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Confused about the full scope of confidentiality agreements – what they’re for, and whether you need them in your business? Read on for the expert advice you need to stay protected.
If you’re like most small business owners, you probably don’t use confidentiality agreements all that often. Most business owners don’t get employees or contractors to sign confidentiality agreements; and don’t understand the full scope of what confidentiality agreements can cover, or why they should use them.
As a new business owner, you might even believe (gasp!) that you can’t protect certain intangible assets belonging to you or your business, or that you don’t need to. To borrow a line, you don’t know what you don’t know.
You’ve run into confidentiality agreements, you just didn’t think of them in the same way as you would a written contract in the course of your business : such as in employment contracts.
To a large extent, you’re right. You don’t need confidentiality agreements…if you’re alright with having employees, contractors, suppliers and your contacts taking economic advantage of you. But if you’re like most business owners, you probably want to do something nuts like protect your ideas and contacts. For that, you need confidentiality agreements.
What are Confidentiality Agreements or NDAs as they are also known?
Before we talk about why you need confidentiality agreements, though, it’s important that you understand what they are.
Let’s start with a basic truth: if you’ve ever been to a doctor, seen a solicitor or had a bank account, you will have come across a version of confidentiality or confidential relationship before. You’ve run into confidentiality agreements, you just didn’t think of them in the same way as you would a written contract in the course of your business.
If you want to get technical about it, confidentiality contracts are a kind of agreement to prevent the party receiving the confidential information from disclosing it to third parties—in the employment situation – you’re signing an agreement between you and your employer, designed to protect your employer, and your employer’s customers, from the disclosure of private and/or confidential information to third parties without prior authorisation.
Ultimately, that’s what confidentiality agreements are, except instead of functioning as just an agreement between you and another party, it’s an agreement that can extend between you, another party and third parties that are not even directly party to the agreement. Because the doctrine of confidentiality is what is known in law as an equitable doctrine it can extend to whosoever receives the confidential information even if they were not signatories to the original contract, it can also be used to prevent your customers, suppliers or business contacts using information you have provided to engage other involved parties without your prior authorisation. Confidentiality agreements are also legally mandatory where you have matters that must be kept confidential if they are to have legal efficacy such as patents before and after they are filed or personal information protection obligations under the General Data Protection Regulations.
The specific content of a confidentiality agreement varies based on your business and industry–after all, everyone’s looking to protect something different – some want to protect a business idea; another a business contact or connection; others might want to protect a trade secret or business know-how.
However, all confidentiality agreements have a few common elements. Under the existing law, for information to be protected as confidential, it must: be of a confidential nature i.e. have the necessary ‘quality of confidence’ and be disclosed in a ‘situation imposing an obligation of confidence’. Where these elements are met, the person receiving the information will owe a duty of confidence. The receiving person may not disclose the information to any third party without prior authorisation. Any unauthorised disclosure that causes any detriment gives the disclosing person a right of action and several legal remedies through court action See the Coco v Clark case and Attorney General v Guardian Newspapers (No 2).
Among the most basic goals of a confidentiality agreement is protecting your idea. This will prevent others from copying your business plan or idea, internal processes/know-how, trade secrets, etc. without authorisation (more on the technical aspects of this later in the article).
It can also often include a non-circumvention clause, which states narrowly defined purposes for which the information disclosed may be used. It would say that the information may not be used to go directly to your suppliers or some other third party.
There is also non-solicitation clause or non-compete clauses which are – clauses in the confidentiality agreement whose aim is to prevent a third party such as a supplier, potential partner or investor from soliciting your employees and clauses restricting a former employee or third party from competing with your business, respectively.
They’re many different types of confidentiality agreements for multiple purposes offering different legal protections. You need to make sure you get the right one.
Why You Need Them
With this in mind, let’s talk about why you need confidentiality agreements for your business, start-up or ideas.
Prevent bad faith
One of the biggest legal concerns that lead people to want confidentiality agreements is to prevent abuses of good faith negotiations.
We said earlier that confidentiality agreements act as a legal contract between you and another party. By agreeing to it, the other party is stating that they agree not to take the information you provide and use it for themselves to your economic detriment.
