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What is the maximum term of an NDA if it is not mentioned in the contract?

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When signing a non-disclosure agreement, the benefits of including a term clause (i.e., end of the contractual obligations) depend on whether you are more likely to be disclosing or receiving confidential information.

If you are the disclosing party, you want to ensure that your confidential information is kept confidential and there are no potential unauthorized disclosures. This means you want to protect the confidentiality of that information for as long as possible.

If you are the receiving party, you want to limit your obligations in the agreement, which includes what information you have to keep confidential and for how long you have to keep it confidential.

 

You can view and customize a Confidentiality Agreement on Clausehound:

NDA

 

Term of a Confidentiality Agreement

If a term clause is not included in an NDA, the parties can imply that the NDA will be in effect indefinitely. An NDA with no term clause is more common in an agreement where an ongoing relationship is taking place.

Assuming that the NDA contains a termination clause, once a party gives notice to terminate the contract, all of the obligations under the contract will terminate on the termination date unless the NDA includes a survival clause. However, circumstances may vary depending on whether the information is considered a trade secret, where the Ontario Court of Appeal held that disclosing a company’s trade secrets can be considered a restraint on trade.  

Note that after the termination date, the receiving party will no longer be under an obligation of confidentiality for information received after the termination date. This will be true whether or not the confidentiality clause continues to apply to confidential information received before the termination date.

 

Survival Clause

For an example of a contract with a survival clause, follow the image below!

Survival

The exception to all the obligations being terminated on the termination date is where a survival clause has been included. A survival clause explicitly states which obligations will ‘survive’ the life of the agreement. Clauses that survive an agreement usually include the confidentiality clause.

Although a confidentiality clause can ‘survive’ the term of the agreement, the standard term of survival for a confidentiality clause is generally  two to four years after the termination date. Companies that are receiving confidential information will be reluctant to agree to an unlimited term for the confidentiality clause.

To see a standard non-disclosure agreements, visit our Small Business Law Library!

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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The Scope of your Confidential Information: Too Broad, Too Narrow, or Just Right?

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In our office, and no doubt in many others, the non-disclosure agreement (NDA) is considered a stepping stone into the world of contracts because of their straightforwardness. The purpose of an NDA is to protect information you want to keep confidential. Just like how information can exist in many different forms, the NDA can be applied to a variety of contexts, be it between companies, employers and employees, or laypersons.

But with great applicability comes the question of scope—what is appropriate?

Pastor v. Chen (2002) (BCPC) is a good example of where too general of an NDA can open you up to problems. The claimant in this case, Amando Pastor, was just a teenager when he developed the moves for his own version of “La Rueda,” a Cuban salsa dance, by incorporating a complex group element. He copyrighted his version of the dance, which he called “the Wheel of the World,” years later as a dancing instructor in Vancouver.

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Not soon after Pastor began teaching his dance, the defendant, Roger Y. Chen, became his student. Upon reaching a level of proficiency to perform publicly, Pastor made Chen and all his other dancers sign a confidentiality agreement that reads as follows:

“I, Roger Y. Chen, willingly agree to not divulge, publicly perform or teach the artistic work that I have had access to as a performer/student … without the Director Amando Pastor’s, permission … everything I have been taught by him is confidential, and is his property, for which he holds copyrights.”

While at first glance there is nothing wrong with such a succinct NDA, upon a closer look some problematic interpretive gaps make themselves apparent. This agreement lacks a clear definition of what exact “artistic work” Pastor retains the rights to. The intimation that anything he taught his students is his property is an incorrect one, because there are many dance moves that are considered general knowledge. Pastor was even aware of this distinction, as “when asked if he ever told his performers which moves were his, his answer was that he did not make it clear because he wanted to keep them to himself.” For a confidentiality agreement to work, a clear disclosure provision is just as essential as a clear definition of confidential information.

So, when Chen was discovered to be teaching dance routines similar to Pastor’s, he was easily able to use this inconsistency as an argument. He said that the moves he had been teaching were ones already in the public domain, not Pastor’s own. Ultimately the judge found that this was not the case. Regardless, if the definition of confidential information had been more explicit, or even if a non-competition clause had been included to diversify the agreement, the claimant could have better protected his property. To work best for everyone involved, an NDA has to have a clear scope and specificity in outlining what exactly is confidential and how confidentiality should be properly performed.

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On the other hand, being too specific can also be problematic, as can be seen in Minera Aquiline Argentina SA v.

IMA Exploration Inc. and Inversiones Mineras Argentinas S.A. (2006) (BCSC).

