Disclosing Someone Else's Confidential Information

Here’s another confidentiality-agreement issue that I’ve been mulling over. I don’t recall having seen it discussed in the literature.

As I understand it, in a commercial context it’s commonplace for the disclosing party under a confidentiality agreement to disclose to the recipient information that the disclosing party is itself required to keep confidential under the terms of a confidentiality agreement with someone else. (Let’s call that other person “Acme”; let’s call the party disclosing Acme’s information the “Secondary Discloser.”)

Disclosure to the recipient might well be authorized in the Secondary Discloser’s contract with Acme, but on the other hand it might constitute breach. My question is, does the recipient care enough about the possibility of breach by the Secondary Discloser to want to address it in the confidentiality agreement with the Secondary Discloser?

Acme couldn’t successfully bring a claim against the recipient based on breach by the Secondary Discloser unless the recipient were aware that the Secondary Discloser had breached an obligation to Acme by disclosing to the recipient, or if the recipient were aware that its use of the confidential information goes beyond the use authorized in the Secondary Discloser’s contract with Acme. See Henry H. Perritt, Trade Secrets: A Practitioner’s Guide § 7:2 (“Strangers do not have implied fiduciary obligations to trade secret owners.); see, e.g., Imed Corp. v. Systems Engineering Associates Corp., 602 So. 2d 344 (Ala. 1992) (“[O]ne who loses a trade secret has no recourse against one who innocently received the trade secret. The sole recourse is against the misappropriator.”)

But even if you assume that management of the recipient is unaware of the obligation to Acme, what if its employees come to learn of that obligation in the course of receiving confidential information from the Secondary Discloser? That could conceivably constitute notice of breach by the Secondary Discloser.

Furthermore, according to Melvin F. Jager, Trade Secrets Law § 7:16, “The position of an innocent user of a trade secret for profit is difficult, as it should be, to sustain in court. Notice of the trade secret and its disclosure in breach of confidence need not be actual notice. It is sufficient that ‘a person of ordinary prudence would inquire as to the existence of a trust.'”

And if Acme successfully brings an injunction against the Secondary Discloser, it could succeed in bringing an injunction against the recipient, even if the recipient couldn’t be subject to damages for past use of the confidential information. Trade Secrets Law says, “At the very least, the service of a complaint for trade secret misappropriation on the allegedly innocent user would constitute effective notice of the breach of trust. An injunction against future use, and an accounting for damages resulting from sales after the service of the complaint, would be appropriate relief for the trade secret owner under such circumstances.”

So the possibility of breach by the Secondary Discloser of an obligation to keep information confidential would seem a legitimate issue. The recipient could seek to address it by asking that the confidentiality agreement with the Secondary Discloser make it an obligation of the Secondary Discloser not to disclose any information if that disclosure would constitute breach of an obligation of confidentiality that the Secondary Discloser owes to someone else. The recipient could go further by also asking the Secondary Discloser to indemnify it against any claims against the recipient based on any such alleged breach, the notion being that the Secondary Discloser wants no part of any squabble between Acme and the Secondary Discloser, no matter who has the better of any given argument.

What do you think?

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.