I recently encountered a difference in legal cultures between Canada and Europe that has massive implications for businesses who use non-disclosure/confidentiality agreements, or NDAs as they are more commonly called.
An NDA is an agreement between a party disclosing confidential information and a party receiving confidential information pertaining to the use and storage of the information – that the information is to be held in confidence by the receiving party, and not used for any purpose other than a specifically defined purpose – typically the furtherance of their mutual business relationship.
The commercial importance of a good NDA cannot be understated. It protects private information such as financial information, the identities of clients and suppliers, and business plans, as well as sensitive trade secrets – the formulas, programs, processes and techniques that give a business a competitive advantage over its competitors. KFC’s secret spices. The recipe for Coca Cola. It is the grease that enables businesses to have frank open discussions, share information, explore potential relationships and transact business.
In Canada and the United States it is typical for an NDA to obligate the receiving party to hold information confidential either indefinitely, or ‘until such time as the confidential information enters the public domain’. The benefit to this practice is certainty for both parties. The disclosing party need not worry about the confidentiality period expiring – unless an event from outside the relationship occurs (such as the information falling into the public domain). The receiving party knows its obligations: keep the information confidential.
NDA practice different in Europe
In Europe the practice is different. European lawyers and their clients resist obligations that run indefinitely, and favour confidentiality obligations that expire after a relatively short period of time, typically three to five years. Once the fixed term is over the receiving party is free to disclose or use the confidential information as it sees fit.
This difference in contracting practices means the disclosing party must change its practices to fully protect itself.
First, the disclosing party must evaluate the level of sensitivity of the information being disclosed and negotiate the NDA accordingly. If the information is run of the mill business information that will lose its sensitivity within a couple of years (e.g. a product launch strategy) a three or five-year confidentiality period may be fine. By the time it expires, the need for confidentially will be past. If, however, the confidential information includes important trade secrets that provide a competitive advantage to the disclosing party, such as formulas or business processes, the NDA must clearly separate trade secrets from ordinary confidential information and provide for obligations relating to trade secrets to run in perpetuity.
Secondly, the NDA must include an obligation of the receiving party to return or destroy all copies of the confidential information (including its own work product that incorporates or references the information) and to certify the completion of this task. The disclosing party must then follow up and direct that this be done prior to the expiry of the NDA term. If the receiving party is not lawfully in possession of confidential information when the confidentiality period expires, there is nothing for it to use or disclose upon expiry.
One final thought. If you fail to address this issue properly, the damage done could extend beyond inadvertently granting one company the right to use and disclose your confidential information. As I mentioned earlier, it is a standard term in most NDAs for confidentiality obligations to expire if the protected information enters the public domain. This is exactly what would happen should a fixed term confidentially period expire while the receiving party is still in possession of the confidential information. As a result, a failure of your confidentiality strategy in even one transaction, may result in a loss of confidentially protection in your other NDAs.