Chapter 7: CONFIDENTIALITY AGREEMENTS

CHAPTER 7

Confidentiality Agreements

ONCE A POTENTIAL JV PARTNER HAS BEEN SELECTED , the next step is to establish a process for exchanging the technical and business information necessary for the parties to determine if there is actually a basis for a relationship. The exchange of information allows each party to evaluate its prospective partner and to find out their potential compatibility, respective functional strengths and weaknesses, and respective management structures and ideologies, with a view to deciding whether these various factors are or can be made complementary. No information regarding the proposed JV or the current operations of either of the parties should be exchanged before the parties enter into an appropriate agreement to preserve the confidentiality of sensitive technical or business information and to restrict the disclosure of the information. These confidentiality and nondisclosure agreements can take a variety of forms, ranging from simple one page letters to long and elaborate documents, which themselves require a good deal of negotiation. The effort spent on preparing a confidentiality and nondisclosure agreement will depend on the scope of information to be disclosed and its importance to each of the parties, as well as relevant common and statutory law protections for trade secrets and confidential information. In all cases, the agreement should be executed before the initial exchange of information between the parties. In most cases, disclosures made during the negotiation of the terms of a potential business relationship will be protected by the agreement, as will information discovered by any party during the pre-contract, due diligence investigation period. If the parties reach agreement on the terms of a formal JV, the JV agreement will either incorporate the terms of the pre-existing confidentiality agreement or will include new provisions covering the information disclosed prior to formation of the JV as well as during its operation.

Sample Contract: Nondisclosure Agreement

This Agreement is made as of [date], between [name of first party] [a/an] [specify e.g., individual residing in (country) or corporation or other type of entity organized and existing under the laws of (state and/or country)] (hereinafter the “First Party”) and [name of second party] [a/an] [specify e.g., individual residing in (country) or corporation or other type of entity organized and existing under the laws of (state and/ or country)] (hereinafter the “Second Party”). The First and Second Parties are each referred to herein as a “Party” or the “Parties” whenever a term or condition applies to either or both of them, respectively. A Party that is disclosing “Confidential Information” (as defined subsequently) is referred to herein as a “Disclosing Party”, and a Party receiving such Confidential Information is referred to herein as a “Receiving Party.”

COMMENT: The parties to the agreement should be clearly identified. If disclosures are to be made by or to a subsidiary or affiliate of one party, the identification should be extended to include that additional entity. It is also important to give

an effective date for the agreement, although this may be placed to where the parties sign at the end. Keep in mind that, in a cross-border transaction, this agreement may be signed by the parties on different dates, which could cause some confusion unless a single effective date is clearly chosen.

WHEREAS the Parties have each previously furnished to one another certain Confidential Information (as hereinafter defined) to assist them in determining whether to enter into negotiations with respect to [specify purpose, e.g., forming a joint venture for the manufacture of certain products] (the “Business Purpose”); WHEREAS the Parties contemplate furnishing to one another certain additional Confidential Information prior to the consummation of a definitive agreement between them with respect to the Business Purpose; and WHEREAS each Party wishes to furnish to the other such Confidential Information without conveying any interest or right therein to the other Party and without making any Confidential Information public or common knowledge; NOW, THEREFORE, in consideration of the mutual covenants and conditions herein contained, and in contemplation of an association between them, the Parties hereto agree as follows:

COMMENT: The recitals provide an indication of the intent of the parties in forming this agreement. In general, the recitals should cover the following matters: ■ A description of the parties’ purpose for disclosing confidential information. ■ Relevant past actions of the parties regarding the subject matter of the contract. ■ Relevant future actions contemplated by the parties with regard to the subject matter of the contract. ■ The primary intent of the parties with regard to how the disclosure of the information will affect the parties’ respective rights in that information. ■ The description of the purpose for the disclosures is often referred to as the

“Business Purpose.” The description sets limits the scope of the disclosures, as well as the permitted uses of the information by the receiving party.

