Issues on confidentiality and confidentiality clauses

United Kingdom

Duties of Confidence

Obligations of confidence can arise in a number of circumstances; under contract, tort, equity, property, bailment or under statute.

Under contractual confidentiality terms may be oral, written, expressed or implied but are subject to the usual rules of contract, namely consideration and privity. Obligations arising under tort include inducing breach of contractual confidentiality agreements, interference with business, conversion of chattels and misuse or infringement of confidence. Tortious claims may also arise in particular circumstances where specific duties of care are owed.

Under equity it is well established that there is jurisdiction to claim for breach of confidence. The obligation under equity differs from that under contract in that it does not require a binding contractual agreement or consideration) and is not subject to the requirements of privity. Damages would not be available under equitable doctrines, but other appropriate remedies such as injunction, account of profits or order for delivery up of offending information may be available.

Property: tort of trespass to goods or conversion may be available if property is improperly acquired or exploited.

Bailment is traditionally confined to the entrusting of chattels, but where the chattel contains confidential information a claim could exist under bailment.

Legislation imposes many varying obligations of confidentiality including, for example under the Official Secrets Act as well as confidentiality of medical records and protection of minors.

What is Confidential Information?

The information must be of limited public availability and of a specific character. It need not necessarily be original, novel or complex or indeed commercially valuable (consider other methods of protection of such information), but in most circumstances commercial parties will be wishing to protect information of a commercial and valuable nature.

There have been a number of cases in determining what may or may not constitute confidential information. These are described in more detail in the slides (and further details are available if required).

Confidential information must be specific in character. It must not be so contaminated with other non-confidential information as to lose its identity therefore rendering it outside the restrictions of confidentiality.

There may be differences principles as to what constitutes confidential information depending on the circumstances and duties and obligations owed by the parties. For example, the category of information which was held as confidential in the Faccenda Chicken -v- Fowler case was only subject to obligations of confidentiality because of the relationship between the parties as an employee and an employer. In the case of Ocular Sciences Limited -v- Aspect Vision Care Limited the courts determined that this category of information would not necessarily attract confidentiality when passing between two independent contracting parties.

Elements of Breach of Confidentiality

The principles of a breach of confidentiality are derived from Megarry J's statement in the case of Coco v AN Clarke (Engineers) Ltd [1969] RPC 41. The three elements are:

  • the information must have the necessary quality of confidence about it;
  • generally this will mean not in the public domain, although there are exceptions for example where a large amount of effort is required to collate publicly available information. (Question whether database rights would also be applicable to protect that information in these circumstances.)
  • test from Marshall v Guinle sets out best test for determining if information is too widely available to be confidential: owner must believe information release would be advantageous to rivals or injurious to him owner must believe information is not in the public domain the owner's belief for a and b must be reasonable the information must be judged in the light of usage and practices of the particular/trade industry

The principles for what information employees may make use of both during and after their employment is set out in Faccenda Chicken v Fowler.

Information must have been imparted in circumstances importing an obligation of confidence.

Courts have considered factors such as:

  • person disclosing information expressly states it is disclosed in confidence
  • warnings/no admittance signs (Creation Records Limited and others -v- News Group Ltd)
  • implied by professional adviser status, e.g. solicitor-client
  • information supplied for the purpose of performing a contract/permitted purpose clauses
  • the nature of the information and the time for which confidentiality maintains its necessary quality of confidence – it can be forever, for a period until the information becomes public of until the end of an express time limit runs out

There must have been an unauthorised use of that information to the detriment of the party communicating it.

Defences

The defences of iniquity has long been recognised as a defence to breach of confidence whether contractual or otherwise. Recent case law adds the Human Rights Act to this although basically they are deemed to cover the same ground

  • Iniquity – where on the balance the public interest in disclosing the material outweighs the obligation of confidence. Usually but not always where the party looking to enforce the contract has acted inappropriately, e.g.: Lion Laboratories v Evans [1985] QB 526
  • Human Rights Act (article 10) allows for freedom of expression. In London Regional Transport v the Mayor of London [2001] - a case regarding the release of a value for money report on the PPP to the press - the Court of Appeal confirmed the Act could be used as a defence. It was not any contractual confidentiality clause which determined the proportionality of the use of the freedom of expression right but the balance between commercial sensitivity and the public interest.

Confidentiality Clauses in Contract

Advantage: By use of an express term in a contract parties can arguably extend the cover of the equitable principles of confidentiality, tailor them to the particular case and forego the need to refer to a court to define the obligations of the parties.