In doing so, the agreement provides you with recourse if business colleagues, suppliers, potential partners or investors are abusing your relationship (for example, by approaching your contacts behind your back, poaching your employees or getting to market before you with the information you provided etc). The confidentiality agreement expressly states what action you will take if bad faith behaviour is discovered, which your business partners, colleagues, employees voluntarily consent to.
Own Your Ideas
The huge reason for confidentiality agreements is to establish clear legal ownership over your business’s trade secrets and know-how. This is where this article is going to have to get a bit more technical.
As we said earlier, breach of confidence is an equitable doctrine. Historically, there has been no statutory laws for protecting trade secrets and technical confidential information. On 5 July 2016 the EU adopted Directive 2016/943/EU on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure (the TS Directive).
The TS Directive was implemented into UK law on 18 May 2018 through the Trade Secrets (Enforcement, etc) Regulations 2018, SI 2018/597 (the Regulations). The Regulations came into force on 9 June 2018. So, the UK now has the protection of confidential information as a law on its legislative books.
So, what exactly is a trade secret. Reg 2, of the Regulations introduced a new definition of ‘trade secret’ as follows: ‘”trade secret” means information which meets all of the following requirements: (a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles that normally deal with the kind of information in question (b) has commercial value because it is secret; and (c) has been subject of reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret’
A further related concept mentioned earlier is ‘know how’. Like confidential information, it does not have a legislative definition in UK law. However, Under Article 1 of Regulation (EU) 316/2014, the Technology Transfer Block Exemption Regulation ‘know-how’ is defined as:
a package of practical information, resulting from experience and testing, which is:
secret, that is to say, not generally known or easily accessible,
substantial, that is to say, significant and useful for the production of the contract products, and
identified, that is to say, described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality;
You need to be aware that there can be an overlap between confidential information, trade secret and know-how.
What goes in them
Now you know why you should have confidentiality agreements here are a few tips about what they should include.
You need to state how the agreement should terminate or end as is said in the vernacular. You could set the end point at the occurrence of an event or a fixed term period. You should also set out what happens to the information on termination.
Provision and Use of Confidential Information
You should be clear as to why you are providing the information and how specifically you want it to be used. You need to state to who the information can be disclosed.
The agreement should also include information that fall outside the parameters of the confidentiality obligation. This is very important because by stating the information that is not considered confidential you emphasise the importance of the information that you consider to be confidential. You need to exclude trivial or obvious information.
Now that you understand how important confidentiality agreements are, let’s talk about how to create one.
First things first: remember that there are different types of confidentiality agreements doing multiple things. You have agreements that are pro the discloser, or pro the recipient; mutual confidentiality agreements, that involve a two-way flow of confidential information between the people. You can have long form agreements which are very detailed involving listed companies, or short form agreements which are not as complex. You need legal protection for different things, so it only makes sense that you’ll have different types of confidentiality agreements depending on your purpose for having one.
The best way to create a legally sound agreement is to bring in the help of a lawyer specialising in information law. This will help ensure that the agreement meets the legal needs of your business and is what you will need if you need to go to court to protect your intellectual property, know-how, or commission, on future deals.
Need to Create Confidentiality Agreement?
If you need to create a template agreement for an employee/contractor or a tailored agreement for a supplier, or potential investor, or colleague, you’ve come to the right place.
We’re experienced information rights lawyers here to make sure your business gets the protection you need.
Ready to launch your start-up business, or new project, on the right foot? Get in touch with us today.
By Peter Adediran
03. 01. 2019
This article deals with questions business owners, entrepreneurs and start-ups should be asking in relation to protecting their confidential information and relationships. If you are seeking advice on bringing or defending a breach of your business relationship to do with misuse of information that you consider confidential and a betrayal of trust and have read this article, you must take the opportunity to go and seek professional legal advice from a solicitor or barrister. The information and any commentary on the law contained on this web site is provided free of charge for information purposes only. Every reasonable effort is made to make the information and commentary accurate and up to date, but no responsibility for its accuracy and correctness, or for any consequences of relying on it, is assumed by PAIL®Solicitors. The information and commentary do not, and are not intended to amount to legal advice to any person on a specific case or matter. You are strongly advised to obtain specific, personal advice from a lawyer about your case or matter and not to rely on the information or comments on this site. No responsibility is accepted for the content or accuracy of linked sites.