1. DEFINITION OF CONFIDENTIAL INFORMATION. “Confidential Information” shall mean all information, regardless of whether communicated orally, in writing, through personal observation or otherwise, that relates to the Business Purpose specifically, all products and services generally, and all business affairs of the Disclosing Party to the extent that such information is of a proprietary or confidential nature. Such Confidential Information shall include, by way of illustration and not limitation, information concerning the following: (i) research and development activities; (ii) manufacturing and processing techniques and know-how; (iii) software, firmware, and computer programs and elements of design relating thereto (including, for example, programming techniques, algorithms, inference structures, and the construction of knowledge bases); (iv) designs, drawings and formulae; (v) costs, profits, and markets; (vi) financial and other business matters with respect to the Disclosing Party that the Disclosing Party has not made publicly available; (vii) customer business matters, including ordered and sold products of the Disclosing Party, prices, and delivery schedules; and (viii) any matters that a third party has disclosed to the Disclosing Party and that the Disclosing Party has agreed, or is otherwise obligated, to treat as confidential or proprietary.

COMMENT: A basic element of a confidentiality agreement is a provision defining the information, commonly referred to as “Confidential Information” or

“Proprietary Information,” to be treated in confidence by the receiving party. The definition should be broad enough to cover information that would otherwise qualify for trade secret protection, plus any other information in which there is a proprietary interest and a legitimate business reason for guarding it against unauthorized use or disclosure. While the information will either be disclosed to the receiving party in writing or communicated orally, the agreement should be drafted so as to include information that the receiving party might learn through observation or examination of the facilities or procedures of the disclosing party. Several different drafting approaches can be used for this provision. One common method is to describe types of information and the general business areas to which the information pertains, as illustrated here. Other techniques highlight a list of information protected as trade secrets, with a separate list of other proprietary information that might not otherwise qualify as a trade secret. The advantage of such a separation is that the party can retain specific labeling of materials protected by trade secrets, which may be important for showing the exercise of diligent efforts against public disclosure in a lawsuit for misappropriation of a trade secret. The parties may also limit the definition to specific items, provided there is in fact such a limit.

2. EXCLUSIONS. Neither Party, however, shall have any liability to the other Party under this Agreement with respect to the disclosure and/or use of any Confidential Information that it can establish:

a.Has become generally known or available to the public without breach of this

Agreement by the Receiving Party; b.Was known by the Receiving Party before receiving such information from the

Disclosing Party; c. Has become known by or available to Receiving Party from a source other than the

Disclosing Party subsequent to disclosure of the information by the Disclosing Party, and without any breach of any obligation of confidentiality owed by the Receiving

Party to the Disclosing Party; d.Has been disclosed to persons regularly employed by the Receiving Party who have previously agreed in writing not to disclose such information or to use such information for any purpose other than to assist it to determine whether to pursue the Business Purpose; e. Has been independently developed by the Receiving Party without use of or reference to the Confidential Information by persons who had no access to the Confidential

Information; f. Has been provided to the Receiving Party with a written statement that it is provided without restriction on disclosure; or g.Has been approved for release or use by written authorization of the Disclosing Party.

COMMENT: It is common to provide for a number of exclusions to the receiving party’s overriding obligation to maintain the confidentiality of information received during the due diligence investigation and the subsequent term of the JV. However, it is important to note that this clause does not authorize the receiving party to simply run out and start disclosing excluded information to whomever. Rather, the clause limits the receiving party’s liability provided the receiving party

can prove application of an exclusion. In other words, if the receiving party discloses or uses any of the excluded information, the receiving party must demonstrate to the disclosing party, and possibly to a court of law or other dispute resolution forum, that an exclusion applies. It is further important to note that these exclusions tend to cover information that, for whatever reason, would no longer meet the legal standard for protection as a trade secret, that is the standard applied by statute or court rulings. In other words, the receiving party will not be liable if this information is found to have already been disclosed in some other way, whether because it is common public knowledge, it has been previously released to the public by the disclosing party, or it has been independently developed or acquired by the receiving party (in which case the receiving party might have claimed it as a trade secret, too). Accordingly, this clause may be modified to account for variations in national laws and court decisions that protect trade secrets. The burden of proof for exclusions should be placed on the receiving party, but this general term may need to be altered to ensure that this burden is not overwhelming, depending on the application of national laws. For example, the receiving party could be required merely to present documentation to support its entitlement to the exclusion. Alternatively, the receiving party may be placed under an extraordinary burden of proof, which would require that it prove that it is entitled to an exclusion by clear and convincing evidence (beyond doubt), rather than by a preponderance of the evidence (beyond a reasonable doubt).

