Confidentiality Agreements / Clauses
Confidentiality Agreements, Non-Disclosure Agreements, Secrecy Agreements or by whatever the name, these
ubiquitous and seemingly simple agreements/clauses are so common in today’s business environment that many parties to a transaction just routinely sign them without much, if any, actual review, or consideration. A common justification for the cursory handling of these legal agreements is that they are often precursor to a subsequent, more comprehensive agreement that presumably will receive more careful review.
These kinds of agreements are legally binding contracts between parties with requirements to keep certain information confidential and can be used to protect a wide range of confidential information including trade secrets. They are mostly used by start-up’s, individuals, small and medium-sized enterprises (SMEs) and larger corporations trying to establish a new business relationship or partnership with each other, these agreements can be used to maintain confidentiality of valuable disclosures and prevent misuse of such information.
Examples of instances where these agreements come into play are:
• in employer-employee hiring situations;
• between parties who are considering entering into a licensing agreement with each other;
• distribution relationships; and
• between start-ups and companies who wish to test the potential possibility of beneficial commercial partnerships etc.
A confidentiality agreement can go both ways or be only one-way, a mutual non-disclosure is when both parties are making disclosures that need to be kept confidential by the other party whilst a one-way non-disclosure only requires that the party receiving the confidential information keeps secrecy.
Perpertuity of Confidentiality Agreements / Clauses
The validity of confidentiality agreements/clauses that states it is in perpetuity or indefinite in term of years for which such agreement should be in force has been a subject of controversy, and conflicting views in the academic arena. In examining the discuss, it is expedient to state that the elements that govern validity of a contract are applicable in the operation of a confidentiality agreement/clause. Based on this premise can we then say that it is possible for a contract to be binding in perpetuity? Here is the problem, overtime in the law of contract, it is settled that the terms of contract must be certain, definite, clear, or capable of being made certain later for such to be deemed valid. Flowing succinctly it is crystal clear that once a contract is uncertain, unclear, indefinite, or incapable of being made certain, it later becomes unenforceable.
It is pertinent to note that generally the type of information that is protected by these species of agreement/clauses, usually are confidential information. Confidential information can be defined broadly to cover everything from technical information to marketing information to customer lists and trade secrets. Some confidential information may not need secrecy to extend beyond the end of the business relationship, but others will require secrecy to continue to apply even after the termination of the business relationship. Essential features for an information to qualify for the protection of confidentiality are that it must be of;
Limited public availability; and Specific character, capable of clear definition.
Note: the information need not be original or novel, complex, commercially valuable, personally damaging, or
discreditable to the confider nor, in general, need it take any specific form; but if it does not possess the two basic features listed above, it will not be protected even though it is expressly described as confidential.
But for the purpose of this discuss, confidential information will be classified into three (3) categories namely:
• Ordinary Confidential Information (non-trade secrets);
• Government Secrets; and
• Trade Secrets.
On this note we would be analysing perpetuity based on the above classification without ignoring the basic principles that governs the law of contract.
Ordinary Confidential Information (non-trade secrets)
This refers to non-public information relating in any way to the discloser’s business that is not a trade secret and that is provided to recipient by the discloser. When it comes to non-trade secret information some would argue that information such as customer lists, marketing strategies and pricing models may become obsolete after a few years anyway so there’s no reason to argue for perpetuity of same. In support of this line of reasoning the implied and equitable duties of confidentiality should not endure in perpetuity but for only a definite and ascertainable duration. In Lasership Inc. v. Watson the Court ruled that the non-disclosure agreement was unenforceable because the provisions that stopped the employee from sharing information about the employer covered information that were not confidential (non-trade secrets), and it was unreasonable for the provisions to apply indefinitely.
To give perspective to this discuss from the angle of Government secrets, with Governmental confidence, public interest coupled with the freedom of information Act may allow a relaxation, or security considerations may require perpetuity for example- a former cabinet minister may after sufficient interval, publish diaries recording proceedings at cabinet meetings where there is no indefinitely continuing public interest in maintaining the confidentiality of cabinet meetings and the disclosures are unlikely to raise an issue of national security. In the same vein a member of the intelligence services owes a lifelong obligation of confidence to the crown in relation to government secrets.
