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Confidential Information Clauses – Understanding Your NDA

UPDATE 2014-05-27: I think you’ll like the “new” version of this chapter, in the commentary to the Common Draft compendium, even better.

This is a working draft of a chapter of the Common Draft annotated contract form book. The text of the clauses below can be used in accordance with a Creative Commons license; see this page for details. Be sure to see the Cautions page for important warnings.

Symbology: The following symbols indicate my personal view of how controversial a given clause should normally be, but that may well vary from case to case; YMMV.

* This clause includes optional language that the parties can plug in if desired.

? Reasonable parties ordinarily should agree to include this clause; in typ­ic­al circumstances, the clause likely would benefit one or both parties with­out significantly disadvantaging either party.

? One of the parties could reasonably ask for this clause (but might not think it necessary to do so), and the other party might well go along.

? One of the parties might have a reasonable objection to this clause, but the objection might not be a deal-killer.

? One of the parties would likely have reason to object strongly to this clause; in some circumstances, the objection could be a deal-killer.

Table of contents

Table of Contents

Definition of Confidential Information *

Except as otherwise provided in the Agreement, Confidential Information refers to in­form­a­tion that (i) is maintained in confidence by or on behalf of a party, referred to as a Disclosing Party; and (ii) disclosed to other otherwise accessed, pursuant to the Agreement by another party, referred to as a Receiving Party.

Commentary
“Maintained in confidence” – subdivision (i)

For most (U.S.) jurisdictions, in­form­a­tion must actually be “maintained in confidence” to qualify as conf­id­en­tial in­form­a­tion. That is, courts will only protect a party’s supposedly-conf­id­en­tial in­form­a­tion from unauthorized use or disclosure if that party has made reasonable efforts to maintain the in­form­a­tion in confidence. This prerequisite generally comes from the definition of “trade secret,” as found either in the relevant statute — which typically will be a variation of the Uniform Trade Secrets Act — or section 757 of the Restatement of Torts.

• Here’s a typical statutory example, from the California Uniform Trade Secrets Act (CUTSA): “‘Trade secret’ means in­form­a­tion, including a formula, pattern, compilation, program, device, method, technique, or process, that … Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy” [emphasis added].

• To like effect is the commentary to section 757 of the Restatement of Torts, which sets out a number of factors affecting whether particular in­form­a­tion is a trade secret, including “3. the extent of efforts taken … to guard the secrecy of the in­form­a­tion …” (emphasis added).

Here’s a real-world example: In a 2012 case, a U.S. appeals court noted pointedly that a party claiming that its trade secrets had been misappropriated had made no effort to preserve the alleged trade secrets in confidence. See Fail-Safe, LLC v. A.O. Smith Corp. , No. 11 1354 (7th Cir. Mar. 29, 2012) (affirming summary judgment for defendant).

“Pursuant to the Agreement” – Subdivision (ii)

Suppose that two companies in Atlanta (let’s say) sign a conf­id­en­ti­al­i­ty agreement. The companies’ conf­id­en­ti­al­i­ty agreement does not require the disclosing party to mark its in­form­a­tion as conf­id­en­tial. Each of the two companies has a Zanzibar office (for an A-to-Z motif in this example).

Now suppose that people in the companies’ Zanzibar offices exchange similar in­form­a­tion, not knowing that their Atlanta offices have signed a conf­id­en­ti­al­i­ty agreement. In that situation, the people in the receiving party’s Zanzibar office would probably expect that they were free to use the disclosing party’s in­form­a­tion. They would not want to be ambushed by a claim that they were bound by conf­id­en­ti­al­i­ty obligations agreed to by their Atlanta office, of which they had no knowledge.

The “pursuant to the Agreement” language gives the Zanzibar office some protection in that regard.

Specimens

AT&T NDA § 1. Ford Services § 8.1 – “in­form­a­tion … which such Party considers to be conf­id­en­tial” (emphasis added). GE Energy NDA § 1. Pfizer NDA § 3(a). UNC NDA § 1. UT Austin NDA Exhibit A § 1. Verizon-NDA § 1.

[Option:] Disclosing Party: [Party Name] Only

Disclosing Party refers only to the specified party or parties.

Commentary
Caution

A conf­id­en­ti­al­i­ty agreement with just one Disclosing Party will usually take longer to negotiate: That’s because a conf­id­en­ti­al­i­ty agreement will (usually) be more balanced — and therefore quicker to negotiate and easier to work with — if its provisions will apply equally to the conf­id­en­tial in­form­a­tion of each party, not just one party. (Beware, though: even a two-way agreement can be drafted so as (subtly) to favor the drafter’s client.)

A two-way agreement can protect future “afterthought” conf­id­en­tial disclosures by the receiving party: A 2012 Seventh Circuit case illustrates the potential danger of using a one-way conf­id­en­ti­al­i­ty agreement. See Fail-Safe, LLC v. A.O. Smith Corp., No. 11 1354 (7th Cir. Mar. 29, 2012) (affirming summary judgment for defendant). Two manufacturing companies, Fail-Safe and A.O. Smith, worked together to try to develop a pump motor for swimming pools that would help swimmers from being trapped by the pool suction. The parties signed a one-way conf­id­en­ti­al­i­ty agreement, protecting only A.O. Smith’s in­form­a­tion. Moreover, according to the court, Fail-Safe never mentioned that it considered its own in­form­a­tion to be conf­id­en­tial.

Eventually, A.O. Smith began selling pump motors that — according to Fail-Safe — incorporated Fail-Safe’s trade secrets. Fail-Safe filed a lawsuit for misappropriation of trade secrets. Fail-Safe’s lawsuit didn’t get very far: The trial court granted summary judgment that Fail-Safe had failed to take reasonable steps to protect the secrecy of its claimed trade secret. The appeals court affirmed.

A two-way agreement might help avoid future embarrassment: Agreeing to a two-way conf­id­en­ti­al­i­ty agreement can save future embarrassment for all concerned. Suppose that two parties entered into a conf­id­en­ti­al­i­ty agreement that protected only one party’s in­form­a­tion. Also suppose that the agreement’s terms were strongly biased in favor of that party. But now suppose that, at a later date, the parties decided that they also needed to protect the conf­id­en­tial in­form­a­tion of the other party. That is, the party that originally was only going to receive conf­id­en­tial in­form­a­tion from the first party would now be disclosing its own in­form­a­tion to the first party. In that case, with the shoe on the other foot, the original disclosing party might well not want to live with the obligations it had previously gotten the original receiving party to accept.

As a result, whoever negotiated the (one-way) conf­id­en­ti­al­i­ty agreement for the original disclosing party might find himself in a doubly-embarrassing position: He would be asking the original receiving party to negotiate a new agreement. And his boss might wonder, Why didn’t you do this the right way in the first place, instead of wasting everybody’s time?

So it’s often a good idea to insist that any conf­id­en­ti­al­i­ty provisions be two-way in their effect from the start, protecting the conf­id­en­tial in­form­a­tion of both parties.

Specimens

Two-way agreements protecting both parties’ conf­id­en­tial in­form­a­tion: Disney-Pixar § 19(c)(1). Dow § 5.1. Ford Services § 8.1. GE Energy NDA preamble. HP NDA §§ 2, 3. IBM NDA preamble. UNC NDA preamble. UT Austin NDA cover sheet item 4.

One-way agreements protecting only one party’s conf­id­en­tial in­form­a­tion: AT&T NDA preamble. Citigroup NDA § 1(a). Johns Hopkins NDA preamble. Pfizer NDA preamble.. Verizon-NDA § 1. Wal-Mart NDA second paragraph.

[Option:] Protected Disclosure Period Ends [One Year After Agreement Date]

For in­form­a­tion to be considered Confidential Information, it must be disclosed to, or accessed by, the Receiving Party, pursuant to the Agreement, for the first time during the specified Protected Disclosure Period. HYPOTHETICAL EXAMPLE: “Protected Disclosure Period Ends One Year After Agreement Date” means that in­form­a­tion initially disclosed 367 days after the effective date of the Agreement will not be considered Confidential Information.

Commentary
Receiving party perspective:

A receiving party might want to know that it will not have an obligation of confidence for in­form­a­tion not disclosed to it within X months after the conf­id­en­ti­al­i­ty agreement is signed. The disclosing party might not be exactly wild about that prospect, but will often go along if X is a big enough number.

(Both parties should keep in mind that this is not the same as having the Confidentiality Restrictions expire.)

Of course, even disclosures made outside the Disclosure Period might still be subject to obligations of confidence under applicable law, for example, the laws governing protected health information or nonpublic personal financial information.

Disclosing party perspective:

A disclosing party might prefer to know that all its disclosures of Confidential Information would be protected unless and until the Agreement was terminated.

Specimens

See HP NDA § 4(b).

[Option:] Illustrative Examples Of Confidential Information

By way of example and not of limitation, the term Confidential Information encompasses the following when otherwise eligible under the Agreement: Biological materials; business plans; business records; circuit records; commercial information; compounds; computer programs; construction records; designs; designs; diagrams; documents; draft publications; drawings; engineering records; financial information; financial projections; financial statements; forecasts; formulas; hardware items; interpretations; invention disclosures; leases; machine-readable data; maps; market projections; marketing information; methods; offers; operational data; opinions; patent applications; plans; pricing information; processes; product information programs; projections; proposals; research data; research plans; samples; source code for computer programs; specifications; strategies; tax bills; technical information; technical reports; test data; and title reports.

Commentary
Purpose

Some lawyers like to include laundry lists like this one, on the theory that examples are always useful to get the point across. Me, I’ve never been sure whether doing this is worth the printer toner, let alone the time needed for one negotiator to draft the list and for the other side to review it.

This particular laundry list was harvested from a variety of different agreements.

[Option:] Receiving Party’s Notes, Etc., Are Confidential

For the avoidance of doubt, the confidentiality obligations of the Agreement extend to any analyses, compilations, forecasts, interpretations, notes, reports, studies, summaries, and other documents and materials prepared by, for, or on behalf of, the Receiving Party, to the extent they contain Confidential Information.

Commentary
Sound bite clause

Clauses like this are typically tucked away as ammunition with which to blast “creative” int­erp­ret­a­tions by the other side in the future.

[Option:] Third-Party Information Can Be Confidential

For the avoidance of doubt, otherwise-eligible conf­id­en­tial information of a third party in the possession of a Disclosing Party and disclosed pursuant to the Agreement is considered Confidential Information to the same extent as if were the information of the Disclosing Party.

