The Value of Secrets
Alex Ridout
Are confidentiality agreements worth the paper that they are written on?
Over the course of a year, an in-house legal department is likely to review and comment on hundreds of non-disclosure agreements (NDA) which entails significant time and resources dedicated to such reviews and which, translated into billable hours, would equate to a cost (or value, depending on your point of view) of many thousands of dollars. Is it all worth it?
Fundamentally, confidentiality of trade secrets between two parties is not about what is written in the agreement but rather about the trust between the parties: once the information or the materials have been disclosed, that genie cannot be put back in the bottle. The best solution for maintaining confidentiality (if you have to disclose) would be to disclose only what data is strictly necessary to the recipient and for the recipient to prove the high standard of practice it employs to preserve the confidentiality of its own materials.
Customers are not interested in claiming liquidated damages for late delivery of a product; they simply want the product delivered on time. In the same way, the discloser of confidential information is not interested in claims for damages under contract but rather wants the recipient to keep its secrets, well, secret. This may be one of the reasons why enforcement actions for breaches of NDAs are so rare. Another reason that I have heard voiced is that a breach of confidentiality may not result in financial damage to the discloser. During my 20-year working life as a lawyer, I have yet to be involved in a court case based solely on a breach of a confidentiality agreement.
Of course, the reality is that court cases for breach of NDAs may not be common for a whole variety of reasons, most obviously because the discloser may not want to draw attention to the publication of its trade secrets. Further, a lack of court cases does not mean that a well-drafted NDA is a pointless exercise: while it is true to say that there is no global or even regional standard NDA (wouldn’t that be a wonderful plan?), template NDAs typically have many similar underlying terms and they do serve a purpose. Like any good contract, the NDA will document the intention of the parties and clarify any areas of ambiguity both around the scope of the materials considered to be confidential by the discloser and the breadth of the recipient’s obligations. The NDA should arguably be viewed less as a contractual document and more as an operational manual for handling the materials. There is a risk though that the more onerous the NDA, the more likely that there will be extensive negotiations to conclude terms and that there could be a breach, inadvertent or otherwise.
Turning to enforcement, a NDA may offer additional rights and remedies, and quite possibly acts as a warning notice and even a deterrent to an unscrupulous recipient that is thinking of misusing trade secrets. In a well-documented case from 2003, a US state court awarded more than USD70 million to Anglo-Dutch Petroleum for violations by Halliburton Energy Services of a NDA. In some cases, identifiable financial loss may not even be required for a claim of a breach of a NDA because, in what is known as a Wrotham Park award, the injured disclosing party may be able to claim for “hypothetical bargain damages”, i.e. damages for whatever the defendant would have paid if it had negotiated a release of its obligations rather than breaching them.
In short, I seem to have convinced myself that there is value in having a NDA and that my many hours of reviews are not wasted. I will have to keep on plugging away with reviews of hundreds of draft agreements, perhaps without ever seeing a dispute (let alone court case) arising from one. I should change my mindset maybe: like insurance, you may never have to rely on it and bemoan having to pay the premium but you will be relieved that you took out the cover when something goes terribly wrong!
Columnist:
Alex Ridout, general counsel & company secretary, Lamprell
