Editors Note: Caroline Horton Rockafellow is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.Last week this author wrote about the hidden dangers of Confidentiality Agreements, discussing in that article the potential risks associated with the drafting and negotiation of apparently innocuous Confidentiality Agreements. While entering into a Confidentiality Agreement is the first step in almost any form of legal transaction, the execution of such agreements does not signal the end of the legal minefields related to them.
In fact, for both the party disclosing the information (the “disclosing party”) and the party receiving the information (the “receiving party”), the actions or inactions that occur after execution of the agreement carry as much risk as the specific terms that are included in the document itself. This article will address the administrative and procedural concerns that parties must consider and address long after the confidentiality agreement has been signed.
Complying with obligations
It is not uncommon for individuals or departments with the responsibility to negotiate and execute a confidentiality agreement to be separate and distinct from those who are charged with operating under the agreement and managing the ongoing confidential relationship. One major problem with confidentiality agreements is that once signed, they are often put in a file with no further consideration as to the obligations specified in them. Therefore, the first critical action that must be taken is for a copy of the agreement to actually be put into the hands of the persons who will be receiving or disclosing the information protected by the agreement, and to be certain that such persons understand the obligations.
The first consideration by a disclosing party should be what actions are required under the agreement to bring information under the protection of the agreement, and to put into place a process to ensure that these actions are taken. For example, if there is a requirement that the information be marked “confidential,” the disclosing party must make sure that administrative procedures are in place to ensure that all disclosed information is properly marked. Failure to make the proper markings will mean information that was intended to be included as confidential information will not be protected by the agreement. Also, if the agreement provides that information only in certain fields will be included as confidential, it is important not to make disclosures in other fields.
The first consideration by the receiving party should be having a process in place to determine when it has received confidential information and to ensure compliance with all restrictions on its use and disclosure. If the agreement restricts disclosure of the information to a few key people within the company or requires that certain security procedures be implemented with respect to the information, the receiving party must ensure that all such obligations are met. If the agreement requires that only specified uses be made of the information, then a process needs to be established to ensure that it is not used otherwise. If the information is required to be returned by a certain date, the receiving party must have an administrative procedure in place to ensure compliance with this obligation. A failure to meet these obligations may result in a claim for breach of contract or trade secret misappropriation.
A standard term in many confidentiality agreements is an exception from the definition of confidential information for matters previously known to the receiving party. Accordingly, if a party anticipates it may receive information that might, even remotely, be already known to it, that receiving party should take appropriate steps to document its knowledge prior to receipt the information that would otherwise be deemed confidential under the agreement. This documentation should include detailed records maintained in a generally accepted record-keeping format. It is generally recommended that such documentation be signed, dated, witnessed and stored in a secure manner. It should be relatively easy for the receiving party to go back at any time and easily demonstrate what was already known to it prior to the date of the receipt of the information from the other party.
Along the same lines, companies should also have procedures in place to clearly demonstrate how confidential information was used, how it was maintained and what happened to it following termination of the confidentiality agreement. This documentation will become critical if a receiving party is charged with trade secret misappropriation. The ability to demonstrate that confidential information was not used by the receiving party in violation of the terms and conditions of the confidentiality agreement may make the difference between succeeding or failing in defense of a trade secret misappropriation claim.
Separating knowledge centers
If there is any possibility that the confidential information might be similar to information under development by the receiving party, the receiving party should take steps to separate the individuals receiving and evaluating the information from the creative parties developing potentially conflicting materials. Provided that this is properly documented and the receiving party can sufficiently demonstrate that the creative individuals did not receive and did not have access to the confidential information, the receiving party will have a much higher probability of being able to successfully defend any claims of misuse of confidential information. It is often difficult to disprove a claim that an invention was not a direct or indirect result of access to third party confidential information. If a receiving party is able to prove that the inventor and the individuals working directly with the inventor did not have access to such information, it will be much easier to demonstrate that the invention was not a result of access to such information.
Stopping the flow of information
Because the persons drafting and the persons implementing the agreement may not be the same person, it often occurs that the Confidentiality Agreement does not properly reflect what needs to be protected. For example, the drafters may put into place a mutual confidentiality agreement with a consultant when a one-way agreement is appropriate. A mutual agreement would likely result in the receiving party not to be able to use the information it pays the consultant to create for or provide to it. While there is nothing wrong with the form, per se, it simply doesn’t work in the circumstance in which it is being applied. Similarly, the form may cover information that should have been excluded or exclude information that needs to be included. In the event either party determines the document is not technically correct for the particular situation, it needs to stop making and/or receiving disclosures immediately and until such time as the contractual language has been corrected. A failure to suspend receipt or disclosure of information to be disclosed under a faulty confidential agreement may result a disclosure of information that is either too restrictive and does not permit the parties to do the work necessary to effect the purpose of the agreement or too permissive such that confidential information is not adequately protected.
Confidentiality agreements are a common legal contract, yet they are full of hidden dangers. While many of the dangers rest in the language of the contract, others are found in the administrative procedures related to the actual disclosure and treatment of confidential information that occurs long after the contract is signed. A failure to put appropriate administrative procedures in place to ensure compliance with the terms and conditions of a confidentiality agreement carries significant risks that could ultimately result in claims of breach of contract or trade secret misappropriation. Accordingly, it is critical for all parties that execute confidentiality agreement to have appropriate administrative procedures in place to ensure compliance with all of the relevant obligations under such 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 email@example.com