Commentary
Specimens

Citigroup NDA § 1(a).

[Option:] Affiliate Information Can Be Confidential If Clearly Marked

Otherwise-eligible information owned or maintained by an Affiliate of the Disclosing Party is to be treated as Confidential Information, but only if the information is clearly marked as being subject to the Agreement.

Commentary
Receiving party perspective:

A disclosing party might want a conf­id­en­ti­al­i­ty agreement to protect the conf­id­en­tial information of its affiliates, without the affiliates having to sign separate conf­id­en­ti­al­i­ty agreements.

Disclosing party perspective:

A receiving party might go along with this option, IF affiliate information were required to be clearly marked as being subject to the conf­id­en­ti­al­i­ty agreement — that way, there’d be less of a chance that the receiving party might be ambushed by claims of misappropriation of information its people had no reason to know was conf­id­en­tial.

Specimens

GE Energy NDA preamble. Wal-Mart NDA second paragraph.

[Option:] Agreement Terms Are Confidential

The terms and conditions of the Agreement are the Confidential Information of each party.

Commentary
Purpose

Vendors sometimes insist that customers keep pricing terms conf­id­en­tial — otherwise, a buyer for a future prospective customer might say, “I know you gave our competitor a 30% discount, and I want to show my boss that I can get a better deal than they did, so you need to give me a 35% discount if you want my business.”

Caution

In employment agreements, conf­id­en­ti­al­i­ty provisions sometimes require the employee to keep conf­id­en­tial all information about salary, bonus, and other compensation. The NLRB and some courts have taken the position that such a requirement violates Section 7 of the National Labor Relations Act, as explained in this Baker Hostetler memo.

Specimens

Disney-Pixar § 19(b) says that the agreement’s terms and conditions are not conf­id­en­tial except for specified information (which is not shown in the on-line version).

Ford Services § 8.1 says that its terms and conditions are (supposedly) conf­id­en­tial — but those terms and conditions are available on the Web for all to see ….

[Option:] Parties’ Dealings Are Confidential

The following are the Confidential Information of each party: (i) the fact and content of the parties’ dealings with each other, including if applicable the fact and content of their discussions or negotiations; and (ii) the fact that the parties have entered into the Agreement and its terms and conditions.

Commentary
Purpose

Customers sometimes don’t want it known who their suppliers are.

And parties to “strategic” contracts such as merger and acquisition agreements very often want their discussions to be conf­id­en­tial: If it’s known that a company is interested in being acquired, that could send its stock price down. See generally the factual background discussion in Martin Marietta Materials, Inc v Vulcan Materials Co., No. 7102-CS (Del. Ch. May 4, 2012) (Strine, Ch.), aff’d, No. 254 (Del. May 31, 2012) (en banc), in which Martin Marietta was enjoined from pursuing a hostile takeover because, in violation of its conf­id­en­ti­al­i­ty agreement with Vulcan, it filed with the SEC a detailed summary of its prior dealings with Vulcan.

“DEALINGS” — LANGUAGE CHOICE

This language says that the parties’ dealings are conf­id­en­tial — if it said that the parties’ relationship was conf­id­en­tial, that might be (mis)interpreted as a declaration of a “conf­id­en­tial relationship,” which might have fiduciary-like implications.

[Option:] Disclosure Medium Is Irrelevant

For the avoidance of doubt, except to the extent (if any) otherwise provided by the Agreement, otherwise-eligible information is to be treated as Confidential Information regardless of the medium in which the information is disclosed to, made available to, or otherwise accessed by, the Receiving Party.

Commentary
Disclosing party perspective:

This is a comfort clause sometimes proposed by disclosing parties. See also the Protected Disclosure Channels provision below.

Receiving party perspective:

A receiving party will probably be OK with this option.

[Option:] Protectable Information Is Limited To [Specify Types]

Only the specified type or types of information (when otherwise eligible) are considered Confidential Information.

Commentary
Disclosing party perspective:

A disclosing party might want all types of information to be eligible for Confidential Information status, because it might not know what types of information it might be giving to the receiving party.

Receiving party perspective:

A receiving party might not want its confidentiality obligations apply to whatever random information the disclosing party happened to reveal.

Specimens

See AT&T preamble (sort of). HP NDA §§ 2, 3. Johns Hopkins NDA preamble (fill-in-the-blank form). Univ. North Carolina NDA § 1 (fill-in-the-blank form). Univ. Texas NDA cover sheet item 4 (fill-in-the-blank form).

[Option:] Protected Disclosure Channels Are Limited To [Describe]

Only information conveyed to the Receiving Party via the specified Protected Disclosure Channel(s) is eligible to be Confidential Information. HYPOTHETICAL EXAMPLE: “Protected Disclosure Channels Are Limited To: The meeting between the parties’ CEOs on [date]” means that for particular, otherwise-eligible information to be considered Confidential Information, it must have been have been disclosed at the stated meeting between the parties’ CEOs.

Commentary
Receiving party perspective:

A receiving party might want to try to limit the scope of information as to which it must comply with the Confidentiality Restrictions (defined below).

Receiving party perspective:

A disclosing party might want ALL its Confidential Information to be protected by the Confidentiality Restrictions, regardless of how the receiving party happened to come into possession of the information.

[Option:] Economic Value Need Not Be Proved

To be considered Confidential Information, information need not be shown to have independent economic value, nor to provide an opportunity to obtain an advantage over competitors who do not know or use it.

Commentary
Disclosing party perspective:

A disclosing party should consider asking for this option if it might be tricky and/or expensive to prove that its Confidential Information has specific economic value. In most jurisdictions, such proof would require showing that the information has “independent economic value” (under the Uniform Trade Secret Act definition) or that it provides “an opportunity to obtain an advantage over competitors who do not know or use it” (under the Restatement § 757 definition).

Also consider asking for this clause option if you don’t want to have to “open the kimono” someday, in future litigation, by providing the receiving party with documents, deposition testimony, and other discovery relating to the economic-value issue.

Receiving party perspective:

A receiving party should consider objecting to this option if it thinks the disclosing party might try to make a mountain out of a molehill, suing for misappropriation of Confidential Information that in the real world is just not that big a deal.

[Option:] Receiving Party Represents Its Status & Purpose As: [Describe]

To induce the Disclosing Party to provide it with access to Confidential Information, the Receiving Party makes the stated representation concerning its status and purpose.

Commentary
Disclosing party perspective:

A disclosing party might want a receiving party to make representations about its status and purpose to tee up a claim for “fraud in the inducement” and not just a claim for breach of contract. (The former would entail the possibility of punitive damages.)

Receiving party perspective:

If a receiving party is going to make these representations, it should make an effort to ensure that they’re accurate, so as to reduce the risk of a later fraud-in-the-inducement claim.

Specimens

See AT&T NDA § 3.

Specific Exclusions From Confidentiality Status *

(a) For the avoidance of doubt, Confidential Information does not include information shown to have been, at the time in question, within one or more of the following categories:

(1) known by the Receiving Party before obtaining access to the information under the Agreement; or

(2) provided to the Receiving Party by a third party not under an obligation of confidence benefiting the Disclosing Party in respect of the information; or

(3) independently developed by the Receiving Party without use of Confidential Information; or

(4) published, or otherwise made generally available to one or more others not under an obligation of confidence to the Disclosing Party, without breach of the Agreement by the Receiving Party; or

(5) disclosed to a third party, by the Disclosing Party or with its authorization, without conf­id­en­ti­al­i­ty obligations comparable to those of the Agreement.

(b) Also for the avoidance of doubt, a specific selection or combination of information will NOT be excluded from Confidential Information status solely by virtue of the fact that some or all of its individual component parts are themselves so excluded, unless the selection or combination itself is shown to be so excluded.

Commentary
Purpose

It’s extremely common for confidentiality provisions to contain a list of specific, categorical exclusions from confidentiality status. These categorical exclusions work in conjunction with the disclosing party’s burden of proof that particular information qualifies confidentiality status.

Suppose that a disclosing party were to sue a receiving party for breach of a confidentiality agreement. At trial, the effect of such exclusionary language might play out along the following lines:

  • The disclosing party puts on evidence showing (i) that the specific information in question was valuable and (ii) that the disclosing party took reasonable precautions to preserve its confidential information in confidence.
  • The receiving party shows that (let’s say) the specific information in question had been published in a technical journal in the past.

Without more, the receiving party might have to roll the dice about whether the specific information in question would be deemed Confidential Information. That’s because in a jury trial — which a disclosing party might well ask for — the trial judge might decline to grant summary judgment, choosing instead to let the jury decide whether the information was or was not confidential. And as famously illustrated by the 1995 OJ Simpson murder trial, it’s never possible to say with certainty what a given set of jurors will or will not do.

If, however, the confidentialiy agreement contained an express exclusion clause, then the trial judge might be more wililng to grant summary judgment that the specific information in question was categorically ineligible to be deemed Confidential Information. That might shorten or even eliminate the jury trial, saving time and money for all concerned.

INDEPENDENT DEVELOPMENT – SUBDIVISION (a)(3)

Subdivision (a)(3) says that Confidential Information does not include information that was independently developed by the receiving party. The receiving party, though, may have a tough time convincing a judge or jury that it independently developed the information unless it can corroborate its oral testimony with lab notebooks or other evidence. This will be especially true if it turned out that one or more of the receiving party’s personnel who participated in the so-called independent development were ever given access to the disclosing party’s conf­id­en­tial information.

Editorial comment: I saw first-hand the difficulty of proving independent development when I served as co-counsel for the defendant at the trial in Celeritas Technologies, Ltd. v. Rockwell Int’l Corp., 150 F.3d 1354 (Fed. Cir. 1998). The appeals court affirmed judgment on a jury verdict that defendant Rockwell had breached an NDA by using technology disclosed to it by plaintiff Celeritas. The appeals court observed that “[s]ignificantly, Rockwell did not independently develop its own … technology [sic], but instead assigned the same engineers who had learned of Celeritas’s technology under the NDA to work on the … development project.”

See also Martin Marietta Materials, Inc v. Vulcan Materials Co., No. 7102-CS, slip op. at 44-46, 84-85 (Del. Ch. May 4, 2012) (Strine, Ch.), aff’d, No. 254 (Del. May 31, 2012) (en banc): The Delaware Chancery Court enjoined a hostile takeover bid by Martin Marietta, which the court found had improperly used the target company’s conf­id­en­tial information in violation of a prior nondisclosure agreement. Martin Marietta claimed that it had only used publicly-available information about the target company, but the court found that Martin Marietta’s assessment of the likely prospects of a takeover were “profoundly influenced” by its previous access to the target company’s conf­id­en­tial information. Chancellor Strine said that “[o]nce things are learned and done, it is difficult to unlearn and undo them, especially when the old information is still being circulated.Id., slip op. at 46 (emphasis added).