Trade secret is a formula, pattern, physical device, idea, process, or compilation of information, which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In other words, the following are the basic elements of a trade secret;
• A “trade secret” must consist of information, e.g., technical information and business information.
• The information must derive economic value from the fact that it is secret.
• The information cannot be generally known by either by the public or other persons in the industry.
• The information must be treated as a secret and be the subject of reasonable efforts to maintain its secrecy.
Trade secrets are a special type of confidential information. A trade secret has no time limitation and can last forever. It remains a trade secret indefinitely if one can prove that the secret continues to possess commercial value, confers some sort of economic benefit and one has made an effort to keep it a secret. Trade secrets are generally essential to the commercial viability of a business. The single biggest pro of trade secrets is that they don’t expire, while patents and copyrights have a limited duration. As long as a piece of information meets the definition of a trade secret, it is protected. There are two big downsides to trade secrets. First, there is no procedure for filing for trade secret status. It is entirely the responsibility of the owner to take the steps necessary to adequately protect the trade secret and ensure it is enforceable.
To further demonstrate the true position of trade secrets, businesses like Coca-Cola and KFC have managed to keep their trade secrets for over One Hundred (100) years and go to great lengths to protect their trade secrets, treating them with special attention. For example, it has been a belief for decades that only two (2) executives of Coca-Cola know the original secret Coca-Cola formula and that the original recipe is kept in a vault in Atlanta, Georgia. KFC operates similarly in such a covert manner and only a handful of employees know its secret recipe of “11 herbs and spices” and reportedly, all these employees have signed confidentiality pledges. According to reports on KFC, two (2) companies are used to manufacture the secret recipe and each company is only given half of the recipe to prevent either company from knowing the full recipe.
Trade secret is treated differently from ordinary confidential information by the courts. A California Court upheld the importance of confidentiality with trade secrets in the case of Pacesetters Inc. V. Nervicon Co. Ltd (BC424443 California Superior Court, Los Angeles County April 2011) where the prevailing party St. Jude Medical alleged that its trade secrets were stolen by the defendant and was awarded the amount of Two Billion Three Hundred Million Dollars ($2.3 billion) which was later trimmed to Nine Hundred and Forty-Seven Million Dollars ($947 million). enforce continued secrecy of its trade secrets after the time limitation of the non-disclosure ended. In EMC Outdoor. LLC V. Stuart. 2021 U.S. Dist.
LEXIS 63438 (ED Pa), the defendant ex-employee had individually negotiated a provision in her nondisclosure agreement making the confidentiality provisions applicable post-employment only if she resigned. Because she was fired from the position, the court held, the contract language made it impossible to state a claim for misappropriation. Summary judgment was entered for the defendant.
Because trade secrets can last indefinitely, it is advisable to never place a time limitation on how long the secret is to be kept, because this would simply mean that the receiving party of the disclosure no longer needs to keep the trade secret confidential after the time duration for secrecy has passed. If the intention of the disclosing party is to disclose trade secrets, then it would be reasonable to include a clause that requires perpetual confidentiality.
The need for jurisdictional sensitivity cannot be over-emphasized as it relates to non-disclosure agreement/clauses because of the different ways that courts may interpret clauses in the agreement in line with the governing law in such jurisdiction.
In alignment with jurisdictional sensitivity, two alternatives are mostly adopted;
I. If a confidential agreement/clause is to be operational in a jurisdiction where perpetual agreement is accepted
by the courts, then one can choose not to have any time limitation in the agreement.
II. However, if a confidential agreement/clause is to be operational in a jurisdiction where perpetual agreement is generally not looked upon favourably, then it is most preferable to have two separate agreements/clauses to
cover the disclosure time required for ordinary confidential information and trade secrets.
Can Confidentiality Agreements/ Clauses Disclosing Trade Secret Truly Endure in Perpetuity?
