Category Archives: Confidentiality

Is it unethical to be a b*****d?

Confidentiality agreements have been hitting the news in recent months. If it isn’t Harvey Weinstein, it is Donald Trump. Their circumstances are different, but they both seem to have required people to sign detailed, and very one-sided, non-disclosure agreements (NDAs).

This should be good news for IP Draughts, as the author of a Law Society book on drafting confidentiality agreements. But somehow, he doesn’t think the lawyers acting for these gentlemen are likely to be purchasers. And even if they are, they won’t find any mention of the extraordinary clauses that are said to be included in their NDAs. Perhaps that is a new feature that we should include in the 4th edition.

Increasingly, IP Draughts is seeing commentary on the ethical issues for lawyers who advise on extreme NDAs. This is part of a larger issue of whether lawyers should uncritically follow their client’s instructions, however dodgy those instructions may be. Professor Richard Moorhead of UCL has been particularly prominent in this field, with a string of interesting articles about what he calls “solutions-focused but ethically neutered lawyering”.

If you think this problem is confined to a particular type of noisy, low-grade lawyer, think again. The House of Commons Women and Equalities Committee had some tough questions for partners in Allen & Overy about one of the cases in the news.

All of this prompts in IP Draughts’ mind the question of how far a lawyer should go in his or her client’s interests.  Sometimes, clients want a lawyer who is an aggressive b*****d. Some law firms in the City of London have made it part of their selling point that they are “tough but fair” in litigation or negotiations. By this, they mean that they will comply scrupulously with their ethical obligations (as they see them), but they will go right up to the boundary of what is acceptable and, staying on the right side of the line, make life as miserable as possible for their client’s opponent.

If you are dealing with hard-nosed corporate clients, perhaps such an approach is acceptable and commonplace. But if you are dealing with individuals, such as women who are pursuing claims of personal misbehaviour against rich tycoons, does the boundary of what is ethical shift? And is it appropriate to operate right at that boundary? Behaviour that may seem conventional in other circumstances, eg all-night meetings to discuss the terms of an NDA, or fielding a large team of experienced lawyers against a lone, junior associate, may become inappropriate by default, because no-one has stood back from the situation and questioned the status quo.

IP Draughts may not be the best person to comment on being tough but remaining within acceptable bounds. One of his longstanding but occasional clients, whose judgment he respects, recently told him that his trouble was that he was “too nice”. The implication seemed to be that he would have been instructed more if he had been less nice. And he still remembers the time, about 30 years ago, when as a junior associate he refused to work all night on an agreement, just because his opposite number’s boss (a partner in one of the biggest London law firms) thought it would be a good idea. His refusal was regarded as extraordinary. But the world didn’t come to an end, and everyone was much fresher mentally when they resumed work on the draft agreement the next morning. This wasn’t niceness, it was not following convention when it didn’t make sense.

If you are going to be an ethical b*****d, you have to work really hard to make sure you don’t stray over the line. And be aware that the position of the line may change, for reasons outside your control. Much better for your peace of mind to stay back from the line in ethically secure territory, and be nicer than you need to be or even, sometimes, your client wants you to be.

 

 

 

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Drafting ‘hush’ agreements for Donald Trump

Readers may have seen the news of litigation between Stormy Daniels and Donald Trump that relates to a ‘hush agreement’ that Trump’s lawyer prepared by way of settlement of allegations in 2016. Apparently, that same lawyer paid Ms Daniels $130,000 from his own funds, so keen was he to protect his client’s interests. (IP Draughts’ clients take note: much as he loves them, this ain’t going to happen.)

A copy of the Complaint for Declaratory Relief, to which is attached a copy of the hush agreement, can be found here.

Although Ms Daniels’ lawyer, using colourful language, refers to it as a hush agreement, the document itself has a more conventional and long-winded title: Confidential Settlement Agreement and Mutual Release; Assignment of Copyright and Mutual Non-Disparagment [sic] Agreement. (For more on the subject of non-disparagement clauses in NDAs, see this recent IP Draughts article.)