In some circumstances, though, a court might credit a witness’s bald assertion of independent development. That apparently happened in Contour Design, Inc. v. Chance Mold Steel Co., No. 12-1110, slip op. at 10-11 (1st Cir. Sept. 4, 2012) (reversing, in part, district court holding that defendant had breached confidentiality obligations). In that case, the plaintiff claimed, and the trial court held, that the defendant had designed a particular product using the plaintiff’s confidential information, in violation of a confidentiality agreement. The appeals court, however, pointed out that the defendant’s general manager had testified — without more detail, but also without contradiction — that her company had independently developed the product in question; the appeals court also noted that the plaintiff’s trial counsel had not asked the general manager more-detailed questions that might have painted a different picture.

Further reading: See generally Sean Hogle, How Clean Is Your Clean Room?, Sept. 26, 2012 (accessed Sept. 27, 2012).

UNRESTRICTED DISCLOSURE – SUBDIVISION (a)(5)

Some disclosing-party negotiators might object to the exclusion from Confidential Information status, in subdivision (a)(5), of information disclosed without restriction to a third party. That should be a fruitless objection, though, because in general that’s pretty much the way the law works.

Here’s a real-world example: In April 2010, Lockheed Martin won a $37 million verdict against a competitor for misappropriation of trade secret. The judge, though, tossed out the verdict and ordered a new trial. The judge found that Lockheed Martin had withheld email evidence suggesting that the company had disclosed the trade secrets in question to a competitor without restrictions — which would have killed the company’s legal rights in the information. See R. Robin McDonald, Discovery Failure Sinks Lockheed’s $37 Million Win, Apr. 6, 2010; see also a blog posting by Todd Sullivan. The case subsequently settled.

CAUTION: DON’T EXCLUDE SUBPOENAS, ETC.

This clause intentionally does not categorically exclude, from the definition of Confidential Information, information that comes within the scope of a subpoena, search warrant, etc. (Some badly-drafted conf­id­en­ti­al­i­ty exclusion language — for example, the Citigroup NDA at § 1(a) — does just that.) With such a categorical exclusion, arguably even the mere issuance of a subpoena, etc., for Conf­id­en­tial Information would completely strip the information of its conf­id­en­ti­al­i­ty status. That would normally be a big mistake, because it might deprive the disclosing party of the benefit of any conf­id­en­ti­al­i­ty protections in the subpoena itself or in a protective order entered by the court.

The better approach is to provide that the Receiving Party may disclose Confidential Information pursuant to a subpoena, etc., as long as it meets certain conditions, as stated in subdivision (b) of the Permitted Disclosures clause.

SELECTIONS AND COMPILATIONS – SUBDIVISION (b)

Subdivision (b) mirrors the law, which generally provides that particular selections and compilations of information can qualify as conf­id­en­tial information or even as a trade secret, even if the individual information components are not confidential.

Here’s a case in point: A company, Tewari, claimed to have developed a zero-oxygen technique for packing meat. Tewari demonstrated the technology for a specialty meats company, Mountain States, but only after the two companies had signed an NDA. Tewari De-Ox Systems, Inc., v. Mountain States/Rosen, L.L.C., No. 10-50137 (5th Cir. Apr. 5, 2011) (reversing in part and remanding summary judgment).

Tewari later sued Mountain States for allegedly misappropriating Tewari’s trade secrets. Mountain States responded that most of the disclosed information was published in Tewari’s patent application, and the rest were common knowledge in the industry. Tewari replied that the specific combination of things it had disclosed to Mountain States was not public.

The trial judge sided with Mountain States, and granted summary judgment dismissing Tewari’s case. The appeals court, however, reversed (in part): The court held that there was a genuine dispute about whether the specific combination was in fact generally known. Therefore, the appeals court said, it was premature for the trial court to have granted summary judgment.

See also, e.g., Integrated Cash Mgmt. Servs., Inc. v. Digital Transactions, Inc., 920 F.2d 171, 174 (2d Cir. 1990), in which the court observed that “a trade secret can exist in a combination of characteristics and components, each of which, by itself, is in the public domain, but the unified process, design and operation of which, in unique combination, affords a competitive advantage and is a protectible secret.” (emphasis added; internal quotation marks and citation omitted).

Specimens

AT&T NDA § 10. British Design Innovation association NDA § 3.0 (warning: § 3.5 lists disclosures required by law
as a categorical exclusion); includes selections-and-compilations language. Citigroup NDA § 1(a) (ditto). Disney-Pixar § 19(c)(iii). Dow § 1.4. Ford Services § 8.3. GE Energy NDA § 3. HP NDA § 5(e). IBM NDA § 4. Johns Hopkins NDA § 4. Pfizer NDA second paragraph, last sentence. UNC NDA § 2 — last grammatical paragraph includes selections-and-compilations language. UT Austin NDA § 1. Verizon-NDA § 3. Wal-Mart fourth paragraph.

[Option:] Exclusion Proof Requires Documentary Corroboration

A party asserting that an item of information falls into an exclusion from conf­id­en­ti­al­i­ty under the Agreement must provide reasonable corroboration for that assertion in the form of documentary evidence.

Commentary
Disclosing party perspective:

A disclosing party will sometimes propose requiring the receiving party to prove any exclusion from conf­id­en­ti­al­i­ty with documentary evidence, not just oral testimony. The disclosing party usually has a specific concern: That the receiving party’s personnel, trying to dodge a charge of misappropriation of trade secrets, might be tempted to dissemble or even lie about, for example, their having independently developed the information.

The disclosing party’s underlying concern is a valid one — and isn’t unique: Patent law faces a similar problem, namely that of determining who was the first inventor. Under (U.S.) patent law, someone claiming an invention date earlier than the filing date of his patent application must corroborate that claim, for example with a signed and witnessed laboratory notebook.

Receiving party perspective:

The receiving party likely will object to having to prove an exclusion using documentary evidence alone. The receiving party probably has no way to assess, in advance, whether it will have documentary evidence that, standing alone, would convince a judge or jury.

This clause therefore borrows the concept of corroboration from patent law: The receiving party is not required to prove its assertion of an exclusion using documentary evidence alone, but it is required to adduce documentary evidence to corroborate its assertion. This helps to guard against the possibility that the receiving party’s personnel might “describe [their] actions in an unjustifiably self-serving manner …. The purpose of corroboration [is] to prevent fraud, by providing independent confirmation of the [witness’s] testimony.” Sandt Technology, Ltd. v. Resco Metal & Plastics Corp., 264 F.3d 1344, No. 00 1449 (Fed. Cir. 2001) (affirming relevant part of summary judgment; as a matter of law, inventor provided sufficient corroboration of date of invention) (internal quotation marks and citation omitted).

Specimens

The examples below take a tougher stance than this clause does: They appear to require that exclusions from confidentiality be proved, not merely corroborated, with documentary evidence: Johns Hopkins NDA § 4(b) – written records are required to show that information was in the receiving party’s possession or readily available from another source. University of North Carolina NDA § 2(c)(i) — documentary form required for information in receiving party’s possession prior to disclosure by disclosing party. UT Austin NDA Exhibit A § 1 (definition of Confidential Information) — “competent written proof” required. Verizon NDA §§ 3.1, 3.2, 3.4 — written evidence is required to show that information was already in receiving party’s posession, publicly available, and/or independent developed.

Marking Requirement *

For information to be considered Confidential Information, it must be marked, at the time it is initially provided to or accessed by the Receiving Party (unless otherwise provided in the Agreement), with a reasonably-prominent, visually-readable notice, such as (for example) “Confidential information of [name]” or “Subject to NDA.”

Commentary
Receiving party perspective:

Receiving parties very often ask for a marking requirement for two reasons:

  • so their employees will know what information they have to treat as conf­id­en­tial; and
  • to make it clear that unmarked information is fair game for the receiving party to use or disclose as it pleases.
Disclosing party perspective:

A marking requirement usually does not put much of an extra burden on the disclosing party. The disclosing party already has a practical motivation for marking its protected information: In court, a disclosing party, seeking to show that its information is conf­id­en­tial, will usually tout the fact that it marked its information as indirect evidence of conf­id­en­ti­al­i­ty. Conversely, courts can sometimes interpret a disclosing party’s failure to mark information as indirect evidence that the disclosing party didn’t really consider the information to be conf­id­en­tial.

Specimens

Marking required: Ford Services § 8.1(b) – certain information must be marked. GE Energy NDA § 1. HP NDA § 5(c)(ii). IBM NDA § 1 (“should be marked”). UT Austin NDA § 2.

Marking not required: AT&T NDA § 9. Citigroup NDA Dow § 1.4. Disney-Pixar. Ford Services §§ 8.1(a), 8.9 – certain information need not be marked. HP NDA. Johns Hopkins NDA. Pfizer NDA. UNC NDA. UT Austin NDA. Verizon-NDA. Wal-Mart NDA.

[Option:] Marking Grace Period: [Five Business Days]

IF: Otherwise-eligible conf­id­en­tial information is disclosed or made available to the Receiving Party —

(i) in a form not fixed in a tangible medium, for example by an oral disclosure or a demonstration, or

(ii) in a fixed form, for example an unmarked writing or drawing, that is not marked as confidential as required the Agreement;

THEN: The information will nevertheless be considered Confidential Information if, but only if:

(1) the information is identified as conf­id­en­tial at the time of disclosure or availability; and

(2) a copy of the information (in the case of information fixed in a tangible medium) or a written summary of the information (in the case of information not so fixed), in either case marked as conf­id­en­tial in accordance with the Agreement, is provided to the Receiving Party, together with written notice of the marking in accordance with the notice provisions of the Agreement, no later than the end of the specified Marking Grace Period after the initial marked disclosure.

Commentary
ADVANTAGE FOR RECEIVING PARTY

Including a Marking Grace Period could help a receiving party to avoid the result in Beacon Wireless Solutions, Inc. v. Garmin Int’l, Inc. No. 5:11-cv-00025 (W.D. Va. May 9, 2012) (denying in part defendant’s motion for summary judgment).