3. OBLIGATIONS OF RECEIVING PARTY. The Receiving Party acknowledges that irreparable injury and damage will result from disclosure of any Confidential Information to third parties, or utilization of such Information for purposes other than those connected with the Business Purpose. The Receiving Party agrees: a.To hold the Confidential Information in strict confidence; b.Not to disclose such Confidential Information to any third party except as specifically authorized herein or as specifically authorized by the Disclosing Party in writing; c. To use all reasonable precautions, consistent with the Receiving Party’s treatment of its own proprietary and confidential information of a similar nature, to prevent the unauthorized disclosure of the Confidential Information, including, without limitation, protection from theft, unauthorized duplication and discovery of contents, and restrictions on access by unauthorized persons; d.Not to make or use any copies of any of the Confidential Information, or of any synopses, abstracts, summaries, or photographs thereof supplied by the Disclosing

Party or compiled by the Receiving Party, except as are necessary for the Receiving

Party’s internal communications and examinations in connection with the Business

Purpose; and e. Not to use any Confidential Information for any purpose other than the Business

Purpose.

COMMENT: The obligations of the receiving party with regard to protection of the confidential information should be described in the agreement. In general, the agreement will provide for an overriding obligation on the receiving party to protect the confidentiality of covered information, and will also restrict the party’s

ability to make copies of the information or engage in unauthorized uses or disclosures. In some situations, specific obligations should be included as part of the agreement, including language relating to: ■ Execution of written confidentiality agreements with third parties to the extent a party to this agreement is authorized by it to make a disclosure; ■ Maintenance of a log regarding uses and location of the confidential information; ■ Segregation of documents and other tangible embodiments of the confidential information; ■ Use of legends and other markings to indicate that the information is to be maintained in confidence; and ■ Initiation of legal proceedings to protect the confidentiality of the information.

4. REQUIRED DISCLOSURES. The Receiving Party may disclose the Confidential

Information if and to the extent that such disclosure is required by applicable law, provided that the Receiving Party uses reasonable efforts to limit the disclosure by means of a protective order or a request for confidential treatment and offers the Disclosing

Party a reasonable opportunity to review the disclosure before it is made and to interpose its own objection to the disclosure.

COMMENT: The receiving party may be compelled by law to disclose the information to a court or regulatory body. Such disclosures should not be treated as exceptions to the definition of confidential information, because the information should still be considered confidential for other purposes.

The disclosing party should have an opportunity to participate in the steps taken to limit disclosure of its trade secrets. For example, the agreement should put the receiving party under an obligation to give notice to the disclosing party of any subpoenas or other requests for production of records and documents that may relate to the trade secrets, including any information submissions or filings required by government agencies. Notification gives the disclosing party the opportunity to make a motion for a protective order, which might be granted on a showing that the owner’s interest in secrecy outweighs the need for disclosure in the particular dispute for which a subpoena is sought.

5. RETURN OF CONFIDENTIAL INFORMATION. At the request of the Disclosing Party, the Receiving Party shall return all written material, photographs, and all other documentation made available or supplied by the Disclosing Party to the Receiving Party, all copies and reproductions thereof, and all notes, abstracts, reports, commentaries, or other materials prepared by the Receiving Party with respect to such documentation, copies, and reproductions.

COMMENT: The agreement should always provide that, at termination of the relationship or on any earlier demand by the disclosing party, the receiving party must return or destroy of all documents and other tangible items (e.g., notes, abstracts, tapes, etc.) containing the trade secrets or confidential information.