Ken Adams has beaten IP Draughts to it in demolishing the general drafting of the document. This article will focus on the IP assignment clause. In the following paragraph, PP is a code for Ms Daniels, and DD a code for Donald Trump:

3.2 Transfer of Property Rights to DD. In further consideration for the promises, covenants and consideration herein, PP hereby transfers and conveys to DD all of PP’s respective rights, title and interest in and to the Property, and any and all physical and intellectual property rights related thereto. Without limiting the generality of the foregoing, PP does hereby sell, assign, and transfer to DD, his successors and assigns, throughout the universe in perpetuity, all of PP’s entire right, title, and interest (including, without limitation, all copyrights and all extensions and renewals of copyrights), of whatever kind or nature in and to the Property, without reservation, condition or limitation, whether or not such rights are now known, recognized or contemplated, and the complete, unconditional and unencumbered ownership and all possessory interest and rights in and to the Property, which includes, but is not limited to the originals, copies, negatives, prints, positive, proof sheets, CD-roms, DVD-roms, duplicates, outtake and the results of any other means of exhibiting, reproducing, storing, recording and/or archiving any of the Property or related material, together with all rights of action and claims for damages and benefits arising because of any infringement of the copyright to the Property, and assigns and releases to DD any and all other proprietary rights and usage rights PP may own or hold in the copyright and/or Property, or any other right in or to the Property. PP assigns and transfers to DD all of the rights herein granted, without reservation, condition or limitation and agrees that PP reserves no right of any kind, nature or description related to the Property and contents therein. Notwithstanding the foregoing, if any of the rights herein granted are subject to termination under section 203 of the Copyright Act, or any similar provisions of the Act or subsequent amendments thereof, PP hereby agrees to re-grant such rights to DD immediately upon such termination. All rights granted herein or agreed to be granted hereunder shall vest in DD immediately and shall remain vested in perpetuity. DD shall have the to freely assign, sell, transfer or destroy the Property as he desires. DD shall have the to register sole copyright in and to any of the Property with the US Copyright Office. DD shall also have the right, in respect to the Property, to add to, subtract from, change, arrange, revise, adapt, into any and all form of expression or tangible communication, and the right to combine any of the Property with any other works of any kind and/or to create derivative works with any of the Property, and to do with it as she so deems. To the fullest extent allowable under the applicable law, PP shall irrevocably waive and assign to DD any of PP’s so-called “moral rights” or “droit moral” (laws for the protection of copyrights outside of the United States), if any, or any similar rights under any principles of law which PP may now have or later have in the Property. With respect to and in furtherance of the above, PP agrees to and shall execute and deliver to DD an “Assignment & Transfer of Copyright” in the form attached hereto as Exhibit “B”. For greater certainty the foregoing assignment shall be applicable worldwide.

As if the above assignment language is not detailed enough, the penultimate sentence contemplates the execution of a formal assignment of copyright in the form attached as Exhibit B. Exhibit B is not attached to the complaint.

What, you might wonder, is the “Property” to which this Sisyphean assignment clause relates? According to another clause of the 15-page hush agreement, it seems to be mainly some “still images and/or text messages which were authored by or relate to [Donald Trump]”.

IP Draughts is left wondering how much of the above clause is taken from standard template agreements for US copyright assignments, perhaps those used in the entertainment industry, and how much is down to the idiosyncracies of lawyers who advise complainants and defendants in disputes of this kind. Whatever the reason, this assignment is a long stream of garbage.

There are glimmers of sense in some of the sentences. For instance, there is reference to an assignor’s rights to recover copyright after a term of years under section 203 of the Copyright Act 1976. This right was the subject-matter of an English court case before Arnold J, that was brought by members of Duran Duran, which IP Draughts discussed here. Whether the drafter’s solution to this issue (“PP hereby agrees to re-grant such rights to DD immediately upon such termination”) is legally effective, IP Draughts will leave for US copyright lawyers to comment on.

There are also glimmers of partial sense, where the text refers to moral rights as “laws for the protection of copyrights outside of the United States”. Moral rights are not copyright laws as such, but separate rights that exist in certain copyright works. Contrary to the above wording, moral rights are not capable of being assigned, but they can be waived.

But much of the rest is an incontinent word-stream. What is wrong with a (relatively) simple statement, such as the following, to replace most of the above text?

PP hereby assigns and transfers to DD absolutely, all of PP’s right, title and interest in and to:

(a) the Property; and

(b) all intellectual property in the Property.

