Questions to consider before entering into confidentiality agreements

Confidentiality agreements have widespread application and are of course entered into extremely regularly in many different contexts, both in collaborations and in litigation. The acronym “NDA” is commonly used and well understood. However, as acronyms go, it is incomplete in the sense that it only alludes to the obligation on the prospective recipient of confidential information not to disclose it. It does not reflect the separate, potentially much more troublesome, obligation typically contained in such agreements, namely the obligation not to use it for any purpose other than that specifically permitted by the agreement. As recent cases have illustrated, it is upon the way the latter obligation is drafted that a prospective recipient of confidential information should focus especially carefully, when deciding whether or not they can safely sign the agreement in the form proposed and, importantly, before they receive the information in question. In some cases, the prospective recipient of confidential information will be well advised to seek a variation in the way the proposed terms are expressed.

Outside the litigation context, the permitted purpose for which the information can be used might, for example, be for evaluating whether or not to enter into a particular form of transaction. In the sphere of patent proceedings, it is common for individuals employed by one party to receive confidential information of the opposing party, such as disclosure documents or a process description, upon those individuals entering into confidentiality terms that prevent the recipient using the information for any purpose other than the particular proceedings.

The obligation not to disclose is, with care, usually comparatively easy to comply with. The recipient has to make sure that they do not provide documents containing the information or otherwise reveal their contents to someone else. The obligation not to use potentially presents greater difficulty, as a result of the fact that once information has been learnt, it is often impossible to ‘unlearn’ it. This is so even though the recipient wishes to comply fully with the obligation. If the information has relevance to the performance of his or her other duties, likely to be different from the specific purpose permitted by the agreement, this is where problems will arise. The question in such circumstances is can it be said that, by virtue of being in the “recipient’s head” and relevant to a decision or action he or she has made or undertaken, it has not been used, albeit unintentionally or subconsciously?

Certainly, the court’s view is that unintentional or subconscious influence by known information is “use” and hence a breach, if the activity is outside that permitted.  In a decision in January 2013 in the IPCom v. Nokia & HTC litigation, when determining which individuals representing one party, IPCom, should be permitted to see confidential licences entered into by the other parties with others and produced on disclosure, Mr Justice Floyd said this:

26 I accept that the position in the present case is not as stark as in a case where, for example, a secret process falls to be disclosed to a rival manufacturer. Nevertheless, the commercial value of knowing the terms on which HTC and Nokia and the interested parties have been prepared to licence technology is of undoubted commercial value to IPCom. Mr Flynn for IPCom did not really dispute this. He recognised that if the confidential materials were available to IPCom's internal management, they would not be able to “unlearn” them. Consequently, in any negotiations with parties to the licensing agreements disclosed, those individuals would have knowledge of potential value which could direct the way in which those negotiations were conducted.

27 I should deal, at this stage with an argument advanced by Mr Flynn that, in the circumstances just mentioned, the unlawful use of the confidential information would be prevented by the undertakings which the individuals were required to give not to disclose or use the information other than for the purposes of these proceedings. He submitted that merely having the information in one's head, and acting in the negotiations on the basis of it, was not a use of the information. I do not accept that submission. Knowing the information and allowing it to direct one's stance in negotiations is, in my judgment, a plain use of the information. If that is right, as I believe it to be, it is clear that individuals who gave such an undertaking and who were involved in commercial negotiations for the licensing of IPCom's portfolio of patents could find it difficult or impossible to comply with their undertakings. (emphasis added)

Therein lies the danger for the unwitting recipient of confidential information, or for that matter, his or her employer: they risk later finding themselves in the unfortunate position where the only way of being sure to avoid breach is to exclude the recipient entirely from activities to which the confidential information has, or may have, relevance. This could be most inconvenient, if indeed practical at all. Therefore, it is important to avoid this situation happening in the first place. The terms on which the restriction as to use is proposed should be scrutinised carefully. The recipient should ask him or herself at that stage, i.e. before the information is received, whether, having regard to his or her anticipated duties and activities, disclosure on those terms could put them in difficulty later on.

The issue is well illustrated in a judgment of January 2012 in Omnipharm v. Merial. Mr Justice Floyd was required to construe the terms of a confidentiality agreement entered into for the purpose of the claim for a declaration of non-infringement under UK Patents Act 1977 s71. The claimant, Omnipharm, wished to seek a declaration of non-infringement of Merial’s patents in respect of a table of formulations, which were contended to be confidential (“the Table”). The terms of the agreement were recorded in an exchange of solicitors’ letters and included a restriction on Merial’s use of the Table, namely that it would not use it “for any purpose other than responding to the request for an acknowledgment of non-infringement or otherwise in connection with the pending UK proceedings…including without limitation any counterclaim for infringement and/or any application to amend the patents in suit…”.

However, at the time of agreeing terms, Merial, to avoid any future allegation of breach in the event that it decided to amend any of its patents, expressly sought the following qualification, namely that the restrictions “…will not in any event in any way prevent or restrict Merial at any time in the future from making such amendments it may wish to any of its patents anywhere in the world”. The qualified wording was agreed to.

However, a dispute arose some time later as to the meaning of the terms - whether Merial was permitted to use the Table for making amendments to foreign patents or whether the qualification referred to merely stated that Merial were free to amend patents anywhere in the world just as if it never received the confidential information.

The practical point was this. Merial did not actually intend to make direct use of the Table in connection with foreign patents in the sense that it did not intend to send it to foreign patent attorneys for use in prosecuting foreign patents, or referring to it when drafting instructions. However, the problem was that, if the terms were construed as Omnipharm contended, this would place Merial’s internal patent attorney in a very difficult position. He would know the contents of the Table, but would not be able in all circumstances to ensure he had not made any unconscious use of it.

In the event, the judge, Mr Justice Floyd, preferred Merial’s interpretation. Omnipharm sought a variation of the terms, which was also rejected for the following reasons by the judge:

In those circumstances to impose such an obligation after the event on someone such as Mr Ezcurra, Merial’s internal patent attorney would place him in a very difficult position and might cause him to cease to be responsible for the activities in question. I do not think that would be fair. (emphasis added).

As Merial had no intention of making direct use of the Table, the Judge ordered a simple practical step that all copies of the Table be collected up and returned to Omnipharm. Furthermore, he declined to grant any injunction as to “knowing use”.

The case thus provides a good reminder of the potential dangers for recipients of confidential information regarding the obligation not to use other than for the specific purpose permitted.  In this instance, Merial anticipated the problem and proposed a suitable variation to the terms.  The phrase underlined in the above quotation from Mr Justice Floyd’s judgment clearly shows how, in different circumstances, an unwitting recipient of confidential information can later find him or herself in a very difficult position, which may have the practical effect that he or she cannot carry out their normal duties without risking a breach of the agreement.  Clearly this could be most inconvenient; far better, before the agreement is entered into and information received, to study the obligations carefully and provide revisions to the terms to avoid later difficulty. Focussing on this only after the information is “learnt” may be too late.