Confidentiality agreements (part 2): often-seen negotiating issues

Our previous post on confidentiality agreements (CDAs) looked at the terms that should be included in a standard CDA.  This post considers some of the issues that are negotiated in CDAs.

Our starting point is that, in most situations in which CDAs are used, the terms of the CDA should be conventional and parties should try to minimise the transaction costs of negotiating those terms.  But even where the parties have the best of intentions, sticking points can emerge in the negotiations.  Here are some of the issues that we encounter on a regular basis:

  1. “if information is disclosed orally, it must be confirmed in writing, marked confidential and sent to the receiving party within 28 days of the oral disclosure”

This provision protects the receiving party from allegations that confidential information was disclosed orally and has been misused.  By requiring a written record of all disclosed information, the receiving party can better defend itself against spurious claims.  Many multinational companies include this provision in CDAs in which they are the receiving party.

The problem with such a clause is that it ignores the reality of many confidential discussions, in which the party do not routinely keep notes of what has been disclosed and exchange those notes, eg in meeting minutes.  By including such a clause but not following its requirements, the disclosing party may shoot itself in the foot, as (depending on how the clause is worded) the receiving party may end up not have any confidentiality obligations for orally disclosed information.

We have had clients who like the requirement to confirm information in writing, and clients who hate this requirement.  Most of our clients wish the requirement to be removed from CDAs.

  1. “this Agreement is made under [Luxembourg] law and is subject to the exclusive jurisdiction of the [Luxembourg] courts”

If the parties are located in different countries or states, each of them may prefer its own law and jurisdiction to apply to the CDA.

Non-exclusive jurisdiction may be preferable, as the most likely action if a breach of the CDA occurs will be to seek an interim injunction in the receiving party’s home territory.

If the parties reach a stalemate over law and jurisdiction (as can occur when one or more US State universities are involved), parties sometimes agree to stay silent on law and jurisdiction.  Whilst this is not ideal from a legal perspective, the commercial desire to avoid protracted negotiations is understandable.

  1. “the obligations set out in this Agreement shall continue for a period of 36 months from the Effective Date”

A logical argument can be made for having no time limit on confidentiality obligations, particularly when the CDA includes exceptions to the obligations, eg where the information is publicly known.  However, many large companies refuse to accept such an approach.  Therefore, CDAs often include a time limit, which ideally should be linked to the shelf-life of the information as a commercial secret.  In some sectors, eg banking, parties seek very short confidentiality periods eg 1 to 3 years.  This may be much shorter than the shelf life of any technical information that is disclosed.

A possible compromise is to include a clause such as the following:

The obligations on the Receiving Party under this Agreement shall continue in force for a period of [5][10][15] years from the date of this Agreement, [except that any information relating to the Disclosing Party’s technology or products in development shall continue in force for a period of [20] years from the date of this Agreement.

The above three issues are those that we see most frequently when negotiating CDAs.  Less frequently seen, but potentially important, are the following issues:

  1. “the obligations set out in this Agreement shall not apply to any information that …is developed by any of the Receiving Party’s employees who have not had any direct or indirect access to, or use or knowledge of, the Information imparted by the Disclosing Party”

This can be viewed as one of the “standard” exceptions to confidentiality that is found in many CDAs.  However, sometimes a disclosing party simply does not believe that the other party could develop the same information independently, and that any such development is bound to be through direct or indirect use of the disclosing party’s information.  In such cases, this clause is omitted from the CDA or resisted when the other party proposes it.

  1. “the Disclosing Party warrants and represents that the use of the Information by the Receiving Party will not infringe any rights of any third party”

A possible response to this request is to argue that it is inappropriate to spend time in negotiating warranties at the stage of the CDA, and that any such negotiations should occur if and when a subsequent commercial agreement is negotiated between the parties.

  1. “if the Receiving Party breaches any of its obligations under this Agreement, it shall pay the Disclosing Party the sum of ten thousand Euros as liquidated damages”

Under English law, a clause of this kind would often be unenforceable.  It is often difficult to see what financial basis there is for a payment of this kind, and it may be simply an incentive not to breach.  In our experience, such clauses are resisted and usually deleted from the final agreement.

Other drafting suggestions and commentary on the terms of CDAs can be found in our book, Drafting Confidentiality Agreements (2nd edn, Law Society Publishing, 2004).

1 Comment

Filed under Confidentiality, Contract drafting

One response to “Confidentiality agreements (part 2): often-seen negotiating issues

  1. Michael Berkson

    “if information is disclosed orally, it must be confirmed in writing, marked confidential and sent to the receiving party within 28 days of the oral disclosure”
    I entirely agree with your comments. Many years ago, my then employers sued a collaborator who had misused our integrated circuit design information. The purported defence was that the documents had not been marked as confidential. The litigation was settled at the door of the court on terms that can best be described as a complete capitulation but we should never have needed to start legal proceedings.
    In negotiations, companies, particularly American, sometimes argue that they cannot know whether to apply appropriate confidentiality precautions without sufficient documentation. My riposte always is, “If your internal procedures are so inadequate, we do not wish to do any business with you anyway.”

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