In that case, Beacon, the disclosing party, accused Garmin, the receiving party, of misappropriating conf­id­en­tial information. Garmin filed a motion for summary judgment, in part on grounds that the parties’ nondisclosure agreement had included a marking requirement, and the information allegedly misappropriated had not been marked as conf­id­en­tial.

The district court denied Garmin’s motion in relevant part. The court noted that under Kansas law, a party could assert that an agreement had been orally amended, waived, etc., even if the agreement itself required all amendments, waivers, etc., to be in writing.

The court might have been influenced by the fact that the marking grace period in the Beacon-Garmin NDA applied only to information disclosed orally or visually — if written information was disclosed without a conf­id­en­ti­al­i­ty marking, even inadvertently, that information was apparently ineligible to be considered conf­id­en­tial information:

“Confidential information” as used in the Agreement shall include, but is not limited to, all trade secrets, non-public information, data, know-how, documentation, hardware, software (including listings thereof and documentation related thereto), diagrams, drawings and specifications relating to a party, its business or products which [sic] is marked as “conf­id­en­tial” or “proprietary” and which [sic] is disclosed by either party to the other party.

Information disclosed orally or visually shall be considered Confidential Information if such information is identified as “conf­id­en­tial” or “proprietary” at the time of disclosure and is reduced to written summary form by the disclosing party and sent to the receiving party within thirty (30) days after initial disclosure. During this thirty (30) day period, such oral or visual information so disclosed shall be provided the same protection as Confidential Information.

Id., slip op. at 10 (emphasis and extra paragraphing added).

That fact might have affected the court’s reasoning when it said that the disclosing party, Beacon, had adduced sufficient evidence of an oral amendment — dispensing with the marking requirement — that Beacon was entitled to have a jury decide the question:

As stated above, evidence in the instant case suggests that, during the parties’ business relationship, each party provided arguably conf­id­en­tial information to the other without marking it as such.

The plaintiffs point to evidence indicating that the defendants’ corporate representatives understood that the information they received from the plaintiffs, although not labeled as such, was intended to be treated as conf­id­en­tial and, furthermore, that the defendants instructed employees to treat the information as conf­id­en­tial.

Hence, there are arguably facts from which a reasonable jury could determine that there was a meeting of the minds by the parties, evidenced by their course of conduct, to enter into an
agreement to modify the Nondisclosure Agreement’s clause regarding how information exchanged by the
parties would qualify as “Confidential lnformation” under the contract.

Id., slip op. at 13-14 (citations omitted, extra paragraphing added). (Hat tip: Paul Frehling at the Seyfarth Shaw firm.)

If the contract had included a marking grace period, the receiving party, Garmin, could have argued that the parties expressly provided for inadvertently-unmarked disclosures; this likely would have weighed strongly against a finding that the parties had orally agreed to dispense with the marking requirement.

HOW LONG A GRACE PERIOD?

The Marking Grace Period allows marking to be completed within a stated time, which typically is five to ten business days, but often can be as much as 30 days. This is a bright-line approach that favors the receiving party. That’s because, if the disclosing party fails to mark the information by the stated deadline, then conf­id­en­ti­al­i­ty restrictions are no longer in effect for the unmarked information. (This assumes conf­id­en­ti­al­i­ty isn’t separately required by applicable law, for example by HIPAA or the GLBA.)

Time-certain deadlines of this kind can be advantageous in business contracts. They make life easier on the people who actually have to do the work, and they promote predictability, which is prized in the business world.

On the other hand, a time-certain deadline has the potential to damage the parties’ business relationship (assuming one exists). And it’s not clear how much good the approach will actually do for the receiving party.

Put yourself in the disclosing party’s shoes. Suppose you slip up and forget to mark particular information as conf­id­en­tial before the deadline. The receiving party might claim that you’ve lost all right to control the use of the information. It wouldn’t matter whether the receiving party would suffer any prejudice by post-deadline marking. The receiving party (you fear) would assert that the information is no longer conf­id­en­tial, period, because you missed the deadline. If the parties’ relationship were supposed to be a collaborative one, that wouldn’t be a good thing.

For collaborative relationships, a better approach might be to have the Marking Grace Period be a reasonable time. Sure, that could lead to uncertainty about what “a reasonable time” might be. But that very uncertainty can usefully encourage the parties to try to work things out, which in turn can help them preserve their business relationship.

In any case, in a collaborative relationship it’s no bad thing for the receiving party to call up the disclosing party and ask: “Hey, you didn’t mark Document X as conf­id­en­tial; did you intend to do that, or did it just slip through the crack?” The disclosing party gets a chance to protect its information, and the receiving party scores points for being a good business partner.

Specimens

See Dow §§ 1.4, 5.1 – 30 days. Ford Services § 8.1(c) – 15 working days. GE Energy NDA § 1 – 30 days. UT Austin NDA Exhibit A, § 1 – 30 days.

[Option:] Marking Exception For In-Place Information

A particular document containing Confidential Information (for example, a paper document or an electronic file) need not be marked as conf­id­en­tial if:

(a) the Receiving Party is given access to that document as it is kept in the ordinary course of business, for example in the Disclosing Party’s paper- or electronic files; and

(b) the Receiving Party is not authorized by the Disclosing Party to remove, transmit, or otherwise take a copy of Confidential Information contained in the document.

Commentary
Disclosing party perspective:

A disclosing party might propose this provision if it anticipated that the receiving party might be given free access to some portion of the disclosing party’s premises, equipment, files, etc.

Receiving party perspective:

A receiving party might have the same objection to a lack of marking as discussed in the commentary to the main clause.

“NOT AUTHORIZED TO TAKE A COPY”

In subdivision (b), the language, “not authorized … to … take a copy of the document” was chosen to address the situation where a receiving party surreptitiously “steals” information by, for example, photographing a disclosing-party document, making a copy on a USB thumb drive, etc.

[Option:] Marking Exception For Recognizably-Confidential Information

Information otherwise eligible to be considered Confidential Information will be so considered, regardless whether it is marked as such, if under the circumstances a reasonable person would recognize it as being conf­id­en­tial in nature.

Commentary
Disclosing party perspective:

Disclosing parties sometimes propose an exception to the marking requirement for (so-called) recognizably-conf­id­en­tial information. They want such an exception as a safety net, in case they fail to mark conf­id­en­tial information as such.

Receiving party perspective:

A receiving party might have the same objection to a lack of marking as discussed in the commentary to the main clause.
An exception for “recognizably-confidential” information puts extra burdens on the receiving party to figure out what is or is not free for it to use. The exception also could lead to future disputes about what is or is not “recognizable” as conf­id­en­tial.

The disclosing party’s concern can usually be addressed with a marking grace period.

Specimens

See Dow § 1.4; Verizon-NDA § 1.

[Alternative:] Marking Not Required

For the avoidance of doubt, all information provided (directly or indirectly) to the Receiving Party, by or on behalf of the Disclosing Party, pursuant to the Agreement, is to be deemed Confidential Information, regardless whether it is marked as such, unless and until it is shown shown to come within an exception to confidentiality stated in the Agreement.

Commentary

See the commentary to the Marking Requirement clause

Precautions Required: Commercially Reasonable; Not Less Than Own *

The Receiving Party will take, at a minimum, commercially-reasonable security precautions to protect Confidential Information. Such precautions also must be not less than those the Receiving Party uses to protect its own conf­id­en­tial information of comparable significance.

Commentary
Purpose

A disclosing party will nearly always insist that the receiving party commit to taking specified precautions, and to abiding by specified restrictions, to protect the disclosing party’s conf­id­en­tial information. In part, this is because a court might treat the absence of such a commitment as a failure by the disclosing party to take reasonable steps to keep its information conf­id­en­tial. That in turn might doom the disclosing party’s ability to assert legal rights in the conf­id­en­tial information.

Specimens

See AT&T NDA § 5; British Design Innovation association NDA § 5.0; Citigroup NDA § 1(b); Disney-Pixar § 19(c)(ii).
Ford Services § 8.2; GE Energy NDA § 2; HP NDA § 6(a); IBM NDA § 2; Johns Hopkins NDA § 2; Pfizer NDA § 1 – requires receiving party to “hold [information] in confidence”; UT Austin NDA Exhibit A § 2 — requires receiving party to “make all reasonable efforts … to be no less than the degree of care employed by the Receiving Party to safeguard its own conf­id­en­tial information”; Verizon NDA §§ 2.1 — requires the receiving party to “maintain in confidence all Confidential Information that is disclosed to it by or acquired from Verizon”; WalMart NDA, third grammatical paragraph — requires recipient to “hold conf­id­en­tial” WalMart’s conf­id­en­tial information.

[Option:] Cooperation Against Misappropriators

During the term of the Agreement, in response to any reasonable request by the Disclosing Party, the Receiving Party will provide reasonable cooperation with the Disclosing Party (at the Disclosing Party’s expense) in investigating and/or taking action against a third party for potential misappropriation of Confidential Information.

Commentary
Disclosing party perspective:

Disclosing parties’ litigation counsel have been known sometimes to try to conscript enlist receiving parties to help out with lawsuits against third-party misappropriators.

Receiving party perspective:

A receiving party might object to this clause if the possible third-party misappropriator were an employee, etc., of the receiving party, because the receiving party would already have an incentive to cooperate, namely to try to avoid being sued by the disclosing party, with the risk of punitive damages.

Moreover, if the potential misappropriator were a business partner or other ally of the receiving party, the latter might well not want to get in the middle of its partner’s dispute with the disclosing party.

And even if the potential misappropriator were not associated with the receiving party, then the receiving party might legitimately not want the aggravation that can come with “getting involved.”

Confidentiality Restrictions *

(a) No unauthorized use, disclosure, or copying: The Receiving Party will not use, copy, transmit, or disclose Confidential Information, referred to collectively for convenience as “utilization” of Confidential Information, for any purpose — this restriction is itself referred to for convenience as the Confidentiality Restrictions — unless, for each such utilization, both of the following are true:

(1) the utilization either (i) is permitted by the Agreement, or (ii) has received the Disclosing Party’s express prior written consent; and

(2) the utilization complies with applicable law, including (for example) export-control laws and laws governing disclosures of personal financial information or personal health information.

(b) No removal of confidentiality markings: Unless it has the Disclosing Party’s prior written consent, the Receiving Party will not remove, obscure, or alter any conf­id­en­ti­al­i­ty marking from any copy of Confidential Information.

(c) No confirmation to third parties: For the avoidance of doubt, the Receiving Party will not confirm, to any third party, any correlation or similarity between Confidential Information and information from any other source, except as otherwise permitted by the Agreement or with the Disclosing Party’s prior written consent.

