Confidentiality Agreements are not enough

“Oh it’s alright. I don’t need a patent because he signed a confidentiality agreement.” If I could have a pound or even a penny for every time I have heard that remark I would be a very rich woman. Confidentiality agreements are a bit like placebos that make patients feel better – for a time. The client feels that he has tied things up all the loose ends.  Until, that is, his confidante feels that he is not or no longer bound by the agreement.

How Confidentiality Agreements are Enforced
Unless you and your confidante have agreed to refer disputes to arbitration, you need to apply to the courts for an order restraining the confidante from using or disclosing the information until the trial in the action or further order.   This will be expensive.   It means issuing a claim form to be followed shortly by detailed particulars of claim.   Although you hope the other side will cave in after you get your interim injunction you have to indicate to the court that you are prepared to take the case all the way.   You then have to draft a minute of order and attach to an application notice.  Your application notice has to be supported by one or more witness statements that show that

  • you have at least a chance of winning,
  • the damage you will sustain by reason of the breach will not be compensated fully by an award of damages, and
  • you on the other hand can compensate the confidante for any loss or damage he may sustain by reason of the order you seek should it eventually turn out that you were not entitled to the order.

You will need to exhibit to the witness statement some evidence of your ability to meet your cross-undertaking such as your latest report and accounts or facility letter (remember them) from your bank.   Unless the matter is especially urgent you have to serve this paperwork on your opponent at least 3 clear days before the hearing.   Time runs from 17:00 in the courts so if you want your application to be heard on a Friday you have to serve your papers on the other side by Monday.  When the application is heard by the applications judge for the first time, he or she can give you and your opponent a limited amount of time to make your respective cases.   If you or the other side want more time (and the other side almost certainly will) the judge will shunt the application to be heard at a longer hearing in several weeks (but occasionally) months time as an application by order. Normally the judge will direct a time-table for evidence and extract undertakings from the client.  So how much will all this cost? Kate Reid, principal of Pemberton Reid, whose fees are competitive, quoted £15,000 not long ago.  Most solicitors – many with less knowledge and experience than Kate – would charge a very great more.

Difficulties in Enforcement
And after spending all that money you may not even get your injunction. Indeed, you may end up having to pay your opponent £15,000 or possibly more by way of costs.   All because the traditional confidentiality agreement may in the end prove to be ineffective.   “How could that be? I hear you say. “I paid my solicitor/barrister/patent agent to draft me one. For the fee he charged me it should be damn well perfect.” The problem is that the duty neither to use nor disclose confidential information arises not from the agreement itself but from the following circumstances:

(1)        the information should be confidential in nature (that is to say, not known to the public at large or known to the confidante) and its use or further disclosure must harm the confider or benefit the confidante;

(2)        it should be disclosed in circumstances giving rise to an obligation of confidence – that is usually acknowledged in a confidentiality agreement but can arise in other words such as a discussion with a professional adviser; and

(3)        the use or the disclosure of the information must be unauthorized.

In my experience, at least one of those factors is likely to be challenged at the interim injunction application.   The confidante will contend that the information is generally known (or at least was known to him or his company). Further or alternatively, there was nothing to alert him or her to the need to keep the information confidential at the time of disclosure because whatever he signed in the past was for a different purpose – or so he will say. In any case, he will argue, he had a perfect right to use or disclose the information.

How to Anticipate those Defences
My draft confidentiality agreement addresses each of those issues:

Excuse No 1: The information was generally known or at least known to the confidante

First the information is specified in paragraph 3 of the schedule. If it is communicated orally, the date time and persons present at the interview are specified in paragraph 4. If it is contained in a document, those are listed at paragraph 5.

In clause 1 (1) the confidante acknowledges:

“(a)             the information specified in paragraph 3 of the schedule is confidential;

(b)        its unauthorized use or disclosure could injure the Confider and/or benefit any party to whom the Information may be imparted; and

(c)               the Information is disclosed in circumstances giving rise to an obligation of confidence.”

