A few days ago I uploaded a revised version of Koncision’s confidentiality-agreement template. Apart from glitches lurking in a few branches of the template’s copious decision tree, I changed how the template refers to duration of the obligation to keep information confidential.
Anyone completing the previous version of the questionnaire was offered the following answers to the question regarding duration of that obligation:
- Perpetually with respect to trade secrets and for a stated period with respect to all other confidential information
- For a stated period
And the text in the output document reflected whichever answer you selected. In particular, it used the word “perpetually” if the user chose the first or second answer.
But I received an email from a Koncision customer, Rich Vicenzi, an attorney in Westport, Connecticut, that caused me to rethink that approach. Rich said, “In my experience people often overreact to words like ‘perpetual.'” He proposed that instead of a perpetual obligation, it should last as long as the trade secret is a trade secret or as long as the confidential information constitutes confidential information, as applicable.
I think that makes sense—saying that the recipient is under an obligation for ever and ever doesn’t make sense if an obvious cutoff point presents itself.
[Updated January 3, 2012: So I revised the template to address that issue. But commenters to the original version of this post pointed out a further problem with the original version, namely that the recipient isn’t in a position to distinguish a trade secret of the disclosing party from other confidential information. So here’s my latest take on answers to the question regarding duration of the obligation to keep information confidential:
- For as long as it remains Confidential Information
- In the case of specified Confidential Information, for as long as it remains Confidential Information; in the case of any other Confidential Information, for a stated period
- For a stated period
If the user selects answer number two, a subsequent question would ask the user either to state what the “specified Confidential Information” is (“the formula for Widget Elixir”) or to specify that the output document should include an attachment that would state what the specified information is. The latter option would make sense if it would take more than a few words to describe the specified information or if the specified information is unknown at the time the questionnaire is completed.
I agree with Michael Fleming that for purposes of answer number two, nothing is gained by referring to “the specified Confidential Information” as a trade secret. All that matters is that it’s sufficiently important to the disclosing party that the disclosing party doesn’t want the recipient to be able to disclose it after a stated period, along with the other Confidential Information.
I didn’t include an option suggested by Michael, that the disclosing party be allowed to mark Confidential Information when it’s disclosed as constituting “specified Confidential Information.” That would give the disclosing party unfettered discretion to designate Confidential Information as “specified Confidential Information” regardless of how sensitive it actually is.
The second answer is more complex than the other two, but it offers a compromise if the disclosing party is eager to protect some information and the recipient is eager to limit any open-ended obligation to keep information confidential.
My thanks to Pieter, Chris, and Michael for helping me make progress on this issue. I’m open to the possibility of further refinements! ]
[Here’s how the original version of this post ended: So the revised version of the template offers the following answers to the question regarding duration of the obligation:
- In the case of Confidential Information that constitutes a trade secret, for as long as it remains a trade secret; in the case of any other Confidential Information, for as long as it remains Confidential Information
- In the case of Confidential Information that constitutes a trade secret, for as long as it remains a trade secret; in the case of any other Confidential Information, for a stated period
- For a stated period
What do you think?]
8 thoughts on “How to State the Duration of the Obligation to Keep Information Confidential”
As I see it at first glance, one of the challenges to the recipient with two different standards for duration of obligation – one for trade secret information and one for information that is confidential but not a trade secret is one of making sure you know which information is which.
I typically see companies label information as “confidential” rather than “trade secret & confidential.” However, that may just reflect my experience.
In order for the approach that you propose to work, you would need to ensure that the recipient knows which information is a trade secret and therefore subject to a “perpetual” non-disclosure obligation. I wonder how practical this is, except in the case of the most obvious of trade secrets such as the formula of coke?
Do executives in companies really know what meets the definition of a trade secret and what is only confidential? Should the recipient have the obligation of making this determination or should the disclosing party be required to identify what it information it considers to be a trade secret as distinct from information it only considers confidential?
Also as you rightly say information may cease to be a trade secret e.g. it is published or becomes obsolete etc, so should there be an ongoing obligation of the disclosing party to advise when disclosed information is no longer considered a trade secret, and the disclosure obligations are therefore changed or is does this determination rest with the recipient?
Pieter: Thank you for an excellent comment. How about if whatever constitutes a trade secret is specified, in general terms, in an attachment?
As regards whether a trade secret remains a trade secret, that’s a matter of fact and law. Anyone could make the necessary inquiry, so I’d be inclined not to impose on the disclosing party any ongoing obligation to notify the recipient when a trade secret is no longer a trade secret. But I’m open to alternative ideas.
I generally agree with Pieter’s concerns below. That is one reason why I would recommend that you add the following option, which is what I use as a default: for as long as the information remains Confdential Information. I see this as functionally equivalent to “perpetually” while avoiding the problem Rich identified.
This is a good formulation for things that ought to be kept confidential indefinitely, without the need for a self-serving and conclusory statement that something is a trade secret. However, very little should actually get this treatment, and anything that does should be called out in the agreement. In high tech, it’s usually computer source code that is so designated (specifically), while all other information–typically things of transitory commercial value like marketing plans, customer lists, and so on–should be held confidential for a term.