(d) Post-termination restrictions: For the avoidance of doubt, regardless of any termination or expiration of the Agreement or any other right or obligation under it, the Confidentiality Restrictions will continue in effect, as to particular Confidential Information (except to the extent, if any, expressly provided otherwise in the Agreement), as follows:

(1) until the date, if any, that such information becomes subject to one or more of the Specific Exclusions From Confidentiality Status and

(2) for so long as applicable law (for example, a law concerning personal health information or consumer financial information) does not require the information in question to be maintained in confidence.

Commentary
Purpose

A disclosing party will nearly always insist that the receiving party agree to the restrictions of this provision, again because a court might treat the absence of such restrictions as a failure by the disclosing party to take reasonable steps to keep its information conf­id­en­tial.

LEGAL COMPLIANCE REQUIREMENT – SUBDIVISION (a)(2)

Disclosing parties often ask for legal-compliance language like this so that they’ll have an express contractual remedy (and at least some political cover) if the receiving party engages in unlicensed exports of technical data or other unlawful disclosures of conf­id­en­tial information.

Moreover, U.S. export-controls laws require affirmative “written assurances” for disclosures to take place under certain exceptions to the export licensing requirements.

If this legal-compliance language were omitted, the receiving party presumably would still be required to comply with any applicable legal obligations, but it’s unclear whether the disclosing party would have any contractual remedy if the receiving party breached those legal obligations.

CONTINUATION AFTER TERMINATION – SUBDIVISION (d)

The disclosing party will normally want the language to leave no doubt that termination or expiration of the Agreement will not automatically mean termination of the receiving party’s conf­id­en­ti­al­i­ty obligations. The general idea would be to forestall the receiving party’s counsel from someday trying to argue that the conf­id­en­ti­al­i­ty obligations did not survive termination or expiration of the Agreement.

The “any other right or obligation under [the Agreement]” language is intended to preclude a receiving party from contending that expiration of a noncompetition covenant released the receiving party from its conf­id­en­ti­al­i­ty obligations.

Drafters should note that even in the absence of a contractual obligation of confidence, particular information might be subject to a privacy law such as HIPAA or the Gramm-Leach-Bliley Act.

Rule against perpetual contracts? Conceivably, a receiving party might try to argue that post-termination conf­id­en­ti­al­i­ty obligations violated the Rule against Perpetual Contracts and therefore were terminable at will. See generally Brett A. August and Andrew N. Downer, Equitable Exceptions to the Rule Against Perpetual Contracts, Intellectual Property Litigation, Volume 21, No. 4 (ABA Section of Litigation, summer 2010) (requires paid membership in ABA Section of Litigation).

Specimens

Legal compliance requirement: HP NDA § 6(b). IBM NDA § 6. UT Austin NDA §  10.

Obligations continue after termination AT&T NDA NDA § 13 (termination does not negate conf­id­en­ti­al­i­ty obligation). Dow § 5.7 (ditto). University of North Carolina NDA § 7 (ditto). UT Austin NDA Exhibit A §  6.

[Option:] Expiration Of Confidentiality Restrictions: [Five Years After Agreement Date]

Except to the extent (if any) otherwise provided in the Agreement or by law, the Receiving Party will not be bound by the Agreement’s Confidentiality Restrictions after the specified date.

Commentary
Receiving party perspective:

A receiving party will sometimes want a “sunset” on its conf­id­en­ti­al­i­ty obligation. That way, after a stated period of time the receiving party will be free to use or disclose the information as it sees fit, without having to concern itself whether it might be sued by the disclosing party.

Disclosing party perspective:

A disclosing party, on the other hand, is likely to object to a sunset provision if it thinks its conf­id­en­tial information is likely to be of long-lasting value. One principal reason for concern is that after the sunset date the disclosing party might very well lose any ability to assert trade-secret rights in information, because arguably the disclosing party would then no longer be maintaining the information in confidence.

Specimens

See British Design Innovation association NDA § 2.0 (five years). Ford Services § 8.2 (conf­id­en­ti­al­i­ty period redacted). GE Energy NDA § 6 (two years). HP NDA § 4(c) (one year or until new products discussed are available for sale). IBM NDA § 3 (two years after initial date of disclosure). Johns Hopkins NDA § 5 (five years). UT Austin NDA §  3 (five years).

ALTERNATIVE

The expiration exception option immediately below offers a way to accommodate both parties’ concerns, to help them “get to signature” so they can go forward with their main business together.

Further reading

For a more-extensive discussion, see an article by Chicago attorney Julianne M. Hartzell, Time Limits in Confidentiality Agreements, in the American Bar Association’s Intellectual Property Litigation publication, vol. 20, no. 3, spring 2009 (accessed Aug. 12, 2009).

[Option:] Expiration Exception For Trade Secrets

Even if the Agreement states that the Confidentiality Restrictions will expire, those restrictions will remain in effect for any Confidential Information that is shown to be a trade secret under applicable law until such time (if any) as the information becomes subject to a Specific Exclusion From Confidentiality Status.

[Option:] No Other Conf­id­en­ti­al­i­ty Obligations

For the avoidance of doubt, except for the Confidentiality Restrictions or as may be required by applicable law (for example, privacy law):

(a) the Receiving Party is under no obligation of confidence in respect of any information that the Disclosing Party causes to be disclosed or made available to the Receiving Party pursuant to the Agreement, apart from Confidential Information;

(b) consequently, the Receiving Party is free to use and/or disclose any or all such non-Confidential Information in its discretion, as long as such use or disclosure does not violate another intellectual-property right of the Disclosing Party (if any), such as, for example, patent rights, trademark rights, or copyrights.

Commentary
Specimens

See HP NDA §§ 5(d), 7(a).

Permitted Use of Confidential Information

During the term of the Agreement, the Receiving Party may use Confidential Information to the extent reasonably necessary for:

(1) performing its obligations under the Agreement, if any;

(2) exercising its rights under the Agreement, if any;

(3) assessing whether to enter into another agreement with the Disclosing Party; and

(4) any other purpose agreed to in writing in advance by the Disclosing Party.

Commentary
PRE-AUTHORIZING THE MOST TYPICAL USES

Most confidential-information clauses require the drafter to “fill in the blank” to indicate how the receiving party is permitted to use confidential information. That seems like an unnecessary step, given that (at least in my experience) nearly all such clauses fall into the three categories represented in subdivisions (1) through (3) above. Consequently, this clause simply goes ahead and pre-authorizes all three of those typical uses.

CAUTION: USE-RIGHTS WORDING CAN BE IMPORTANT

Subtle differences in wording can make big differences in the scope of the receiving party’s use rights. In Martin Marietta Materials, Inc v Vulcan Materials Co., No. 7102-CS (Del. Ch. May 4, 2012) (Strine, Ch.), aff’d, No. 254 (Del. May 31, 2012) (en banc), the Delaware Chancery Court enjoined Martin Marietta Materials, for four months, from proceeding with its proposed hostile takeover of Vulcan Materials, on grounds that Martin Marietta had exceeded its use rights under a confidentiality agreement. Martin Marietta and Vulcan had previously entered into a conf­id­en­ti­al­i­ty agreement or “NDA,” drafted by Martin Marietta’s general counsel. The purpose of the NDA was to help the parties explore a possible ‘friendly’ business combination. Martin Marietta, though, abandoned the discussions and instead launched a hostile takeover bid for Vulcan. Chancellor Strine construed the language of the NDA’s use restrictions, especially the terms “business combination transaction” and “between” (as opposed to “involving”), relying heavily on extrinsic evidence. See slip op. at 60 et seq. He held that by using Vulcan’s conf­id­en­tial information in the hostile takeover bid, Martin Marietta violated the use restrictions in the NDA. See id. at 88 et seq.

(The opinion makes it clear that Chancellor Strine was influenced more than a little by the behavior of Martin Marietta and its CEO.)

Specimens

See AT&T NDA § 7; Citigroup NDA § 1(d); Ford Services §§ 8.2, 8.6; IBM NDA § 2; Johns Hopkins NDA preamble.

[Option:] Receiving Party Indemnity Obligation For Certain Third-Party Claims

The Receiving Party will defend and indemnify the Disclosing Party and its Protected Persons against any claim by a third party arising out of use of Confidential Information by, on behalf of, or with the permission of, the Receiving Party. For the avoidance of doubt, the obligations of this section will survive any termination or expiration of the Agreement.

Commentary
TYPICAL USES

The disclosing party might want indemnity-and-defense language like this if the receiving party’s use of the disclosing party’s conf­id­en­tial information could put the disclosing party at risk from third-party claims.

The main practical effect of such a provision might be to require the receiving party to fund the disclosing party’s defense up front, instead of reimbursing the disclosing party afterwards.

CLAIMS “ARISING OUT OF”

The indemnity provision is a comparatively-narrow one, in that it applies only to third-party claims
“arising out of” the receiving party’s disclosure or use of conf­id­en­tial information.

HYPOTHETICAL EXAMPLE

Suppose that:

  • A university discloses pre-publication research to a pharmaceutical company under a conf­id­en­ti­al­i­ty agreement.
  • The pharmaceutical company uses the research to prepare a new drug and begins clinical trials.
  • Unfortunately, things go wrong in the trials because of errors by the university’s researchers.
  • A patient sues both the pharmaceutical company and the university.

Under this indemnity language, the pharmaceutical company should pay for the university’s defense costs as well as for any resulting damage award.

Specimens

See GE Energy NDA § 4.

ALTERNATIVE

A receiving party might be willing to agree to such an indemnity obligation if the obligation included a ceiling or cap on the amount of the receiving party’s indemnity liability as described immediately below..

[Option:] Such Indemnity Liability Is Capped At [Describe]

The Receiving Party is not obligated to indemnify the Disclosing Party, pursuant to the Receiving Party Indemnity Obligation (Third-Party Claims) clause, for an aggregate amount greater than the specified capped amount.

Permitted Disclosure Of Confidential Information (Including Pursuant To Subpoena) *

(a) Disclosures to employees etc.: During the term of the Agreement, the Receiving Party may disclose Confidential Information, in confidence, to its officers, directors, and employees who:

(1) have a need to know in connection with a use of Confidential Information by the Receiving Party permitted by the Agreement; and

(2) are bound by a legally-enforceable obligation of confidence to the Receiving Party, by written agreement or as a matter of law, that is at least as restrictive as the Confidentiality Restrictions.