If on reflection the confidante believes that the information may not be confidential or has ceased to be confidential there is a rapid dispute resolution procedure for establishing that fact.  Clause 3 provides:

“(1)             Should the Confidante believe that the Information is not confidential or has ceased to be confidential, he or she may notify the Confider of his or her belief and ask the Confider to release him or her from some or all of the above promises.

(2)              Should the Confider refuse the Confidante’s request, he or she may refer the questions whether

(a)              the Information is confidential and/or

(b)              the Confider should be released from his or her promises;

to arbitration in accordance with clause 4.

(3)              Unless and until the Confider or Arbitrator releases the Confidante from his or her promises, the Confidante shall continue to be bound by them.”

Excuse No. 2: The Confidentiality Agreement did not apply

Well yes it did. The information is specified. The date time and place of the disclosure is recorded.   The documents to be disclosed are listed.   These are reinforced by the confidante’s acknowledgement in clause 1 and promises in clause 2. Game, set and match.

The only thing is that this is not a once and for all process.   You will see that the agreement has space for a serial number at the top right hand corner.   The particulars in the schedule should be recorded on to an index card or keyed into a database.

If you are disclosing information incrementally, get the confidante to sign a fresh agreement for each disclosure. Thus, for example, if you give him say an outline specification of a program that you are developing on Monday and a functional specification on a particular module on Tuesday and maybe a different specification on Wednesday you need to issue 3 confidentiality agreements and not just one.   These are not bulky documents and the agreements vary only in the particulars in the schedule.   This is not a longwinded process.   And if you have to enforce it by an application for an interim application, it is so much easier for your barrister.

Further guidance on tying agreements to the information appears in an article by Yatoni Cole Wilson in “Can you keep a Secret? Are you sure? Managing Confidential Information” first written in Nov 1998.

Arbitration Clause
And then the best bit of all, an arbitration clause:

“(1)             Any dispute or difference between the parties shall be referred to arbitration under the NIPC Arbitration Rules.

(2)              Except for orders under clause 4 (3), such arbitration shall take place before a single arbitrator to be agreed by the parties or, in default of agreement, appointed by the Managing Director of NIPC Ltd of the Media Centre, 7 Northumberland Street, Huddersfield, HD1 1RL.

(3)              If a party fears that it will suffer irreparable loss or damage from an act or default of the other (such as the threatened use or disclosure of the Information) such party may:

(a)        apply to the Managing Director of NIPC Ltd. to appoint an arbitrator to hear an application for an order under s.48 (5) of the Arbitration Act 1996; and

(b)              apply to such arbitrator for an order under that section.

(4)              An arbitrator appointed pursuant to clause 4 (3) (a) shall follow mutatis mutandis the practice of the Chancery interim applications judges in hearing and determining such application.

(5)              Unless the parties agree or the Arbitrator determines otherwise, the Arbitrator will determine the dispute on the documents only and will have power to order to order costs including the arbitrator’s fee and the costs of the arbitration.

(6)              All references to “the Arbitrator” refer to an arbitrator appointed under this clause including an appointment pursuant to clause 4 (3).”

The arbitration will take place under our Arbitration Rules which applies the practice of the Patents Court but provides for the award of costs at the same rate as the Intellectual Property Office tribunals which is very much lower (see my article “Enforce a Confidentiality Agreement for as Little as £475” in my Inventors Club blog of 21 Aug 2010).

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About Jane Lambert

I am a barrister specializing in intellectual property, technology, media and entertainment and competition law. I specialize in helping SME (small and medium enterprises) protect and exploit their investment in brands, design, technology and the arts. SME require intellectual property (legal protection for their intellectual assets) at least as much as big business but their limited means restrict the way they can use it. Looking after such clients wisely requires skills and knowledge which have taken me years to learn.
This entry was posted in Confidential Information, confidentiality agreements, Contracts, Dispute Resolution. Bookmark the permalink.

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