Confidentiality Agreements – Ten Top FAQs
December 2010
1. Does the law protect confidential information?
Yes. The law protects people who give confidential information to people who then make use of it or disclose it to other people in breach of trust.
2. What law are we talking about?
The law which people generally rely on to protect confidential information (we’re talking UK law here) is the law of equity rather than the law of contract. In simple terms, the law of equity states that in certain circumstances someone owes someone else a duty of care, and can be liable if they breach that duty of care. A breach of the law of equity is known as a ‘tort’ (in case you were never tort that!).
You need to know this distinction because it explains many of the other answers here.
3. What kind of information can be protected? What IS ‘confidential information’?
-it must have involved some thought or effort.
-the owner must reasonably believe that disclosure of the information would cause them damage or would give advantages to their rivals or others
-the owner must reasonably believe the information to be confidential or secret and not already in the public domain
-in deciding whether information is confidential in nature, a court will look at it in light of the usages and practices of the particular trade or industry concerned.
4. When does the law provide protection?
-The information must be confidential (see FAQ 2.)
-The information must have been given in circumstances importing an obligation of confidence – ie it must have been clear to the recipient that it was meant to be kept confidential
-The recipient must have made use of the information in a way which was not authorised by the giver of the information
-The giver of the information must have suffered some detriment as a result of the unauthorised use.
The more ‘important’ or clearly ‘secret’ the information the easier it will be to protect. So, for example, it is usually possible to protect trade secrets or carefully protected customer lists
5. What remedies are there?
Under the law of equity people who breach confidentiality obligations can be made liable to:
-an injunction (an order that they must stop doing something); or
-an order that they must account to the wronged person for the profits they earned as a result of the breach.
Note that these are not remedies which are generally available under contract law for a breach of contract.
(Although, getting a bit technical there was a House of Lords case in 2000– the George Blake case about whether the spy was entitled to royalties from the memoirs he published – which said that in some exceptional circumstances an account of profits COULD be sought as part of the damages for a breach of contract. But when looking to protect confidential information it is generally far easier to rely on the equitable law.)
Under the law of contract, the usual way to calculate damages is based on what is needed to compensate the claimant for the loss which could foreseeably be suffered by them if there was a breach by the other party. It can often be very hard to show that they suffered any actual loss themselves as a result of a breach of a confidentiality obligation. One measure which could be applied is what the discloser of information would have agreed to accept to release the disclosee from its non-disclosure obligations.
The right under equity to an account of profits is not automatic. The court has a discretion – it must decide that it would be just and equitable that the defendant should retain no benefit from its breach. In a case in July 2010 (Vercoe and others v Rutland Fund Management Ltd) the claimants had approached the defendant with regard to a potential management buy-in by the defendant (a venture capital company) of a potential target company. The defendant breached the NDA they had signed and bought the target without involving the claimants (who had hoped to be put in as the new management with a stake in the target business). They later sold the target on AIM for a large profit. The court thought the breach of covenant here was more like a breach of a restrictive covenant than a breach of a fiduciary duty, and decided that an account of profits was not the appropriate remedy. Instead, it awarded the claimants the amount it thought they would have accepted at the time if there had been a ‘reasonable transaction’ for releasing the defendants from their obligations (this is called a ‘Wrotham Park’ approach). Broadly, this was held to be calculable by reference to the amount of shares which the claimants would probably have got if they had been involved in the management buy-in. This was considerably less than the profit the defendants had made. So perhaps you need to be a little careful when drafting ‘introduction fee’-type agreements to clarify what kinds of damages the parties agree would be appropriate to compensate the introducer for its loss if the other party was in breach.
6. Is an NDA worth the paper it’s written on?
You often hear that an NDA isn’t worth the paper it’s written on. It is true that there are a number of obstacles if you want to bring an action for breach. It is up to you to prove there has been a breach, and this can be difficult.