(b) Disclosure pursuant to subpoena, etc.: For the avoidance of doubt, it is not a breach of the Confidentiality Restrictions for the Receiving Party to disclose Confidential Information when, and to the minimum extent, required by a legally-enforceable external demand — such as (for example) a subpoena, search warrant, summons, interrogatory, requests for production of documents, or civil investigative demand, where the same is made in the course of or prepatory to any civil- or criminal litigation, investigation, administrative proceeding, or arbitration, before a tribunal having jurisdiction and the power to punish non-compliance with the demand — IF in any such case (subject to any applicable legal prohibitions) the following prerequisites are met:

(1) The Receiving Party must promptly advise the Disclosing Party upon learning of the external demand.

(2) If so requested by the Disclosing Party (and at the Disclosing Party’s expense), the Receiving Party must provide reasonable cooperation with any efforts by the Disclosing Party to limit the disclosure and/or to obtain legal protection for the information to be disclosed.

(3) The Receiving Party may disclose only so much Confidential Information as its counsel advises is legally required.

(c) Non-compulsory legal disclosures: For the avoidance of doubt, subdivision (b) does not authorize disclosures that are not compelled by law in response to an external demand; as one example, subdivision (b) does not authorize the Receiving Party to file Confidential Information in or as part of a public filing with the Securities and Exchange Commission.

Commentary
DISCLOSURE TO IN-HOUSE PERSONNEL – SUBDIVISION (a)

In many jurisdictions, an employee of a company is obligated by law to preserve in confidence his or her employer’s conf­id­en­tial information. This includes third-party information as to which the employer is itself bound by an obligation of confidence. The same would normally be true of officers, directors, managers, members, general partners, etc., of a corporation or other entity. [CITE NEEDED]

Caution: In jurisdictions bound by the Uniform Trade Secrets Act, disclosing parties should consider whether the UTSA preempts any implied obligation of confidence. Some courts have held that their states’ versions of the UTSA preempts all tort claims for misappropriation of conf­id­en­tial information. For example:

  • A California appeals court so ruled in KC Multimedia, Inc. v. Bank of America Technology & Operations, Inc., 171 Cal. App. 4th 939 (Cal. App.–6th App. Dist. 2009) (affirming judgment on jury verdict for defendants in trade-secret lawsuit).
  • Likewise, the Utah supreme court in CDC Restoration & Construction, LC v. Tradesmen Contractors, LLC, No. 20100127-CA (Utah Feb. 24, 2012) (affirming in part and reversing in part summary judgment in favor of defendants in trade-secret lawsuit).
  • And in New Hampshire, the federal district court ruled, in effect, that under the New Hampshire uniform trade secret act, information was either a trade secret or it was unprotectable under state tort law. See Wilcox Industries Corp. v. Hansen, No. 11-cv-551-PB (D.N.H. May 7, 2012) (granting in part and denying in part defendant’s motion to dismiss lawsuit for misappropriation of trade secrets, unfair competition, etc.).

Preemption should not be an issue for contract claims, because UTSA expresly does not preempt contractual remedies. See, e.g., section 3426.7(b)(1) of the California Uniform Trade Secrets Act.

SUBPOENAS, ETC. — SUBDIVISION (b)

Purpose: A receiving party won’t want to breach the contract if it turns over the disclosing party’s conf­id­en­tial information in response to a subpoena or search warrant. On the other hand, it won’t want to find itself in contempt — or under arrest for obstruction of justice — if it declines to do so. (Receiving party to disclosing party: “I’m not going to jail for you”).

Subject to any applicable legal prohibitions: If a receiving party receives a grand-jury subpoena or search warrant, it might be a criminal offense for the receiving party to tell the disclosing party that conf­id­en­tial information had been subpoenaed; anyone who did so might go to jail for it.

Promptly advise the DIsclosing Party: This language The “promptly advise the Disclosing Party” language does not set out a strict time deadline. That gives the receiving party some flexibility to accommodate informal requests for cooperation from law enforcement agencies and similar bodies.

External demand: In Martin Marietta Materials, Inc v Vulcan Materials Co., No. 7102-CS (Del. Ch. May 4, 2012) (Strine, Ch.), aff’d, No. 254 (Del. May 31, 2012) (en banc), the Delaware Chancery Court found that a would-be acquiring company (Martin Marietta) had violated a conf­id­en­ti­al­i­ty agreement with a target company (Vulcan). One of Martin Marietta’s alleged violations was its inclusion of Vulcan’s conf­id­en­tial information in a public SEC filing for a proxy contest, without first going through the notice and vetting process that was required by the parties’ conf­id­en­ti­al­i­ty agreement (NDA).

The NDA’s disclosure prohibition stated that the parties were not allowed to “disclose to any other person, other than as legally required,” certain specified information. Id., slip op. at 17. The question faced by Chancellor Strine was whether the “legally required” exception to the disclosure prohibition encompassed Martin Marietta’s inclusion of conf­id­en­tial information in an SEC filing, without any kind of subpoena, search warrant, etc. The chancellor found the term “legally required” to be ambiguous, so he looked to extrinsic evidence of the parties’ intent as expressed in their negotiations.

Taking the extrinsic evidence into account, Chancellor Strine construed the term “legally required” disclosures as those disclosures required by external demands such as subpoenas, as opposed to those initiated by Martin Marietta. See id., slip op. at 90 et seq. In particular, Chancellor Strine said that:

In my view, the NDA operates to put the burden on a party disclosing Transaction Information or Evaluation Material to show that each and every disclosure of Transaction Information and Evaluation Material was legally required. That goes not only to the subject of the disclosure but to the specificity.

Id. at 126. The chancellor enjoined Martin Marietta from pursuing its hostile takeover bid for four months.

Specimens

See AT&T NDA § 7; Citigroup NDA § 1(d); Ford Services §§ 8.2, 8.6; IBM NDA § 2; Johns Hopkins NDA preamble.

Disclosure pursuant to subpoena, etc.: See AT&T NDA § 11; Citigroup NDA § 1(a) — badly drafted as a categorical exclusion from confidentiality; Disney-Pixar § 19(c)(iv); Dow §§ 5.3, 5.5; Ford Services § 8.7; GE Energy NDA § 3(b); HP NDA § 6(a); IBM NDA § 2; UT Austin NDA Exhibit A §  3.

[Option:] Disclosure To Receiving-Party Affiliates And Contractors

The Receiving Party may disclose Confidential Information to its Affilates and contractors on the same basis as it may do so to its employees.

Commentary
Receiving party perspective:

A receiving party might not want to have to ask permission every time it wanted to provide Confidential Information to one of its Affiliates or contractors.

Disclosing party perspective:

A disclosing party, though, might well want to maintain control over the receiving party’s disclosure of conf­id­en­tial information to ANY other entity (other than as required by law) without consent, because a receiving-party Affiliate or contractor might turn out to be a disclosing-party competitor.

Specimens

Disclosure to Affiliates: See Dow § 5.6; Ford Services § 8.2; IBM NDA§ 2.

Disclosure to Contractors: See British Design Innovation association NDA § 2.1 (consultants and advisers who are directly concerned); Dow § 5.6.

[Option:] Specific Conf­id­en­ti­al­i­ty Instruction To In-House Personnel Required

IF: The Receiving Party wishes to disclose Confidential Information to one or more of its employees in accordance with the Agreement; THEN: The Receiving Party will first specifically instruct all such employees of their obligation to abide by the Confidentiality Restrictions.

Commentary
Specimens

See Disney-Pixar § 19(c)(iii), buried at the end of the paragraph.

[Option:] No Disclosure To [List Or Describe]

Even if the Agreement allows the Receiving Party to disclose Confidential Information to certain individuals and/or organizations, the Receiving Party may not do so to any of the described individuals or organizations without the prior written consent of the Disclosing Party.

Commentary
MIGHT NOT BE NEEDED

The Disclosing Party should keep in mind that a Receiving Party contractor that competes with the Disclosing Party might not want to come anywhere near the Disclosing Party’s conf­id­en­tial information, for fear of getting tied up in litigation down the road.

On the other hand, there’s no limit to what companies, including contractors, can do by way of Stupid Human Tricks (with apologies to David Letterman). Consequently, it can make sense to require prior Disclosing Party approval of any disclosure of Confidential Information to contractors that are its competitors.

Specimens

See AT&T NDA § 5.

[Option:] Copies Of Written Conf­id­en­ti­al­i­ty Agreements Provided Upon Request

(a) If so requested by the Disclosing Party, the Receiving Party will provide the Disclosing Party with a copy of the written conf­id­en­ti­al­i­ty agreement between the Receiving Party and each individual or organization to which the Receiving Party provides Confidential Information.

(b) Such copies may be redacted, if so desired by the Receiving Party, to prevent disclosure to the Disclosing Party of conf­id­en­tial information.

Commentary
DISCLOSING PARTY perspective:

For a disclosing party, this clause probably falls into the nice-to-have category to show that its confidential information was being disclosed only to individuals who were under a written confidentiality obligation. Perhaps there might be circumstances in which such evidence could come in handy, but at this writing I’m hard-pressed to think of any that would justify the burden such a requirement might impose on the receiving party.

Receiving party perspective:

Compliance with this provision could be burdensome for a receiving party.

Specimens

See AT&T NDA § 5.

[Option:] Disclosure In Public Filings After Consultation

The Receiving Party may disclose Confidential Information in any legally-required submission to a regulatory agency or other governmental body to the same extent as if the submission were required in response to a subpoena, but only if the Receiving Party first consults with the Disclosing Party a sufficient time in advance to give the Disclosing Party a reasonable opportunity to seek a protective order or other relief.

Commentary
Specimens

See IBM NDA § 2.

[Option:] Receiving Party Indemnity Obligation For Misappropriation

IF: Any third party — including for example any officer, director, member, manager, partner, employee, agent, or subcontractor of the Receiving Party — obtains or otherwise accesses Confidential Information in question as a result of the third party’s relationship with the Receiving Party; AND: The third party uses, discloses, and/or copies that Confidential Information in a manner not permitted by the Agreement; THEN: The Receiving Party will indemnify the Disclosing Party against any resulting damage to the same extent as if the damage had been caused by use, disclosure, or copying of the Confidential Information by the Receiving Party. For the avoidance of doubt, the obligations of this paragraph will survive any termination or expiration of the Agreement.

Commentary
Disclosing party perspective:

A disclosing party might want this provision so that it would have “one throat to choke” if it were concerned about leaks or misuse by “rogue” employees, etc., of the receiving party.

