Should Your Business Use Confidentiality Agreements?
Should your company use confidentiality agreements? If your business has information it needs (or wants) to keep out of the public domain, then yes. Information of this type may include:
- Certain types of intellectual properties
- Company information disclosed to potential investors and investors identities
- Customer lists
- Employee salaries
- Independent contractor identities
- Research and development assets
- Suppliers identities
- Tax returns
- Trade secrets, etc.
As a general rule, once information enters the public domain, you can’t make it private. You have to be proactive.
Three Types of Confidentiality Agreements
1) Confidentiality Agreement
This agreement can be used when the involved Parties agree to hold the information disclosed in “strict confidence.” When the Parties become adverse or one of the Parties is seeking to avoid the terms of the Confidentiality Agreement, the Parties may argue over:
- What was the information disclosed in “strict confidence?” (It is helpful to specifically identify the information covered in the Confidentiality Agreement itself)
- What the Party receiving the disclosed information must do with the information
- Which State’s law controls the provisions of the Agreement
- Where the venue and personal jurisdiction will be, should litigation become necessary
2) Confidentiality and Evaluation (CE) Agreement
Potential Patent rights (or Patent rights) can be the subject of a CE Agreement. A CE Agreement specifies that the subject matter disclosed is to be held in “strict confidence” and that the information is provided solely for the purpose of evaluation. In the event one Party is dissatisfied with the CE Agreement, the same issues as identified in the above (Confidentiality Agreement) section will apply here. Additionally, this type of agreement will need to specify:
- Is audible disclosure a disclosure to be held in “strict confidence?”
- Is visual disclosure a disclosure to be held in “strict confidence?”
- What happens when the Party receiving the disclosure evaluates the audible or verbal disclosure outside the jurisdiction where the Parties are domiciled?
This matters because any public disclosure related to potential Patent rights (prior to the filing of the Patent Application) can bar any future Patent related to the disclosed information
3) Confidentiality, Evaluation and Noncompetition (CEN) Agreement
As with the two agreement types above, almost anything that one Party wants to be kept in “strict confidence” can be the subject matter of a CEN Agreement. Along with Confidentiality and Evaluation, a CEN Agreement also includes a Noncompetition (anywhere in the world) provision for the Party receiving the information. Whenever possible, Business Patent Law, PLLC recommends its clients use a CEN Agreement.
In the event one Party is dissatisfied with the CE Agreement, the same issues as identified in Sections 1) and 2) above, may also be grounds for argument between the Parties.
An example of when a CEN Agreement might be used: Private/nonpublic companies often have corporate bylaws that require shareholders to execute CEN Agreements before shareholders can be issued stock.
If a Business Fails to Use Confidentiality-Type Agreements
Unless some type of Agreement between the Parties is executed, the disclosing Party has minimal legal recourse against the receiving Party repeating publically the disclosed information or using the disclosed information for another reason.
Here are a few ways such disclosures could become a problem:
- Public disclosure of the company’s private information will likely temporarily disrupt the company’s operations
- What would happen if all the company’s employees were aware of each employee’s salary?
- What would happen if the company’s competitors were aware of the company’s research and development information?
- A trade secret disclosed publicly is no longer secret and the secret is lost forever
What You Need To Know About Confidentiality Agreements
- Confidentiality Agreements between trustworthy Parties can improve profits for both companies
- The bargaining power of the Parties tends to influence the type of Confidentiality Agreement executed (A publicly traded company will likely have a Confidentiality-type Agreement that is more favorable to the publicly traded company when contracting with a business having annual sales of $2M)
- Bad actors tend to exploit the other Party to a contract (Character of the Parties matters)
- Agreements executed between Parties who were not represented by legal counsel may be unenforceable
- Confidentiality Agreements that were drafted for a first purpose may not be acceptable for a second (but similar) purpose
- Without the advice of legal counsel, parties my draft contracts for almost anything they feel is important at the time the contract was allegedly executed (Some of these contracts may be enforceable, some may not)
- If the alleged contract is only partially in writing, there may be issues when memories fade ten years later (Get it in writing)
- Perspective matters (Three different eyewitnesses can witness the same event and three distinct testimonies may be offered into evidence)
- Written, properly executed agreements can minimize business disruptions
If you have questions about intellectual properties or agreements, please contact Business Patent Law, PLLC. We are here to help you grow your business and protect your intellectual properties.
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