PP irevocably and unconditionally waives all moral rights in the Property.

Ideally, we would also have a definition of intellectual property, that listed the various types of IP and made clear that the definition applied to IP existing in any country of the world. If intended, we might add a right to sue for past infringements, which doesn’t seem to be covered by the Trump lawyer’s text. We might also want to broaden the definition of Property in the agreement to include all copies that have been made of the Property, in any medium.

If IP Draughts’ version doesn’t adequately cover all the bases, please could readers enlighten him as to where his version is deficient?

 

 

 

 

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Non-disparagement clauses in NDAs

Unequal bargaining power

Non-disclosure agreements (NDAs) have been in the news recently. First, there were the revelations about the US film producer, Harvey Weinstein, and the suggestion that some of the women who made allegations about his conduct have broken the terms of NDAs that they have signed.

More recently, there has been political controversy in the UK about the BBC requiring NDAs when settling disputes with female staff about whether they are paid less than men for the same work.

One of the issues that has emerged is the use of so-called non-disparagement clauses in NDAs. In effect, these require a party not to bad-mouth the other party. Here is an example found quickly on the internet:

Executive will not disparage the Employer or any of its directors, officers, agents or Executives or otherwise take any action which could reasonably be expected to adversely affect the personal or professional reputation of the Employer or any of its directors, officers, agents or employees.

Whether such a clause is enforceable will, no doubt, vary between jurisdictions. There are likely to be situations where the clause is not enforceable on public policy grounds, eg if the employee is reporting illegal activity (whistle-blowing) or giving evidence in court. See, for example, this commentary (on a related point) from a leading employment law chambers in London.

IP Draughts notes in passing that the model settlement agreement recommended by ACAS in the UK doesn’t include any non-disparagement clause, but commentary on various employment law firm websites seems to be in favour of such a clause.

IP Draughts doesn’t see these clauses very often, though he is occasionally asked to review (UK) employment settlement agreements. He recalls seeing one in an agreement to settle a dispute between UK academics (not an employment dispute). You might think that there is something about academic disputes that make such a provision useful; I couldn’t possibly comment.

Clauses of this kind seem to be more popular in the USA. He has his doubts over whether, in a UK setting, they are typically anything more than something for the ex-employer to point to, when seeking to dissuade the ex-employee from making negative comments.

Postscript: Since writing this article, IP Draughts has seen a news report about an ex-employee of Redwood, a San Francisco start-up company, who complained of harassment and “declined to sign the nondisparagement agreement offered to her as a condition of severance”.

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CDAs and liquidated damages

panicConsider the following clause, which is taken from a template confidentiality agreement that can be found quickly on the internet.

Liquidated Damages. In case of unauthorized use or disclosure of the Confidential Information, the Disclosing Party shall be entitled to liquidated damages in the amount of €10 000 (ten thousand Euro) for each such use or disclosure.

Notwithstanding the right to liquidated damages, the Disclosing Party has the right to take any measures available and to claim and receive a higher amount of compensation if the Disclosing Party can prove that the actual damage sustained will exceed the amount of liquidated damages.

IP Draughts has seen variants of this wording in a significant minority of CDAs over the last decade. Typically, the CDA has been drafted by a lawyer in a civil law jurisdiction, rather than a common law jurisdiction. The above example appears in an agreement used by a Dutch company.

To a common lawyer’s eyes (well, certainly to this English common lawyer’s eyes), the clause appears strange and inappropriate for several reasons, and would often be resisted. In IP Draughts’ experience, when the clause is resisted, the party that proposed it is, in a fair number of cases, willing to remove it from the CDA. It doesn’t seem to be a “must have” clause.

Why does the clause seem inappropriate to an English common lawyer?

First, because the traditional view of liquidated damages clauses was that they were supposed to be a “genuine pre-estimate” of the loss that the non-breaching would suffer as a result of the breach. They were specifically not supposed to be a penalty, or disincentive for breach, as this would render the clause unenforceable.

illiquidPutting the figure of €10 000 in a template agreement does not suggest that the drafter has related the amount to a pre-estimate of loss in an individual case. Rather, it appears that the figure has been included as a disincentive to breach. IP Draughts’ view was (and still is, subject to comments at the end of this article) that, if you are going to include a liquidated damages clause, some thought is required as to why the figure is appropriate in the individual case, and that it would be prudent to record the reasons for coming up with the figure in a file note. If the clause is later challenged in court, one could produce the file note to demonstrate that it was intended to be a pre-estimate of the loss and that the amount was thought to be reasonable rather than a penalty or “stick” to beat up the other party.