Receiving party perspective:

A receiving party might object to this clause if, for example, the parties contemplated that the receiving party would be sharing the disclosing party’s confidential information with third parties, but the receiving party didn’t feel it had a lot of control over the third parties. The receiving party might also feel that it was up to the disclosing party to bear the risk of misappropriation by third parties as a cost of doing business.

ALTERNATIVE

A receiving party might be willing to agree to such an indemnity obligation if the obligation included a ceiling or cap on the amount of the receiving party’s indemnity liability.

HYPOTHETICAL EXAMPLE

Suppose that:

  • The disclosing party is a doctor; the receiving party, a medical laboratory.
  • The doctor orders a blood test for a patient who is a well-known Hollywood celebrity.
  • A medical laboratory processes the blood test.
  • An employee of the laboratory leaks the result to the tabloid press.
  • The celebrity patient sues both the laboratory and the doctor for invasion of privacy.

Under this indemnity language of this clause option, the laboratory should be responsible for paying the doctor’s defense costs up front, and also for any damage award that the celebrity patient might win.

Specimens

See Ford Services § 8.2, second sentence; HP NDA § 9, second sentence.

Further reading

This provision is adapted from one suggested by Ken Adams at his Koncision blog, but rewritten to make it likely to be more acceptable to a receiving party.

[Option:] Such Indemnity Liability Is Capped At [Describe]

The Receiving Party is not obligated to indemnify the Disclosing Party, pursuant to the Receiving Party Indemnity Obligation (Misappropriation By Certain Others) clause, for an aggregate amount greater than the specified capped amount.

Permitted Copying of Confidential Information

(a) Unless otherwise stated in the Agreement, during the term of the Agreement the Receiving Party may make copies of Confidential Information, solely to the extent reasonably necessary for disclosures and uses permitted by the Agreement.

(b) For the avoidance of doubt, any copies of Confidential Information made by or on behalf of (i) the Receiving Party, and/or (ii) any individual or organization to which the Receiving Party discloses Confidential Information, are subject to the conf­id­en­ti­al­i­ty obligations of the Agreement.

(c) The Receiving Party will make commercially-reasonable efforts to ensure that any copy of Confidential Information that is made by or on behalf of the Receiving Party includes an appropriate marking to show that it is or contains Confidential Information.

Commentary
Specimens

See AT&T NDA § 7; Citigroup NDA § 1(d); Ford Services §§ 8.2, 8.6;.

Return Requirement (Except System Backups, Etc.) *

Except as otherwise provided in the Agreement, promptly upon any termination or expiration of the Agreement (or as otherwise specified in the Agreement), the Receiving Party will make diligent efforts to dispose of all copies of Confidential Information, as set forth more fully below; this obligation is referred to as the Return Requirement.

(a) Copies affected: The copies to be disposed of are any and all that are in the possession, custody, or control of (i) the Receiving Party and/or (ii) any individual or organization to which the Receiving Party provided Confidential Information.

(b) Returned to: If returned, the copies must be returned to (i) the Disclosing Party or (ii) a party designated in writing by the Disclosing Party.

(c) Acknowledgement of receipt: If so requested by the Receiving Party, the Disclosing Party will acknowledge in writing its receipt of returned copies of Confidential Information.

(d) Exception for backup tapes, etc.: The Return Requirement does not apply to copies of Confidential Information not reasonably capable of being readily located and segregated (such as, for example, backup copies of email and other information). For the avoidance of doubt, the Confidentiality Restrictions will continue to apply to all such copies.

Commentary
“POSSESSION, CUSTODY, OR CONTROL”

This provision requires the receiving party to return or destroy all copies of Confidential Information within its “possession, custody, or control.” Litigators will recognize this phrase from various federal- and state rules of civil procedure governing pre-trial discovery, such as Rule 26 of the Federal Rules of Civil Procedure.

Disclosing party perspective:

For its own peace of mind, a disclosing party may well want the receiving party to return or destroy all copies of Confidential Information upon termination of the agreement: The fewer copies remained in the receiving party’s hands, the less likely it would be that the information might be misused.

Moreover, suppose that the disclosing party were to sue someone for misappropriation of conf­id­en­tial information. The disclosing party would want to put on evidence that it took reasonable measures to protect its conf­id­en­tial information, because that’s generally one of the requirements to get legal protection for confidential information in the first place. Suppose now that the disclosing party had contractually obligated anyone receiving copies of its conf­id­en­tial information to return or destroy all copies (or at least to make commercially-reasonable efforts to do so). That fact would probably carry some weight with the court, as it did in Vernor v. Autodesk, Inc., 621 F.3d 1102, No. 09-35969 (9th Cir. Sept. 10, 2010): The Ninth Circuit held that Autodesk’s failure to require customers to return outdated software versions did not fatally undermine its contention that it licensed, not sold, its software (therefore, licensees were not entitled to benefits of copyright’s first-sale doctrine). The appellate court vacated and remanded the district court’s summary judgment.

(The reverse is also true: Suppose that the disclosing party had not required recipients of conf­id­en­tial information to return or destroy it. In that case, a judge or jury might be skeptical of the disclosing party’s claims that it had taken reasonable steps to protected its conf­id­en­tial information, as happened in the Lockheed Martin case discussed above.)

CAUTION: Inconsistent enforcement of a return requirement could be a danger to the disclosing party: Suppose that the disclosing party were to insist on a tough return-or-destruction policy on paper, but then failed to enforce that policy. In later litigation, that might be far worse for the disclosing party than having no policy at all. Another party could portray the disclosing party as not really having considered its information to be conf­id­en­tial after all.

Receiving party perspective:

A receiving party likely would agree to return requirement for Confidential Information — as long as the requirement included an exception for copies which would be unduly burdensome to locate, such as (for example) backup tapes and the like. (As provided below, the receiving party might also want an exception for an archive copy of Confidential Information, possibly in the custody of its outside counsel.)

As a practical matter, from a receiving party’s perspective, a return requirement (as opposed to actually returning or destroying Confidential Information) would do only two things: It would create a compliance burden for the receiving party — especially if the receiving party’s emails, electronic notes, and other on-line documents must also be returned or destroyed. And it would give the disclosing party some ammunition with which to paint the receiving party as unreliable, or even a scofflaw: “Ladies and gentlemen of the jury, the receiving party obviously didn’t take its return-or-destroy obligations seriously. Why should we think they took their other conf­id­en­ti­al­i­ty obligations seriously?”

The receiving party might not need to be contractually bound to return or destroy conf­id­en­tial information: The receiving party might very well have a business incentive to get rid of copies of conf­id­en­tial information, so as not to suffer the continuing potential ‘taint’ of having the disclosing party’s conf­id­en­tial information sitting in its files.

One small tactical advantage of a return requirement, from the receiving party’s perspective, might be as follows: Suppose the receiving party were later to be accused of misappropriating the conf­id­en­tial information. The receiving party could protest that it had taken seriously — and had honored — its contractual obligation to return or destroy all copies. That could be a useful argument for the receiving party to be able to make to the disclosing party’s executives, or later to a judge or jury.

CAUTION: Half-hearted compliance with a return requirement could be a danger to the receiving party: If a receiving party were to make inadequate efforts to dispose of conf­id­en­tial information, it could later find itself not believed when it claimed to have gotten rid of the information. This seems to happened in Martin Marietta Materials, Inc v Vulcan Materials Co., No. 7102-CS (Del. Ch. May 4, 2012) (Strine, Ch.), aff’d, No. 254 (Del. May 31, 2012) (en banc). The receiving party’s general counsel had made what Chancellor Strine described as “a clunky attempt” to gather up conf­id­en­tial documents that the receiving party had been given by the disclosing party. Id., slip op. at 84-85; see also id. at 42-43. But the general counsel did not collect copies of detailed analysis memos prepared by receiving-party executives that, according to the court, were “swollen with specific nonpublic information” from the disclosing party. Id. at 43.

Specimens

British Design Innovation association NDA § 8.0; Citigroup NDA § 1(e) (receiving party must “purge [Confidential Information] from my systems and files”); Ford Services § 8.5 (upon request of disclosing party), § 8.10 (separate requirement for Ford
data); GE Energy NDA §  5; Wal-Mart NDA fifth paragraph

[Option:] Return Requirement Certification Deadline: [30 Days After Termination]

No later than the specified certification deadline, the Receiving Party will provide the Disclosing Party with a certificate that it has complied with the Return Requirement. The certificate must:

(1) be signed by an officer of the party or other individual authorized to bind the party;

(2) note any known compliance exceptions; and

(3) for each exception, whether and how the exception is authorized by the Agreement.

Commentary
Purpose

Disclosing parties often want to require the receiving party to provide a certificate of return of destruction. In some cases, though, one possible hidden motive might be to have the receiving party provide a certification that later turned out to be incorrect — thus giving the disclosing party’s counsel a cudgel with which to bash the receiving party in court.

Specimens

See Ford Services § 8.5 (certification required at the request of the disclosing party); UT Austin NDA Exhibit A §  5.

[Option:] Archive Copies Permitted

As a limited exception to the Return Requirement, a set of archive copies of Confidential Information, including reasonable backups for such copies, may be maintained indefinitely, by or on behalf of the Receiving Party, PROVIDED THAT the following conditions are met:

(a) The archive copies must be maintained at one or more locations meeting commercially-reasonable security standards.

(b)  The archive copies must be made accessible only:

(1) on a need-to-know basis to the Receiving Party for purposes of compliance with the Receiving Party’s confidentiality obligations under the Agreement;

(2) as directed or permitted by a tribunal of competent jurisdiction; or

(3) with the Disclosing Party’s consent.

(c) For the avoidance of doubt, the Confidentiality Restrictions will continue in effect as stated for all archive copies.

Commentary
Receiving party perspective:

Receiving parties sometimes want to be able to preserve a set of archival copies. This is sometimes seen in conf­id­en­ti­al­i­ty provisions relating to M&A deals.

Disclosing party perspective:

A disclosing party might object to allowing a receiving party to keep a set of archival copies of Confidential Information for the same reasons it wants the receiving party to return copies in the first place.

SECURITY REQUIREMENTS

The intent of the term “one or more secure locations meeting commercially-reasonable security standards” is to allow archive copies to be maintained, for example, at commercial storage facilities, and/or “in the cloud,” that is, at Internet data storage sites.

WORTH THE TROUBLE?

