Thursday, April 7, 2011

Confidentiality Agreements

There are four basic ways a company protects their proprietary rights:
  • Patents protects an idea and provide a right to exclude others from making/using/selling items that include the patent for 20 years from filing date
  • Copyright protects a particular expression of an idea from copying.
  • Trademark identifies the source of a good or service to eliminate consumer confusion.
  • The last way is managing information as a Trade Secret to protect the information.

.Most of the time “trade secret” information is information or technology that has been kept secret and that provides commercial value or advantage to that company.  A trade secret can be any type of information that meets three conditions:
  1. The information is not generally known or readily ascertainable.
  2. The information is valuable to its owner (or would be valuable to a competitor),
  3. The company must demonstrate that it intended to keep the information secret.
One of the ways a company demonstrates the intent to keep their Trade Secret information secret, is by requiring Confidentiality or Non-Disclosure Agreements to protect the information.

Suppliers will want to protect are things such a specifications on unannounced products, business plans, product road maps, cost information, technical information about their products or processes, etc.  Buyers want to protect many of the same types of things.

Most Confidential or Non-disclosure agreements will contain the same basic requirements:
  • The description of what is confidential and what is required for it to be managed as confidential. For example, the parties may require a non-confidential description of what each plans to transmit.
  • The process which must be followed for submission and receipt, This would include things like who to submit it to and how it must be marked.
  • Restrictions on disclosing the information to other individuals or companies. This would identify whether subsequently disclosure under a CDA to another party would be allowed.
  • Restrictions on the use of the information. This could be restrictive such as using it solely in connection with business with the discloser. It could also provide broad use, such as being able to use it for any purpose subject to maintaining the confidentiality obligations.
  • The period during which those obligations remain in effect. This is the term you need to hold it as confidential. The term should never be left open ended, as you would be obligated to maintain it as confidential forever when most information has a useful life.
  • The standard by which the information will be protected. Frequently this is the standard to which you manage your own confidential information, but for highly sensitive data extreme restrictions may be imposed such as limited the number of copies, prohibiting copying, requiring access control etc,
  • Rights the recipient may have in the disclosed materials subject to the confidentiality and underlying intellectual property rights of the Discloser.
  • Exceptions to the obligations.  Examples of this are when there is a court order that requires disclosure or the information becomes public knowledge

Receiving technical confidential information is a serious problem for many companies as there is always the potential for the breach of the agreement and the damages associated with that. Many times confidentiality agreements do not include a limitation of liability. There is also the risk that such receipt could be used to limit the ability to develop, manufacture or market future products. There is further the risk the information may inadvertently wind up being used in a future product that would subject the recipient to:
  • Potential injunctions on the sale, manufacture or use of such products or services for infringement of the Discloser’s intellectual property rights, or
  • Claims for misappropriation of trade secret information (unlawfully taking the property of the discloser).
That’s why many CDA's will either include a right to use the information as long as the confidentiality obligations are met or provide a right to use retained information so individuals that were exposed to the information would be able to use what they mentally retained.

The best was to manage the risk associated with the receipt of confidential information is to manage and limit its receipt. You want to ensure you do not get unsolicited information and all receipts should be justified on a “need to know” basis.

If you need to share confidential information, you need to put an appropriate agreement in place before you receive it or before you disclose it. If a Supplier submits something that is market as confidential and there is no agreement in place, return it. If you are seeking bids or proposals put the Supplier on notice in your document that all materials submitted should be non-confidential and if they require something be treated as confidential, that it be submitted only after an appropriate agreement is in place.

One of the issues that frequently may be an issue in negotiating confidentiality agreements is the term you must maintain the information as confidential. The simple fact is most things that a Supplier would want to protect have a limited life where it meets the three conditions of a trade secret. Un-announced products get announced. Product designs that needed to be protected lose their value once the product is available for sale where anyone can buy one and see how it’s made. Business plans and strategies seldom remain fixed for an extended period. The period you agree to for confidentiality obligation should depend upon what’s being disclosed and the dynamics of the market. There are few things that would be disclosed that need protection for more than two or three years.

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