One interesting issue I’ve confronted lately is whether to measure the term of confidentiality from the time of disclosure or, as is more usual, from the termination of the NDA. I have resisted the former, as it is always possible that the NDA, even if for a defined term, will be extended, and because it’s not always practical to identify when a thing was disclosed (especially if it’s disclosed over and over). Most companies that undertake nondisclosure obligations don’t have procedures in place to keep things confidential forever, except things they can physically isolate like source code. For other things, the measure of the obligation ought to be the commercial relationship between the parties. Once that has ended, as evidenced by the termination of the NDA, people can keep things under wraps for a time, but shouldn’t be burdened with having to do so forever.
Pardon the simple point, but given that one of the conditions (in any implementation of the universal trade secret act I’ve seen at least) for maintaining something as a trade secret is that it be maintained as confidential information by the party purporting that it’s a trade secret, wouldn’t it work to simply use that as the sole test? One cannot maintain a trade secret that has already lost its status as being confidential as to the world.
Michael: I accept your point. But if the recipient wants the confidentiality obligation to last for a stated period for purposes of non-trade-secret information, who gets to distinguish between trade secrets and other kinds of confidential information? Is that only feasible if the trade-secret information is noted in an attachment? Ken
In other words, your second choice/bullet above would maintain the need to keep them distinguished. But, in my mind a recipient has no way to distinguish a trade secret from anything else that is confidential information. A TS is allowed its enhanced remedies for breach only once it’s both confidential AND has value because of its secrecy, but the recipient is in no position to know if it has value because of its secrecy (and in fact that’s not something under the control of the discloser, since it’s a question of fact determined by a trier of fact in a trade secret enforcement case). The discloser can control for whether or not it keeps it confidential, but not for the ultimate question of whether or not it is in fact a trade secret (which is why all of us are having difficulty in making that distinction or feel it is unreasonable to put the burden on the recipient to know whether its a confidential datum or a trade secret).
I’d suggest the only way around this is the one already suggested — call out in the act of disclosing which things are considered to be special (i.e., not subject to the automatic expiration of obligation rule). You don’t even need to allege that they’re trade secrets to make that work — simply say “will expire in five years unless listed on Exhibit A,” or, “Unless marked double super secret”, or, “unless marked TRADE SECRET”. (If I were a recipient who was trying to be fussy, I’d suggest that I won’t accept the discloser’s own characterization of something as a trade secret, as this involves the question of fact discussed above — thus creating yet another layer on the contract to note that just because you say it’s a trade secret doesn’t mean I accept it’s a trade secret, and I’ll merely accept that I’ve got a contractual obligation to keep it confidential without admitting that it’s a trade secret. And so on…)
(The awkwardness of that is why I’ve always favored the simpler rule you suggest in your first bullet — As long as the discloser is taking pains to keep it confidential, the recipient should be held to a continuing burden to do much the same.) Stated period rules work for me as a discloser only when I’m able to be certain I’m giving only things that are going to lose their value as confidential information in a set period of time (which admittedly is practical in many cases, but not always).
Ken, the comments have caused me to consider why I think it is appropriate/reasonable to include a perpetual confidentiality period for “trade secrets.” Here goes:
The main criticism of this approach (the recipient has no way of knowing when any particular confidential information is a trade secret and thus subject to a longer confidentiality period) assumes that it is desirable for a confidentiality agreement to spell out what the recipient must do to comply with its confidentiality obligations with respect to different types of confidential information. However, a mutual confidentiality agreement typically contains a number of trade-offs that try to balance the interests of the recipient and disclosing party, and having a perpetual confidentiality period for “trade secrets” is just one of those trade-offs (that in this case favors the disclosing party).
Similar trade-offs are embodied in the standard confidentiality “exceptions” (e.g, information that is publicly available, independently developed, etc.), which are not useful for managing the recipient’s confidentiality obligations, because it would be difficult if not impossible for the recipient to determine if and when a piece of information qualifies for one of the exceptions. For example, if someone in Division A of Recipient receives Confidential Information from Disclosing Party, and someone in Division B of Recipient receives the same information (without an obligation of confidentiality) from a third party, the information would qualify for an “exception” (received from third party without obligation of confidentiality) and Recipient would be able to use that information without breaching its confidentiality agreement with Disclosing Party. However, from a practical standpoint it is unlikely Division A would know this exception exists and therefore that it could freely use the information.
A wise man once told me that most confidentiality agreement terms are there just to provide ammunition to litigators, because the existence of a confidentiality exception or other defenses to a confidentiality breach claim often is not known until after there is litigation and the defendant is able to use the discovery process to determine whether any such defenses exist (such as whether the information is publicly available).
Therefore, I don’t think having a perpetual confidentiality period for “trade secrets” is objectionable solely on the grounds that it would be difficult for the recipient to manage this obligation, because that is not the intended purpose of the provision.
From a practical compliance perspective, I suppose the recipient should assume that when in doubt consider all confidential information to constitute a trade secret subject to the longer confidentiality period.