Also, if you look at the piece of paper as just being a contract, then yes, it is not necessarily much use as a contract (see FAQ 2) (although remember – contracts don’t have to be in writing anyway) . Here are some reasons why it can be worth setting down an NDA in writing:
-It provides evidence which can be produced to tick the necessary boxes when the information provider subsequently wants to bring a claim under the law of equity: that the information has been disclosed; that the person who gave it considered it to be confidential and was giving it on the basis that it was confidential; and that the recipient of the information agreed this (so, the more clearly the NDA actually describes the information which the giver wants to protect, the better, as there is less room for doubt).
-It can include further contractual provisions which the parties might have agreed to, such as specific restrictive covenants. The existence of the confidentiality obligations can help to establish the reasonableness and enforceability of such provisions (when the person in breach might otherwise try to argue that the restrictions are so unreasonable as to be unenforceable because they are in restraint of trade).
-If you have something you are thinking of patenting then you do want to protect it with an NDA. You lose a right to protection for a possible patent if it gets known about before you patent it. Disclosing details under the terms of an NDA can protect you from losing the patentability.
7. OK, it might be worth the paper it’s written on, but it doesn’t give me much certainty in my particular situation. What else could I do?
-Be careful what information you disclose! Ideally only give it to people whom you think you can trust anyway! Once information is in the public domain it can be very hard to protect.
-In appropriate circumstances it is sometimes worth drafting an agreement which provides for a pre-agreed contractual payment to be made if one party does something as a result of an opportunity which it agrees has been made available to it by the other party. So, for example, rather than the contract saying that one party must not solicit the other’s employees, or must not make use of a business idea, or must not deal with a potential customer that is being introduced to it, the contract could say that IF that party takes on the other’s employees or takes advantage of the opportunity given to it to make use of a business idea or do business with that customer, it will make a pre-agreed payment to the other party (eg a percentage of salary, or a percentage of turnover or profit). This turns the situation from being one where the wronged party a/ has to prove a breach of contract or tort and b/ has to argue how much of a damages claim he can make, to being one where the damages claim is clearly based on the non-performance of the contractual obligation to pay a clearly-calculable sum in clearly defined circumstances.
-An alternative is to provide that if a party breaches its obligation not to do something, then it will pay a pre-agreed amount which both parties consider to be a genuine pre-estimate of the loss which the other party might suffer as a result of the breach. This can be a dangerous game, as under English law if a court decides it was not a genuine pre-estimate of loss it might strike the whole thing out as being a penalty clause, which under English law is unenforceable (nb the position is not the same under other laws, eg those of most other European countries).
8. What’s the difference between a Confidentiality Agreement, an NDA, and a Non-disclosure and Non-circumvention Agreement?
None that I know of.
9. What does ‘in the public domain’ mean?
This can get a bit complicated so I won’t try to explain it here (this might or might not mean that I don’t fully understand it myself…). But if you apply a common sense approach you probably won’t go far wrong.
10. Do you have any other brilliant insights?
No. Not here. They’re confidential!
11. (Bonus FAQ!) Where can I get a good precedent NDA?
There are all sorts of shapes and sizes of NDAs. Most of them do a reasonable job, although the more you tailor one to your specific circumstances, the better. Through the legal knowhow providers that OnHand Counsel and most of the other best UK law firms subscribe to, I have access to all sorts of precedent agreements and clauses to suit all sorts of scenarios. As with all precedents, I do not charge for them, as I generally charge my fees simply by reference to the time I spend on any particular matter. This might include the time spent reviewing and selecting and deciding how best to apply the precedents and other knowhow available to me to get the best job done for my clients. I am afraid that under the terms of my licence with my knowhow provider (to whom I pay many £1,000s a year) I cannot generally simply provide you with a free precedent, whether it is a confidentiality agreement or anything else, unless you also want me to do some work (it doesn’t always have to be very much) which you will pay me for!
As an example of how commoditised the production of many legal documents has become and is likely to become, you can find a perfectly decent NDA by going onto Microsoft Word while you are connected to the internet, and clicking to open a new document. Look down the list of templates, and you will see a heading ‘contracts’, and clicking on that will take you to a few passable confidentiality agreement templates.