Disadvantage: However there is a possibility that contract in a similar way can provide less cover. For example where a contract provides for confidentiality for 5 years, after that period there will probably be no bar on a party using that information whereas in equity a court may consider that confidentiality should be maintained in perpetuity.

Where there is no clear contractual term it is unclear as to whether a term may arise as an implied term in contract or in equity - litigants should plead both as remedies for each are different and one should be aware of the possibility of equitable rights being available beyond the scope of the contractual rights. However, where an express terms are provided in the contract, courts would be less likely to allow equitable remedies - relying on the express provisions between the parties.

Claims for damages would not be entertained under equitable principles although other equitable ?….? would be available.

Drafting Definitions of Confidentiality

One of the key points to consider for the drafter is the balance of flow of information in the Agreement. The party receiving information may want a wide definition, the party giving the information may want a more restricted definition. This may not always be the case. Certain companies do not like receiving third party confidential information as they may be concerned over "inadvertent use" in their own research activities and are not prepared to accept any restriction on how they conduct their development. Drafting suitable provisions in the confidentiality clause can address this.

If the confidentiality definition is drafted widely it is not clear that it would attach to all information in any event. For confidentiality principles to be applicable the information itself must be of a confidential nature (i.e. it must meet the appropriate tests).

Where confidential information is disclosed in different media, in particular oral information, evidential issues may arise. Oral disclosures of confidential information can be hard to prove - unless followed up in writing.

Parameters of definitions

Generally the width of the definition can be adjusted in four ways:

  • Class of information to be protected - wide or narrow
  • Source - does it cover information obtained from just one party or from any party?
  • Medium - Is the information to be limited for example to that received in written form or should it cover that received orally tool? If so, does this need to be confirmed in writing?
  • Relationship to Equity - Should information which the common law would not deem confidential be covered? This can be done although is likely to cause more problems with restraint of trade and commercial difficulties from the other side. However it is common practice to do this when used in tandem with exceptions (see below). Example 1 "Confidential Information" shall mean all information disclosed by one party to the other in writing PROVIDED THAT each such item of information would appear to a reasonable person to be confidential or either contains or bears thereon (in either case in a prominent position), or is accompanied by, a written statement that the same is confidential or proprietary." Example 2 "Confidential Information" shall mean all that technical information relating to [the Product] which is disclosed to the Receiving Party by the Disclosing Party, or is otherwise obtained by the Receiving party from the Disclosing Party [including without limitation the information contained in the documents listed in the Schedule hereto]." Example 3 "Confidential Information" shall mean all information or data relating to [subject matter] disclosed (whether in writing, orally or by any other means) to one party by the other party or by a third party on behalf of the other party and shall include but not be limited to (a) any information ascertainable by the inspection in the Schedule hereto as having been disclosed prior to the date hereof; and (b) any information relating to that party's operations, processes, plans, intentions, products information, know-how, design rights, trade secrets, software, market opportunities, customers and business affairs, [but shall exclude any part of any such disclosed information or data which:]

Exceptions/Carve outs

Why have these? These are designed to acknowledge what the common law will recognise as confidential information and thus minimise the possibilities of a clause being found unenforceable. They also provide a mechanism for custom designing the clause to the parties' requirements while maintaining as much control as possible. Subject matter will commonly include information in the public domain, publicity, or where disclosure is required either by law such as to the Stock Exchange or to enable a party to meet its obligations under a contract.

The exceptions maybe included in the main clause so that they never receive protection (as seen in Example 1 above from "PROVIDED THAT…") or may be constructed in a separate clause (see Example 3) so that the matters are excluded following a wide definition of information.

Example 3

Nothing in this definition of Confidential Information shall be construed to limit each party's use or dissemination of information that:

Was in the lawful possession of the receiving party at the time of disclosure by the disclosing party without an obligation to keep it confidential;

Was in the public domain at the time of receipt or disclosure or subsequently becomes so (without breach of the obligations of confidentiality by the receiving party);

Is not identified in writing as being proprietary or confidential at the time of disclosure;

Was originally considered proprietary under this Clause but which subsequently becomes part of the public knowledge or literature through no fault of the receiving party;

Is developed by or for the receiving party at any time independently of the information disclosed to it by the disclosing party [by persons who have had no access to or knowledge of the said information];

Has been or hereafter may be rightfully acquired from third parties without obligation to keep confidential; or

Consists solely of generalised ideas, concepts, know how or techniques relating to [data processing].,

Time Limits

It is important to differentiate between confidentiality clauses relating to employees and clauses between companies. Clauses affecting individuals are more likely to be deemed in restraint of trade and the issues of time limits in these cases seem very much more sensitive.