In many situations, an exception for archival copies might not be especially useful. If the receiving party could convince a judge or jury that it had been scrupulous in storing archival copies of all the Confidential Information it received, then the absence of a particular bit of information from those archival records could prove useful in arguing that the receiving party never had access to that information. But this could be difficult unless the trier of fact believed that Confidential Information had been disclosed exclusively in suitably marked writings, or through narrow channels such as an M&A data room, and not via some less-formal channel.

Specimens

See Ford Services § 8.8 (exception for “legally required data, document, or record retention or maintenance”); GE Energy NDA § 5 (copies maintained by “legal counsel”); UT Austin NDA Exhibit A §  5 (“in a secure location to be used solely to determine its obligations”).

ALTERNATIVE

It might be more palatable to a disclosing party if the archival copies were required to be maintained on an outside-counsel-only basis, as discussed immediately below.

[Option:] Archive Copies: Outside Counsel Only

IF: The Agreement permits the Receiving Party to retain any archive copies of Confidential Information; THEN: All such copies must be maintained on an outside-counsel-only basis, that is, under the direct or indirect control of the Receiving Party’s outside counsel. (Such control can include, for example, maintenance of the archive copies in a commercial records-storage facility operated by an individual or organization that, directly or indirectly, is contractually obligated to outside counsel to maintain the copies in confidence.)

Commentary
“OUTSIDE COUNSEL ONLY”

The phrase outside counsel only is well understood to lawyers who work in litigation. See, for example, paragraph 11(c) of the protective order entered in an antitrust case brought by the [U.S.] Department of Justice.

Specimens

See GE Energy NDA § 5 (copies maintained by “legal counsel”).

Disclaimer Of Unstated (i.e., Implied) Grants And Warranties

For the avoidance of doubt:

(a) The Receiving Party is not granted any license rights or ownership rights of any kind, in Confidential Information, nor in other any intellectual property of the Disclosing Party, EXCEPT to the extent (if any) expressly stated otherwise in the Agreement.

(b) The Disclosing Party DISCLAIMS all warranties, representations, conditions, and terms of quality, express or implied, about Confidential Information (for example, warranties of completeness or accuracy), all of which is provided or otherwise made available AS IS, WITH ALL FAULTS, EXCEPT to the extent (if any) expressly stated otherwise in the Agreement. Accordingly:

(1) The Receiving Party is not entitled to rely, and agrees not to rely, on Confidential Information for any purpose, EXCEPT to the extent (if any) expressly stated otherwise in the Agreement; and

(2) The Disclosing Party will not be liable for any use of Confidential Information made by the Receiving Party EXCEPT to the extent (if any) expressly stated otherwise in the Agreement.

Commentary
Sound bite clause

Clauses like this are typically tucked away as ammunition with which to blast “creative” int­erp­ret­a­tions by the other side in the future.

Case study

Perhaps not every court will enforce a warranty disclaimer concerning conf­id­en­tial information as vigorously as the Delaware Supreme Court did in a 2012 case. See RAA Mgmt., LLC v. Savage Sports Holdings, Inc., No. 577, 2011 (Del. May 18, 2012) (affirming dismissal of complaint). In essence, the court said, you signed a contract that specifically said you’d be relying solely on your own investigation, so you can’t complain now about what the other side supposedly didn’t tell you. See id., slip op. at 2, 4-5. After an extensive review of case law, the court held that the NDA provision unambiguously precluded the receiving party from relying on information provided by the disclosing party, and thus excluded liability “for any allegedly inaccurate or incomplete information provided by [the disclosing party] to [the receiving party] during the due diligence process,” id., slip op. at 15 (emphasis in original), even if the disclosing party’s intent was fraudulent. See id., slip op. at 10-15.

But not every court will necessarily go so far, as noted in a Kaye Scholer client memorandum about the case, for example if a fraud claim is brought under the federal securities laws. See Derek Stoldt & Joel I. Greenberg, Non-Reliance and Waiver Clauses in NDA Preclude Fraud Claims by Would-Be Private Equity Buyer, at 2 (May 25, 2012) (accessed May 31, 2012).

Specimens

See Citigroup NDA NDA § 2; Ford Services §§ 8.4, 8.9; GE Energy NDA § 4; HP NDA §§ 9, 10; IBM NDA § 5; Johns Hopkins NDA § 6; UT Austin NDA Exhibit A §  7; Verizon NDA § 6.

Disclosing Party Not Obligated To Provide Confidential Information

For the avoidance of doubt, the Agreement does not obligate the Disclosing Party to provide any particular Confidential Information to the Receiving Party.

Commentary
Specimens

See GE Energy NDA § 4; IBM NDA § 6.

Disclosing Party Warranty Of Authority To Disclose

Each Disclosing Party warrants to the Receiving Party that it has the right to disclose any Confidential Information that it makes available to the Receiving Party pursuant to the Agreement.

Commentary
Specimens

See GE Energy NDA § 4; HP NDA § 9.

Receiving Party’s Consent Required For Disclosure To It

The Receiving Party will be under no obligation of confidence under the Agreement with respect to any Confidential Information disclosed to it unless the Receiving Party first consents in writing to the specific disclosure.

Commentary
Receiving party perspective:

Suppose a receiving party and disclosing party were competitors. The receiving party might want to be sure that it was under a conf­id­en­ti­al­i­ty obligation only for limited, specific conf­id­en­tial information, so it doesn’t become entangled in unwanted conf­id­en­ti­al­i­ty obligations with respect to other information.

Disclosing party perspective:

A disclosing party might regard this provision as imposing an unnecessary paperwork burden.

Equitable Relief Against Misappropriation *

In any case of actual or threatened breach of the conf­id­en­ti­al­i­ty obligations of this “Confidential information” section, the Disclosing Party may seek equitable relief such as specific performance and/or injunctive relief.

Commentary
Disclosing party perspective:

A disclosing party might want this clause to speed up seeking a preliminary injunction against a receiving party that it thinks is breaching the Agreement.

Receiving party perspective:

A receiving party should think twice about conceding the appropriateness of injunctive relief. In a 2012 opinion, Chancellor Strine of the Delaware chancery court relied at least in part on just such a concession in granting a four-month injunction against one company’s hostile takeover bid targeting another company. See Martin Marietta Materials, Inc v. Vulcan Materials Co., No. 7102-CS, slip op. at 132 (Del. Ch. May 4, 2012), aff’d, No. 254 (Del. May 31, 2012) (en banc),

Specimens

See AT&T NDA § 12; Citigroup NDA NDA § 3; Ford Services § 8.8; GE Energy NDA § 7; Pfizer NDA § 5; University of North Carolina NDA § 10.

[Option:] Injunctive Relief – Inadequacy Of Damages

IF: The Disclosing Party proves an actual or threatened breach of the conf­id­en­ti­al­i­ty obligations of this “Confidential information” section; THEN: For purposes of seeking injunctive relief or similar equitable remedy, the Disclosing Party will be deemed to have established that monetary damages alone would not be an adequate remedy.

Commentary

See the commentary to the main clause.

Specimens

See the examples listed in the commentary to the main clause.

[Option:] Injunctive Relief – No Bond Required

The Disclosing Party need not post a bond to obtain injunctive relief against actual or threatened breach of the conf­id­en­ti­al­i­ty obligations of this “Confidential information” section.

Commentary
Disclosing party perspective:

A disclosing party might want to get a receiving party to waive the bond that might be required for a preliminary injunction in many jurisdictions. Such a bond is in essence is an insurance policy payable to the party being enjoined. When a bond is required for a preliminary injunction, if the party being enjoined were to suffer financial harm from the injunction — such as being temporarily put out of business — then the bond would serve as a pot of money, from which the enjoined party could be compensated for that harm, in case the party seeking the injunction were unable to pay compensation itself. The bond requirement is set forth, for example, in Rule 65(c) of the Federal Rules of Civil Procedure.

Receiving party perspective:

A receiving party should normally object to waiving the bond requirement for equitable relief. Consider what would happen if:

  • a disclosing party were to successfully obtain a pre+trial injunction forbidding the receiving party from selling one of the receiving party’s key products;
  • at trial, though, the receiving party were to prove (let’s say) that the disclosing party’s information was never conf­id­en­tial; and
  • the receiving party also proved that it suffered millions of dollars in financial losses from not being able to sell its key product.

Without the set-aside pot of money represented by the bond, the receiving party might find it difficult, or even impossible, to recover its financial losses for the wrongful injunction from the disclosing party.

Specimens

See Citigroup NDA NDA § 3; UT Austin NDA Exhibit A §  9.

Further reading

A detailed discussion of bond requirements for injunctive relief, with copious case citations, can be found in chapter 3 of Thomas E. Patterson, Handling the Business Emergency (American Bar Association 2009). Extensive excerpts can be found (at this writing) at http://goo.gl/ak7Mt.

Residuals Rights

(a) The Receiving Party may, without obligation to the Disclosing Party, use ideas, concepts, know-how, techniques, and similar information (collectively, residuals) that may be retained in the unaided memory of the Receiving Party’s personnel who did not intentionally memorize the information for that purpose.

(b) For the avoidance of doubt, any such use of residuals by the Receiving Party will be subject to any applicable patent rights, copyrights, trademark rights, or other intellectual-property rights owned or assertable by the Disclosing Party.

Commentary
Receiving party perspective:

A receiving party might want to be immune from suit for use of “residuals,” namely conf­id­en­tial information that its personnel “happened” to remember.

Disclosing party perspective:

Residuals rights might well be tantamount to a blank check authorizing the receiving party do whatever it likes with the disclosing party’s information, as long as its people are willing to swear they didn’t intentionally memorize the information for the purpose of using it. As the Delaware Chancery Court put it in Martin Marietta Materials, Inc v. Vulcan Materials Co., No. 7102-CS (Del. Ch. May 4, 2012) (Strine, Ch.), aff’d, No. 254 (Del. May 31, 2012) (en banc): “Once things are learned and done, it is difficult to unlearn and undo them ….” Id., slip op. at 46 (emphasis added).

Consequently, most disclosing parties will object, vigorously, to a residuals-rights provision.

Proof problems

Not least of the problems with “residuals” rights are those of proof. Suppose that the receiving party’s relevant employee were to testify, “oh no, not me, I didn’t intentionally memorize the information.” It might be difficult or impossible for the disclosing party to refute such testimony. That, in turn, would mean that the case might turn on how favorable an impression the testifying employee made on the jury.

Further reading

See, e.g.:

Specimens

See IBM NDA § 4.

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