Like the heading of this paragraph reads, what is the jurisprudence of perpetuity that is attached to trade secrets when disclosed in confidential agreements. In Warner Lambert Pharmaceutical Co. v John J. Reynolds, Inc., a certain Dr. J.J. Lawrence, a Physician and editor of a medical journal in St. Louis Missouri having devised a formula for an antiseptic compound called ‘Listerine’, entered into an agreement with J.W. Lambert in 1881. This agreement allowed for the disclosure of the secret formula for the compound in consideration for which Lambert agreed on behalf of himself, his heirs, executors and assigns to pay the sum of $20.00 to Dr. Lawrence, his heirs, executors or assigns for each gross of Listerine which he subsequently manufactures and sells. This payment was reduced by Dr Lawrence himself to $12.00 and thereafter to $6.00 per gross between October 1881 and March 1883.
In January 1885, J.W. Lambert assigned his rights to Listerine and other synthetic compounds to Lambert Pharmacal Company, the Plaintiffs predecessor in title. Lambert Pharmacal Company also executed an instrument assuming Mr. Lambert’s obligations under the two aforesaid agreements. Defendants on the other hand were the successors in interest to Dr J.J. Lawrence. Several years later, the Plaintiffs subsequently alleged before the New York District Court for the Southern District that over the years the Listerine formula had become a matter of public knowledge, having being disclosed through no fault of the Plaintiff as a result of proceedings brought against its predecessor before the Federal Trade Commission and through publication in the United States Pharmacopoeia, the National Formulary as well as in the Journal of the American Medical Association. They further contended that in view of the fact that the 1881 and 1885 agreements were indefinite induration, the terms thereof were consequently ambiguous, and the Plaintiffs should be relieved from the responsibility of making further royalty payments. The trial judge held unequivocally that the defendants were entitled to judgment based on public knowledge as a matter of law in view of the undisputed facts. The Court reasoned that a distinction should be drawn between instances in which a promisor’s obligations are expressed to last in perpetuity, normally found in real property cases and which are regulated based on public policy considerations, and instances where though apparently intended, the parties have omitted to prescribe a termination date. In this second instance, the courts would supply a date by construing the agreement based on the perceived intention of the parties as discoverable from the underlying contract. If no such intention can be reasonably ascertained, then such contracts are deemed terminable at will or revocable within a reasonable time. In appreciation of the above case, both scenarios above are distinguishable from instances where the relevant contract fails to prescribe a definite termination date but conditions the termination of the promisor’s obligation upon the occurrence of a definite event, a category to which the facts of the present case belonged. Consequently, as long as the Plaintiff continues to manufacture and sell the listerine products, it remained obligated to make the royalty payments under the various contracts.
In conclusion, After a sweep through of the validity of the concept of perpetuity in light of confidentiality
agreement/clauses and the judicial reaction to same, it is settled that the law of contract does not permit a term of contract to be unclear, indefinite, and confidential agreements/ clauses flows from the law of contract and guided by the principle of same and on this note these agreements cannot be said to exist in perpetuity. Having stated the above, it is also unavoidably clear that when trade secrets are on the field of play the principle of contract as it relates to certainty of terms takes a back seat and remains on the bench.
The main delineation adopted by the Courts in different jurisdiction hinges on the nature of the information disclosed between parties. If the information disclosed qualifies as a trade secret, then the Court is more predisposed to declaring that the obligation to keep such confidential information endure in perpetuity, but if the information disclosed does not qualify as a trade secret the Courts do not look favourably on enforcing same to endure in perpetuity, this is due to the protective status that trade secrets acquire by default upon establishing same, but this further begs the following question;
• what happens to trade secrets when there is no longer a trade in existence?
• does the receiving party still owe a duty of confidentiality to keep trade secrets of a trade that is no longer in
For the first poser, in so far as the confidential information possesses the character of property, it therefore becomes capable of devolving. This position is evidenced with commercial, literary, and dramatic works, this is assisted by the close links with patents, design, and copyright law. Flowing from above, the second poser is also settled so long as the trade secrets can be termed to possesses the character of property then the obligations to keep confidential can be said to capable of devolving so long as the trade secret is protected by taking all applicable measures.
We welcome further engagements and contributions to these posers as the discussion involving perpetuity of
confidential agreements/clauses is non-exhaustive and the jurisprudence of the law can be further enriched through more academic probing.