The defendant had been scoping out a plot of land to buy in Argentina, and received geological data from the seller during site visits and tours, which required signing a confidentiality agreement. The plot in question was later purchased by the plaintiff, while the defendant used the data received to discover a large metals deposit elsewhere. Whether the data was considered confidential or not was the crux of this case. The definition of confidential information was as follows:

“… financial, operating, technical, geological and other information (the “Confidential Information”) concerning the Project … will include all communications, whether written, electronically stored or delivered, or oral, of any kind, between the Participants relating to the Project, any observations made by Reviewer during site visits or tours, and any and all information, reports, analyses, studies, compilations, forecasts or other materials prepared by Reviewer relating to the Project which contains or otherwise reflects such information.”

This is a much more comprehensive definition of confidential information, but still, the defendant was able to argue that since the data wasn’t explicitly listed, it wasn’t considered confidential. The judge resolved that the data was considered confidential information because the definition included “the words ‘relating to’ and ‘concerning’”. This specific wording cast the net of the definition wide enough to cover unlisted information. So, in a sense, the definition was actually just broad enough to serve its purpose effectively here.

This case is one that shows there is only so much that can be done to cover your bases, so it’s important that your contract can hold up under scrutiny.

One of the most effective steps you can take when drafting an NDA is to be cognizant of covering what is most important to the protection of your business – and define it.

Case Citations:

  • Pastor v. Chen, 2002 BCPC 169 (CanLII)
  • Minera Aquiline Argentina SA v. IMA Exploration Inc. and Inversiones Mineras Argentinas S.A., 2006 BCSC 1102 (CanLII)

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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NDA before Negotiations! Otherwise, Risk a Leak of Confidential Information

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A party that allowed access to its confidential designs but took no action to protect themselves beyond signing a confidentiality agreement with the company, lost their dispute. This article discusses the case of nClosures, Inc. v. Block and Co., Inc. where nClosures, in their contract negotiations with Block, did not require Block’s engineers to sign any confidentiality agreements. However, when negotiations broke down, Block’s engineers used the information that they had received during the negotiations to redesign a product that was similar to nClosure’s. One of the main reasons for why nClosure lost is that the court found that the disclosing party did not take reasonable efforts to safeguard the information covered by the agreement.  Specifically mentioned as missed opportunities to safeguard were actions including:  1) documents were not kept in a vault with limited access, 2) engineers using the drawings were not required to sign confidentiality agreements, 3) vendors given access to drawings were not required to sign agreements, 4) drawings were not marked “confidential” or with other words showing their proprietary nature.

Read the article here.

 

Take away: 

  • Parties to a business transaction may want to lay out detailed provisions in the NDA to safeguard their confidential information, they may also want to consider the further protection of entering into intellectual property agreements if the material in question is highly sensitive and not protected by copyright or patent. Specific suggestions on further safeguarding are itemized above.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Confidential Information & Name For Your Product

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Allowing a provision under Toxic Chemical Substances Act to remain intact, allows manufacturers to use a generic name when publicly disclosing an industrial chemical they produce rather than the scientific name that is submitted to EPA (thereby protecting it’s IP, as the name would disclose the compounds involved to make it). This strikes the desired balance between maintaining public confidence in the safety of industrial chemicals, while giving manufacturers the incentive to create newer and greener chemicals without divulging the scientific names for the chemicals to submit to the EPA. This issue is something to be considered in confidentiality agreements as well. If the name of the product exposes information as to its makeup, care should be taken when drafting the ownership of confidential information clause and definition of “confidential information” section in the agreements to use a generic name in reference to the specific product.

Read the article here.

 

Take away:

  • By using a generic name to divulge a product to the public, instead of using the scientific or specific name, it may strike a balance between protecting your company’s intellectual property while appeasing any requests for information by the public or investigative agency.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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When a Confidentiality Agreement Isn’t Enough…

When determining how to protect specific confidential information, it is important to consider whether the terms of the confidentiality agreement offer at least the level of protection available under the common law.

When Will Confidential Information be Protected?

Under the common law, confidential information will be protected if the person claiming the confidentiality of the information can show that they have the sole right to benefit from the use of that information, someone else has wrongfully used it, and damages have been suffered as a result. The courts will also apply a multi-pronged test to determine the confidential nature of the information. This will include for example, the question of whether the information is generally unknown to others, subject to some measure of secrecy or protection, is in some way unique or novel etc.

