I’m currently working on Koncision’s first product, a line of confidentiality agreements. I’m being assisted by Koncision’s confidentiality agreement editorial board (go here [link no longer available] for their bios), but I expect to air issues on this blog routinely. And here’s one to get the ball rolling:
If Acme discloses confidential information to Widgetco and subsequently a rogue Widgetco employee discloses some of that information, Acme would likely want a remedy. How should Acme address that concern in its confidentiality agreement with Widgetco?
Here are some alternatives:
- Widgetco shall cause its Representatives not to disclose any Confidential Information other than as permitted in this agreement.
- Widgetco will be responsible for [or liable for ] any disclosure of Confidential Information by its Representatives other than as permitted in this agreement.
- Any disclosure by any of Widgetco’s Representatives other than as permitted in this agreement will be deemed to be disclosure by Widgetco.
- Widgetco shall indemnify Acme against any Losses arising out of any disclosure by any of Widgetco’s Representatives other than as permitted in this agreement.
Option 1 represents the most common approach, but I have a problem with it. Strictly speaking—and when it comes to contract language, that’s the only way to speak—saying X shall cause Y to … works only if Y is an instrumentality of X. For example, if Y is a subsidiary of X.
In the context at issue, Widgetco can’t cause a rogue employee not to disclose confidential information. Widgetco can instruct the employee not to disclose. Heck, Widgetco can even make it a condition to continued employment that the employee enter into a confidentiality agreement obligating the employee not to disclose. But that falls short of actually causing the employee not to disclose.
As for option 2—saying that Widgetco will be responsible for any disclosure—that leaves me wondering what the implications are. Widgetco will be responsible? What exactly does that mean? [Update, Dec. 4: See Mark Anderson’s comment and my reply.]
The same goes for option 3. And it seems to go overboard in establishing a legal fiction where one isn’t required.
That leaves option 4. I think it captures what’s going on. Widgetco can’t control the actions of employees so as to preclude them from disclosing. Instead, Widgetco will compensate Acme for any damages that Acme incurs due to unauthorized disclosure.
I can see some objections. One is that using shall cause is standard in this context. But the popularity of a given appreach has no bearing on its merit.
I have greater sympathy for other possible objections. That the issue of unauthorized disclosure is so fundamental that you don’t want to bury it lower down in the contract, in the indemnification provisions. That businesspeople don’t pay attention to indemnification provisions.
So that’s my initial take on this issue. What do you think?