Sharing the Secrets to a Good Confidentiality Agreement

By Hafez Daraee

Businesses often need to collaborate to accomplish their goals, win specific jobs, or gain industry-specific expertise. When a company determines that an unconventional relationship, such as a joint venture with a competitor merits exploration, each party should protect the confidential information that it may share.

Historically, companies have relied on copyrights, trademarks, patents, and other statutory creations to protect confidential information or intellectual property. But these methods are time-consuming and expensive to establish and enforce. Confidentiality agreements have gained popularity because they are more cost-effective to prepare, can manage risk more effectively, and expedite enforcement.

Three things should appear in each confidentiality agreement: an adequate description of the confidential information sought to be protected, adequate remedies if there is disclosure, and an effective dispute resolution provision.

Defining Confidential Information

Nothing is more important than clearly defining what constitutes protected confidential information. The definition must be specific enough to address known circumstances but flexible enough to encompass unforeseen issues. Generally, there are three approaches to defining confidential information: the general description, the specific description, and the marked item.

The general description approach is usually drafted as a promise, such as, "I promise not to reveal any trade secrets or confidential or proprietary information of ABC Company." This broad description is easy to prepare and covers most possibilities, but can be overly broad or vague.

The specific description approach should be used if the disclosure will be limited to identified material. This approach falls short if an item is difficult to describe or if the owner wants to protect against the disclosure of information not currently contemplated.

The marked item approach is useful if the item to be protected is difficult to describe. Typically a stamp that identifies the item as confidential is used to mark documents. But this approach does not lend itself to protecting information not reflected in written documents, and employees sometimes forget to mark documents. Finally, if the information was not confidential to begin with, simply marking it will not render the item confidential.

Measure of Injury Caused by Disclosure

Measuring the damage to a company resulting from the disclosure of confidential information is difficult. Courts disfavor awarding damages if they are speculative or cannot be proved to a reasonable degree of certainty.

To address this, confidentiality agreements often include liquidated damages clauses, which are normally enforceable in Oregon and can provide certainty of damages in the event of a breach. To be enforceable, liquidated damages clauses must not act as a penalty and must reflect an attempt by the parties to estimate the actual damages in the event of a breach. Moreover, a liquidated damages clause may make obtaining injunctive relief more difficult in the event of a breach.

A better approach is a clause that allows the owner to quickly obtain injunctive relief in the event of a breach, thus forcing a disclosing party to stop immediately. This is often accomplished by clearly labeling each release as a material breach and providing that if confidential information is disclosed, both parties agree that the owner of such information will be immediately and irreparably harmed. This language can substantially decrease the burden of obtaining an injunctive order from the court.

Dispute Resolution

A dispute resolution clause allows the owner to define the law that applies to a dispute, determine how a fact finder will be chosen to preside over the dispute, and regulate the speed with which the dispute will be resolved.

Primary consideration should be given to determining who will preside over the dispute. Business disputes often involve highly technical facts. Oregon has a number of highly qualified lawyers with substantial commercial experience who routinely act as mediators or arbitrators, and such experience is invaluable to efficiently resolve disputes.

Second in importance is the choice of applicable law — particularly if the parties are located in different states.

And, finally, choosing the procedural rules that will apply in the event of a dispute can either expedite or slow down the dispute resolution process. The rule of thumb is that speed favors the owner. Speed, however, can quickly force the parties out of settlement mode and into litigation mode.

Conclusion

Imitation may be the sincerest form of flattery, but not when a competitor is using your confidential information. A carefully crafted confidentiality agreement and vigilance on the owner's part will keep business assets confidential while allowing the freedom to explore new ventures or relationships.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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