Reader David recently posed the following question:
I have a question for you that has bugged me for several years. From time to time, my company shares company-related information with a third party and, before doing so, enters into a confidentiality agreement (CA) [also known as a nondisclosure agreement—KAA] with the third party. Our CA has a term of five years, and it often gets negotiated down to a shorter time frame. Several lawyers have suggested that we remove the term in our agreement and force the third party to request a term. These attorneys argue that, if a term is not requested, and thus no term is specified in the CA, the term is perpetual (i.e., the confidentiality obligations will go on forever), which would benefit my company. Other attorneys I have spoken with have said that a CA without a term runs the risk of being voided by a court (either the court would impose its own reasonable term, or void the entire contract for vagueness reasons). Do you know of any case law on this particular issue or have any thoughts on whether you should or should not include a term in a CA (or any other contract)?
It would take me several pages to answer this question thoroughly. For the time being, here’s my quick answer:
Information that Constitutes a Trade Secret
The key issue is the nature of the information being protected.
Information that constitutes a trade secret is protected under common law until such time as it’s no longer a trade secret.
The owner of a trade secret could elect to reinforce by contract the common-law protection afforded trade secrets, and there are advantages to doing so. See Milgrim on Trade Secrets § 4.02. Could duration of a contract obligation not to disclose trade secrets be subject to a “reasonableness” standard? Here’s what Milgrim has to say:
While there is some (and, in your author’s view, fundamentally misconceived) authority for the proposition that covenants not to disclose must also be reasonable as to duration, such view is patently unsound because the covenant simply ceases to be enforceable upon the underlying matter’s becoming generally known or otherwise ceasing to be a trade secret, and hence such restriction can never be unreasonably enforced. Given the inherently indeterminate life of trade secrets and the practical inability to enumerate specific trade secrets which may be known to the employee as a consequence of the ensuing employment, the notion that restrictions on use and disclosure must be limited as to time is both unreasonable and harsh.
In other words, according to Milgrim it wouldn’t make sense for a court to say that an open-ended contract obligation to keep trade secrets confidential isn’t enforceable, that instead it should have been of limited duration.
But I’d add that it might make matters clearer for the parties, and for any court, if it were made explicit that any contract obligation not to disclose trade secrets would lapse once the trade secrets in question stopped constituting trade secrets. Sure, you’re stating the obvious, but sometimes stating the obvious is the cautious thing to do. What say you?
Information the Doesn’t Constitute a Trade Secret
But it’s a different matter when a contract seeks to cover information, such as confidential information revealed to an employee during the course of employment, that’s broader than trade secrets. Such broad confidentiality obligations constitute, along with restrictions on competition, “restrictive covenants,” and in many jurisdictions restrictive covenants have been held unforceable unless they are limited in duration. See Milgrim on Trade Secrets 4.02[a].
I’ve only dipped into the case law. For instance, one relevant case is AMP, Inc. v. Fleischhacker, 823 F.2d 1199 (7th Cir. 1987) (applying Illinois law).
So David, whether it would make sense to remove the term from your confidentiality agreement depends on the nature of the protected information. But even if the agreement protects only trade secrets, the protection wouldn’t last forever. I suspect that your agreement covers more than trade secrets. If that’s the case, I’m not sure you’ve been given good advice. Of course, this isn’t the place to get into a discussion of what constitutes a trade secret.
And of course, I’m not giving you legal advice! These are simply my first impressions, based on a couple of hours of thought. I expect some readers will weigh in with thoughts of their own.
How to State Duration in a Confidentiality Agreement
Here’s a question David didn’t ask: what’s the best way to state the duration of a confidentiality agreement?
To state the duration of any obligation, you have two choices. You could build it into the obligation: Acme shall keep the Information confidential for three years. Alternatively, you could omit any mention of duration from the obligation and instead specify the duration (or “term”) of the entire agreement.
Economy favors the former approach, but I can think of two reasons in favor of specifying duration of the agreement.
First, if you state the duration in the obligation, that suggests that the agreement itself is of indefinite duration. I prefer to specify that a confidentiality agreement terminates at some point, so there isn’t any question of a company having to forever include a given confidentiality agreement in any list of contracts to which it’s party, even though it’s no longer bound by the only obligation in the agreement.
And second, confidentiality obligations often form part of a broader agreement that contains a “term” provision; duration of the confidentiality obligation should key off that “term” provision. Sometimes that requires a hybrid arrangement, with the confidentiality obligation also addressing duration: During the term of this agreement and three years thereafter, Acme shall keep the Information confidential.