Secondly, because it is inherently difficult to pre-estimate loss in the case of many CDAs, particularly those which concern early-stage technology. The confidential information might be used to develop a product, and the product might be highly successful. Or it might not. The range of possible values for the information will sometimes range from zero to millions. Even if the information stands a reasonable chance of being developed into a blockbuster product, a court would typically be likely, when assessing damages, to heavily discount the amount to take account of the uncertainties, risks and time involved in taking information through to a successful product.

In the case of many CDAs, the most useful remedy for breach or anticipated breach may be to obtain an urgent injunction to stop any disclosure or further disclosure.  The likely cost of obtaining such an injunction may be several times €10 000, at least in the English legal system.

Thus, the figure of €10 000 seems to be plucked out of the air, unrelated to any measurable loss, and unrelated to the costs of enforcement of contractual rights under the CDA.

Thirdly, because the whole idea of a liquidated damages clause in the English system (and, IP Draughts suspects, in other common law jurisdictions) is to avoid the need to calculate losses at trial. The parties are agreeing in advance what the damages will be. This is what the term “liquidated damages” is supposed to mean. It is therefore misconceived to say, as the above clause does, that you can claim more than the agreed amount. It turns the clause into a “minimum damages” clause rather than a “liquidated damages” clause.

IP Draughts suspects that wording such as that quoted above reflects a misguided mish-mash of common law and civil law concepts. IP Draughts has commented before on the pervasive use of US templates in agreements that are made under non-US laws, and where the template uses US legal concepts that may not be appropriate in the jurisdiction in which the agreement is made.

penaltyIP Draughts doesn’t know what the correct Dutch law term (ie in the Dutch language) is for a damages provision such as that quoted above, nor what its English language equivalent would be. He suspects that the term might be “penalty” or its Dutch language equivalent, but that the drafter of the English language version was concerned about including this word in view of its negative connotations under common laws, and preferred the more benign, but inaccurate term, “liquidated damages”.

For most of IP Draughts’ career, English lawyers have focussed on trying to ensure that a clause providing in advance for a financial payment of this kind was a liquidated damages clause rather than an unlawful penalty. Many lawyers have even thought it desirable to include in such a clause a statement such as “The parties acknowledge that this amount is a genuine pre-estimate of the anticipated loss that will result from a breach of clause X.” This statement was designed to echo the words used by one of the judges in the leading English case on liquidated damages clauses, the 1915 House of Lords case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd. IP Draughts has always found this wording rather self-serving, and likely to be ignored by the court in the event of dispute.

English lawyers’ certainties about liquidated damages clauses were shaken last year, with the decision of the UK Supreme Court in a pair of cases that, in the interests of brevity, IP Draughts will call the ParkingEye case [2015] UKSC 67.

The Supreme Court decided that the Dunlop case had been misunderstood. The justices in the Supreme Court each gave slightly different reasons for their decision, but a common thread was that a penalty could be enforced if:

  1. it protects a legitimate business interest; and
  2. the amount is not extravagent, exorbitant or unconscionable.

parkingeyeMoreover, in commercial contracts between parties  of comparable bargaining power, there was a presumption that the parties were the best judges of what is legitimate, and the court should not strive to find an unlawful penalty.

In light of this important decision, IP Draughts is less concerned about the enforceability of a pre-determined damages clause of €10 000, as this is not a huge amount in the context of commercial litigation or for most business clients. However:

  • He will probably continue to use the term liquidated damages rather than penalty, if that is what the clause is.
  • He will be less concerned about demonstrating that the amount is a genuine pre-estimate of loss, and more concerned with whether there is a good reason for the clause, whether the parties are of comparably bargaining power, and whether the amount seems proportionate.
  • He will continue to recommend that clauses of the kind quoted above are resisted, as being unnecessary and inappropriate in many cases.

 

 

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