Editors Note: Caroline Horton Rockafellow is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.Now that the deal market is heating up again, it is a good time to take another look at an area that impacts many business professionals–the confidentiality or nondisclosure agreement.

The first step in almost any form of legal transaction, from a simple license or partnership arrangement to a complex merger or acquisition, is almost always the execution of a confidentiality agreement. Sometimes referred to as nondisclosure agreements, these documents are intended to protect the disclosure of confidential information and are generally considered to be one of the shortest and easiest to understand of all legal documents.

It is far too common for individuals and corporations to view these documents as “boilerplate” agreements and rely on the false belief that such documents do not require any detailed consideration or review. Unfortunately, they are also full of hidden perils which, if not anticipated and recognized, can result in serious consequences and liability for both persons receiving the confidential information (the “receiving party”) and those disclosing it (the “disclosing party”).

Definition of Confidential Information

The first hidden danger relates to the definition of “confidential information” used in the agreements. The definition can vary widely, but it is generally either a description of the information to be disclosed or specification that the term includes documents marked as confidential. Sometimes the definition includes verbal disclosures as long as written notice is sent within a period of time after the disclosure. Of course, if verbally disclosed information is only confidential after receipt of written confirmation, such information may be disclosed prior to receipt of that confirmation and if this occurs the iformation is in the public domain and no longer protected.

It is not uncommon for disclosing parties to provide a relatively vague definition of “confidential information” intended to cover a multitude of information, but which instead creates an ambiguous description of what should be deemed confidential. If a disclosing party cannot clearly demonstrate what information is protected by a confidentiality agreement, it will be difficult to enforce an apparent breach of it At the same time, the disclosing party must be careful that the definition is not so narrow that it fails to cover all of the information to be disclosed under the agreement. Accordingly, the definition of confidential information must be carefully analyzed to make sure it appropriately and completely describes the information to be protected upon disclosure.

Receiving parties have an equally significant concern with respect to the definition of what is deemed confidential, and in particular avoiding a definition that includes information related to any product or technology the receiving party is researching or has under development. If a receiving party agrees not to use or disclose certain information and then begins producing a product or service that incorporates or is based on the content similar to that of the “confidential information,” the disclosing party may be able to claim that such product or service was developed in breach of the confidentiality, thus precluding the receiving party by using its own proprietary information without risk of a lawsuit. A receiving party can avoid claims of trade secret misappropriation based on misuse of confidential information simply by carving out potentially conflicting information from the definition of confidential information. For example, if both parties are working on development of drugs for a similar application, then the receiving party may not want to receive any information related to the formulation or development of such drug.

Exceptions to the Definition of Confidential Information

Confidentiality agreements almost always include exceptions to the definition of Confidential Information, and these exceptions constitute another hidden danger of these agreements. If both parties are working on the same concept, carefully parsing what or is not excluded is critical.

Beyond this, there are common exceptions for information that is already publicly available, that has been previously disclosed to the receiving party without an obligation of confidentiality, that the receiving party develops on its own without use of the confidential information or that is required to be disclosed by law. Although these exceptions would seem to be very standard items, and relatively innocuous, they are also full of potential problems.

Consider the exclusion for information that is publicly available. What if the disclosures include a detailed list of employers in a particular field, the employment opportunities within such employers, contact information, average salaries and standard benefits? All of this information may very well be publicly available information, but would be difficult and time consuming to compile. Thus, the disclosing party may need to specifically limit exclusion from the definition of “confidential information” certain complied or analyzed information, even though the raw information can be found in the public domain with adequate research.

Likewise, the independent development exception can be wrought with problems. Basically, this exception allows a receiving party to disclosure or use the confidential information without restriction if it developed the information on its own initiative without using the confidential information. This is a helpful exception for receiving parties in that it eliminates the possibility that it will be hindered simply because it receives information substantially similar to information already under development. At the same time, the exception can be problematic for disclosing parties if the receiving party is less than completely honest, if a receiving party employee unintentionally accesses the confidential information but such access is not documented or substantiated, or if the agreement does not specifically require proof of independent development. Developments often result from access to information and the creator may not always be in a position to recall or even recognize where the initial spark was initiated.

Another very common exception is the “legally required” exception. This exception usually includes language that excludes from the definition of confidential information any information that is required to be disclosed by law. While this appears to be a completely logical statement and is very common in confidentiality agreement, disclosing parties should not agree to include it as an exception. The problem is that often information will be required to be disclosed under court order or a statutory requirement, but such legally mandated disclosures may be able to be made “under seal” or otherwise such that the information is never made publicly available. The fact that such a disclosure is made should not make permanently remove the information from the definition of what is confidential, but rather only be a permitted use which is subject to careful restrictions.

Use of Confidential Information

Another common problem with confidentiality agreements lies in the description of the permitted use. Occasionally, confidentiality agreements will restrict the disclosure of confidential information, but not the use. When this occurs, the receiving party may use the information in any manner it desires, including development of competing products.

Conversely, if the permitted uses of the confidential information are not broad enough to cover all of the applications required by the receiving party, the receiving party may be in violation of the confidentiality agreement simply by undertaking the activities that would be required to fulfill the purpose of such an agreement.

Accordingly, both parties need to be careful that the agreement includes a restriction on the use of the information and that that restriction is broad enough to cover the desired activities of the parties.

Confidentiality agreements are valuable and useful legal documents, but only when used and applied in an appropriate manner. Failure to recognize the legal liabilities surrounding such agreements may subject users to claims of trade secret infringement or conversely a devastating loss of trade secret rights. These dangers can generally be reduced or eliminated if parties take the appropriate steps when negotiating these agreements.

Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Caroline Horton Rockafellow is a licensed patent attorney who works primarily in the areas of technology deals and licensing. Questions or Comments can be sent to crockafellow@d2vlaw.com