Licensor.

A clause can be added to the agreement to remind the Licensee that it should not disclose the Confidential Information to anyone else.

The Licensee and its employees shall not disclose the Confidential Information to any third party without the prior written permission of the Licensor.

It is fine for two companies to agree to keep each others information confidential, but if the employees who are handling the information are not aware of the company's obligations, the confidential information will be at risk. The recipient of the confidential information should be obliged to advise its employees as to their duties and obligations under the agreement. The obligations "trickle down" to the employees. The Licensor should insist on seeing the confidentiality agreements in place between the Licensee and its employees to ensure that such agreements are in place and contain the needed clauses.

The Licensee shall advise its employees who have access to the Confidential Information as to this obligation under this Agreement. The Licensee shall ensure that each of its employees who receive the Confidential Information shall agree in writing to maintain the Confidential Information as confidential in a form acceptable to the Licensor.

The obligation of confidentiality should survive the agreement.

Licensee acknowledges that its obligation to maintain the Confidential Information as confidential survives the termination of this agreement and lasts until the Confidential Information is made public.

In some cases, the obligation may survive the publication of the confidential information so as to prevent a leap-frog advantage to the Licensee (see See the Delrina and Pacific Bell case (1994) where temporary injunction was imposed after the termination of the confidentiality agreement to prevent Delrina from launching a fax mail box service.).

Licensee acknowledges that its obligation to maintain the Confidential Information as confidential survives the termination of this agreement and lasts until six months after the Confidential Information becomes public.

The Grant Clause should specify the limited use to which the Confidential Information is to be used. This limited use can be reinforced buy further clauses stating what the Licensee may not do with the Confidential Information. For example:

The Licensee may not use the Confidential Information to develop a system competing with that of the Licensor.

The Licensee may not disclose the Confidential Information to third parties without the prior written approval of the Licensor.

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