Return of the documents is part of the disclosing party’s larger program of diligently protecting the information by ensuring that the unnecessary circulation of the information is minimized.

6. RETENTION OF LEGAL RIGHTS. The Disclosing Party retains all rights and remedies afforded to it under the patent, trademark, and other laws of all applicable jurisdictions,

including without limitation any laws designed to protect proprietary or confidential information.

COMMENT: Athough a written confidentiality agreement can serve to bolster protection that would otherwise be available to the owner of the information under intellectual property or other laws, it is also important that the agreement indicate that is not intended to limit the available protections. For example, information exchanged under the agreement may continue to be protected under trade secret, copyright, trademark, and patent laws after expiration of the agreement, and the agreement should make it clear that none of those rights are intended to be limited by, or abandoned on expiration of, the agreement.

7. INJUNCTIVE RELIEF. Each Party acknowledges that the unauthorized use or disclosure of the Confidential Information of the other Party would cause irreparable harm to the other Party. Accordingly, each Party agrees that the other Party will have the right to obtain an immediate injunction against any breach or threatened breach of this Agreement, as well as the right to pursue any and all other rights and remedies available at law or in equity for such a breach.

COMMENT: Each party should specifically acknowledge that breach of the agreement will lead to irreparable harm to the disclosing party, and that the disclosing party will have to obtain immediate injunctive relief. Even though irreparable harm will often be presumed in trade secret cases, the acknowledgments of the receiving party can be important in any subsequent litigation, although they are not binding on a court. This clause may need to be modified to accommodate variations in remedies afforded by national laws.

8. TERM OF AGREEMENT. This Agreement applies to all Confidential Information that is disclosed by either Party to the other Party during the period that begins on the date set forth at the front of this Agreement and ends [number, e.g., six] months thereafter. The obligations of this Agreement will remain in effect for [number, e.g., five] years after the date of the last disclosure of Confidential Information hereunder, at which time this Agreement will terminate.

COMMENT: The agreement should define the time during which any disclosures made by the disclosing party will be covered by the protective obligations in the agreement, as well as the duration of the obligations themselves. The periods selected will usually depend on the difficulties that the disclosing party expects to have in monitoring the confidentiality agreement. A party making substantial disclosures will generally attempt to have the obligations continue for the useful life of its trade secrets. However, the receiving party will want the obligations to extend for some determinate period of time (e.g., two years after execution of the agreement or two years following termination of the JV). If appropriate, different time periods may be set for different classes of information.

9. ENTIRE AGREEMENT. This Agreement sets forth the entire agreement and understanding of the Parties and merges all prior discussions between them as to Confidential Information. Neither Party may be bound by any definition, condition, representation, or waiver other than as expressly stated in this Agreement or as subsequently set forth in writing signed by the Parties hereto. This Agreement shall survive the termination of any business relationship between the Parties and shall supplement any subsequent agreement between the Parties with respect to the subject

matter hereof to the extent that the terms contained herein are not inconsistent with any such subsequent agreement.

COMMENT: The agreement should include a merger clause that makes it clear that the agreement between the parties regarding protection of the confidential information is to be confined to the terms in the agreement. Amendments to the agreement must be set forth in writing and agreed to by both parties.

10. GOVERNING LAW. This Agreement shall be governed by the laws of as applied to contracts entered into and to be performed entirely within [location].

COMMENT: The agreement should identify the law that is intended to govern the nondisclosure obligations. The choice is important because the laws of countries (and states or other subdivisions) often vary with respect to the definition of trade secrets and the scope of protection afforded to other proprietary information.

11. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and inure to the benefit of the Parties hereto and their respective heirs, administrators, executors, successors, and assigns.

COMMENT: The agreement should clearly declare that its provisions will continue to apply to any successor or assigns of the parties, such as a business entity that acquires a party following the beginning of the underlying business relationship.

IN WITNESS WHEREOF, the Parties execute this Agreement in recognition and understanding of the obligations and conditions imposed. FIRST PARTY

Date: [date] By [signature] [typed name and title]

SECOND PARTY

Date: [date] By [signature] [typed name and title]