Legal Perspective

Hidden issues in confidentiality agreements
By Mark Hanson and Todd Guerrero | May 01, 2006
Businesses routinely enter into confidentiality agreements. These agreements are used for a number or purposes, primarily to protect information exchanged between businesses as they consider a possible relationship. Perhaps because these agreements are so common and their provisions seemingly so easy to understand, businesses often fail to review them carefully. Often, however, careful review discloses risks that are not obvious at first glance.

Risks to the disclosing party
Primarily, a business disclosing confidential information is primarily concerned that the information is properly protected. Unfortunately, the terms of confidentiality agreements can often hinder that protection in unexpected ways.

Often, the confidentiality agreement will not cover all of the information the business considers confidential, at least not without additional work on the part of the disclosing business. Many forms of confidentiality agreements, for instance, require that information be marked or otherwise identified as confidential by the disclosing party, but not all businesses have procedures in place to ensure that the marking or identification actually occurs. Information disclosures that do not meet the requirements of the confidentiality agreement will not be protected by the agreement. Once confidential information is disclosed without the proper protection, the business can no longer claim that information as a trade secret or otherwise proprietary.

Confidentiality agreements also often limit the time period in which information has to be treated as confidential. Once that time period has expired, there is no longer any restriction on use or disclosure of confidential information received under the agreement. This artificial limit can severely reduce the value of any confidential information disclosed under the agreement.

Another problem arises when the confidentiality agreement does not limit the use of confidential information disclosed under the agreement. Generally, the party receiving information should be limited to using that information only for the purpose for which it was disclosed. Without such a restriction, the receiving party could use that information for any purpose, including the development of competitive products.

Risks to the receiving party
The receipt of confidential information under a confidentiality agreement can also adversely affect a business. For example, when a business receives information that overlaps information already in the possession or knowledge of the business, use of that knowledge might appear to be a breach of the confidentiality agreement. Proving prior knowledge can be difficult, and disclosing parties can be very aggressive when they believe their confidence has been betrayed.

Measures can be taken to reduce the likelihood of these problems occurring, and to increase the likelihood of a successful resolution if these problems do occur. One approach is to limit the number of individuals who are exposed to confidential information received from other businesses. In fact, some businesses establish special teams to conduct confidential business and product evaluations. Such teams are often used to isolate research and development personnel from potentially conflicting product ideas from outside the business.

Confidentiality agreements in context
The disclosure and receipt of information under a confidentiality agreement can create other risks to a business. These risks can be properly evaluated only in the context of the confidential information to be disclosed and received, the purpose for the disclosure of that information, the circumstances under which that information will be disclosed, and the terms of the applicable confidentiality agreement. Carefully considering the risks involved in a confidential information exchange can give a business the opportunity to reduce or eliminate many of those risks, whether by changing the terms of the confidentiality agreement, or by establishing procedures for disclosing and receiving information under the agreement.

Mark Hanson and Todd Guerrero are members of the Agribusiness and Energy Practice Group of Lindquist & Vennum PLLP, a leading provider of legal assistance on renewable energy projects throughout the country. Tim Keller, a partner with the firm specializing in technology transfer and intellectual property matters, contributed this article. They can be reached at (612) 371-3211.
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