The limited case law there is on determining the period for which an obligation of confidentiality between commercial entities may run has not laid down any easily identifiable rules. Much seems to depend on the circumstances of disclosure, the commercial value and nature of the information.

Obligations of confidentiality between parties to a contract are often limited by the contract to a certain period of time. The time maybe decided by the period for which the confidential information is likely to remain sensitive as in many cases within a few years commercial information will have lost this quality.

Example 4

"the obligations and restrictions of in this clause shall be valid for a period of [five ]years from the date of the signature hereof."

In cases where a time limit clause is required but information under an Agreement is revealed on an ongoing basis, a clause with time running from when the information was released as opposed to the date of Agreement maybe appropriate.

Example 5

"the obligations and restrictions of in this clause with regard to each disclosure of Confidential Information shall be valid for a period of [five ]years from the date of receipt of that information by the Receiving Party"

In may cases though the obligations will be perpetual. If this is desired it is important to state specifically that the term will outlast the life of the contract.

Example 6

"The provisions of this Clause [ ] shall survive any termination of this Agreement."

Most of the case law on the time limits of confidentiality clauses relates to individuals and restrictive covenant based principles. Is this perhaps because all companies always find the clauses they negotiate between themselves reasonable or does it have more to do with the difficulty in suing on the confidentiality agreements? From a purely English law perspective the lack of reported cases on the enforceability of confidentiality clause time limits suggests that if a person is drafting a confidentiality clause from a position of wanting to protect the information, unless it would be obviously unreasonable to do so, one option seems to be to make the obligation perpetual.

Protection of the Information

The provisions of the confidentiality agreement should clearly define what a receiving party can and cannot do with the confidential information.

The express provisions should clearly identify that the recipient should keep the information subject to confidentiality obligations, but should also expressly state what can and what cannot be done with the information. For example, obligations may include:

  • Right to use for licensed purposes;
  • Right to disclose to others, upon terms of confidentiality which provide no less favourable protection than those applicable to its disclosure;
  • Return information upon termination.

The disclosing party may also want warranties as to what levels of confidentiality it can expect from the receiving party.

Example

To maintain the same in confidence and to use it only for the Purpose and for no other reason and in particular, but without prejudice to the generality of the foregoing, not to make any commercial use thereof or use the same for the benefit of itself or any third party other than pursuant to a further agreement with the other party;

Not to reproduce or reduce to writing any part thereof except as may be reasonably necessary for the Purpose and that any copies reproductions or reductions to writing so made shall be the property of the disclosing party;

Not to disclose the same whether to its employees or to third parties except in confidence to such of its employees or directors who need to know the same for the Purpose and that (i) such employees and directors are obliged by their contracts of employment or service not to disclose the same; and (ii) the receiving party shall enforce such obligations at its expense and at the request of the disclosing party in so far as breach thereof relates to the disclosing party's Confidential Information;

To be responsible of the performance of sub-clauses (a), (b) and (c) above on the part of its employees or directors to whom the same is disclosed pursuant to sub-clause (c) above; and

To apply thereto no lesser security measures and degree of care than those which the receiving party applies to its own confidential or proprietary information which the receiving party warrants as providing adequate protection of such information from unauthorised disclosure, copying or use.

Litigation

Where there is no clear contractual term it is unclear as to whether a term may rise as an implied term in contract or in equity - litigants should plead both as remedies for each are different

There is no breach of confidentiality where the documents are disclosed in litigation - Chantry Martin & Co v Martin [1953] 2 QB 286. A court will balance the interests of the party seeking disclosure and the party whose secrets maybe put at risk Premier Profiles Ltd v Tioxide Europe Ltd, [2000] QB - possible point of drafting a clause that the parties will seek to gain every protection for their confidential information should it become subject of litigation disclosure.

Useful reading

Mehigan and Griffiths - Restraint of Trade Business Secrets

Richard Christou - Boilerplate: Practical Clauses

Richard Christou - Drafting Commercial Agreements

For further information please contact David Roberts at [email protected] or on +44(0)20 7367 3678 or contact Ben Horton at [email protected] or on +44(0)20 7367 3747.