"Keeping the Cat in the Bag"

Confidentiality as a Contract Right

The Author:

Andrew J. Felser

practices in Denver, Colorado, and concentrates on representing individuals and closely-held businesses in the fields of business law, commercial law, real estate, civil litigation, estate planning and estate administration. A graduate of the Georgetown University School of Foreign Service with an emphasis in international economics, Mr. Felser has a juris doctor from the University of Maryland. He was admitted to the bar in Maryland, the District of Columbia and Colorado and is the author of a number of legal articles.

E-mail: afelser@lawyernet.com
Web: www.lawyernet.com/members/afelser

By Andrew J. Felser

EW ENTREPRENEURIAL ENDEAVORS are lone eagle enterprises. More often than not, one needs the expertise of others for an idea to take flight. Almost as often, the proprietor of the idea fails to take steps to protect its confidentiality. This article will address the concept of the confidentiality agreement and how it can be put to use.

What is a confidentiality agreement? Generally speaking, it is an agreement that proprietary information disclosed by one party be kept secret by the other party, and that it be used only to evaluate the transaction and not for any other purpose. For example, two individuals (or businesses) who are negotiating a partnership or merger may want to examine each other's financial condition before completing the deal. Naturally, each party will want to ensure that such information is not leaked to the public or to third parties. In order to quell their apprehension, they enter into an agreement to honor the confidentiality of the information. A difficulty sometimes encountered with confidentiality agreements is that one party or the other may be offended at the implication that it cannot be trusted. As negotiation is, at its best, a patient and honest search for common ground, this problem is best dealt with by frankness and civility. If it cannot be overcome, perhaps the transaction should be avoided.

Will a court enforce a confidentiality agreement? A confidentiality agreement is a contract, and courts generally will enforce private contracts so long as they are not against public policy. For example, the Colorado Supreme Court recently ruled that an agreement to seal court records would not be enforced, as the public's interest in an open court system outweighed the private interests of the parties. Ordinarily, however, a confidentiality agreement between two prospective business partners, or between employee and employer, or between the seller and prospective buyer of a business, will be enforced.

Why would a confidentiality agreement be necessary? The relationship between the parties may be such that a duty of confidentiality exists even without a written agreement (such as between attorney and client). When such a relationship does not exist, a written confidentiality agreement helps remove any doubt, not only about the existence of the duty, but also about the scope of the duty, the type of information covered, and the remedies available if the duty is breached.

What should a confidentiality agreement say? How perfunctory or how detailed the agreement should be will vary with negotiation, individual taste and business necessity. The party disclosing the confidential information will want as thorough an agreement as possible. The party receiving the information may not want as thorough a treatment, since "thorough" usually means a multiplicity of obligations. The confidentiality agreement should address, at the very least, the following points:

Specifically what type of information will be subject to secrecy and what type of information will not be?
Must the parties keep secret from third persons the fact that they are negotiating and the fact that a confidentiality agreement exists?
For how long must the information be kept confidential? The disclosing party will usually want the duty of confidentiality to be perpetual.
If the parties are from different states or countries, which state's law will apply to the agreement, and where will arbitration or trial of disputes be heard?
If a party breaches the agreement, are there any limits on its remedies (such as a jury trial)?

Can a confidentiality agreement be retroactive? If the need for a confidentiality agreement arises after some or even all information has already been disclosed, the parties may agree that the agreement covers information previously disclosed. As with every other contract, the wording of the confidentiality agreement should be carefully crafted. A court will enforce the plain language of the agreement to the extent that the language is clear. Ambiguous language will create uncertainty, open the door to circumstantial evidence, and increase the cost of litigation.

Web Law Review, 1998