 

Definition of Confidential Information

Under an NDA, the definition of confidential information can be expanded to provide contractual protection for information not considered confidential under the common law. Drafters beware! The way that confidential information is defined in the NDA could also turn out to be narrower than it would be under the common law.

When drafting the NDA, lay out all the terms that you wish to include, clearly setting out what it is that you are seeking to protect, and compare it to the common law. In some circumstances it will turn out that the common law could have offered better protection for the confidential information. If so, consider including the broader definition of confidential information in the NDA.

This could be especially important in the context of the sale of a business, where there are several bidders. If the confidential information is “defined” too narrowly, the successful bidder may run into the problem where the parties in question are utilizing the confidential/proprietorial information in a way that does not breach the agreement, but goes against the primary intentions of keeping the information out of the hands of the unsuccessful bidders. Ultimately, you may be permitting competitor organizations to use confidential information that was actually intended to remain confidential.

 

Application in Real-Life Cases

A prime example can be found in Novawest Resources inc.

v. Anglo American Exploration (Canada) Ltd. et al. 2006 BCSC 769. The case involved a dispute between a successful bidder for a mining property, and an unsuccessful bidder. The NDA covered confidential information used to stake new claims in “the area of influence”, which was defined to include a 1 kilometer zone. The unsuccessful bidder used the information to stake claims beyond the 1 kilometer zone, claiming that this did not breach the terms of the non-competition clause contained in the NDA.

The court agreed with this interpretation of the agreement, and concluded that the agreement permitted the unsuccessful bidder to stake anywhere outside the “area of influence”. Under the common law, the information was clearly confidential, and the unsuccessful bidder(s) would have been prevented from using the information to stake claims anywhere. Since the parties had voluntarily bound themselves to the terms of this agreement, they were held to the terms of their bargain. The court declined to read in the ‘extra’ restrictions of the common law.

 

Takeaways:

  • the definition of ‘confidential information’ should be drafted broadly to capture all of the information which is to be protected
  • non-competition and non-use provisions should be drafted to include all types of competition and uses which are to be restricted
  • comparing the definitions in the NDA with the protection offered under the common law can reveal any gaps in the NDA

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Is An NDA Always A Good Idea?

Entrepreneurs often assume that using an NDA will provide the tightest security possible for their confidential information. This is not always true.

The tightest security possible is to avoid disclosing anything not essential to the deal. For the information which must be disclosed, an NDA might be the tightest security available IF the NDA is robust enough for your circumstances.

 

What makes an NDA robust?

This will depend on several factors, including how the confidential information is defined; whether this definition is broad enough to capture everything that would be protected without the NDA; how the other party is permitted to use the information; and whether the NDA also contains non-compete and non-use provisions which extend your protection beyond simply maintaining the confidentiality of your information.

 

What if you have no NDA?

Without an NDA, the courts will protect your confidential information if you can show that you have the sole right to benefit from the use of that information, someone else has wrongfully used it, and damages have been suffered as a result. The courts will also apply a multi-pronged test to determine the confidential nature of the information. This will include, for example, the question of whether the information is generally unknown to others, you have protected it with some measure of secrecy, the information is in some way unique or novel etc.

 

What are the Advantages of an NDA?

The advantage of an NDA is that you can expand the definition of what is protected beyond what would otherwise be considered to be confidential information by the courts. Another advantage is that if your NDA says so, you can apply for a court order to stop someone from misusing the information – you won’t have to wait until all the damage is done and then sue them. The process for getting a court order will also likely be cheaper because the other party has already agreed that you can do this.

 

When are you better off without an NDA?

If the NDA is not drafted to suit your particular needs, you might be better off without one.

A high profile example of an expensive drafting mistake involved two mining companies bidding to purchase the mining interests of a third company.

 

The NDA prohibited competition by using the confidential information to stake new claims in the “area of influence”, which was defined to include a 1 km zone.

The losing bidder used the confidential information to (successfully) stake new claims outside the 1 km zone. The court held that the agreement was clear that the protection under the agreement covered only the 1 km zone, and the losing bidder did not breach the contract. Without the NDA, the protection would not have been limited to the 1 km zone. The court held the parties to their bargain. The result was that the successful bidder paid for information that the unsuccessful bidder used for free to ‘strike it rich’, all because the protection in the NDA was defined too narrowly.

 

Takeaways:

 

  • make sure that the NDA definitions capture all the information you want to protect
  • be cautious when using geographic limits to define your confidential information

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

What you don't know can hurt you! Subscribe to stay informed.

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Inter-lapping Business Documents and Employees’ Private Property

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The article discusses an employee’s general duty of confidentiality to an employer. Although there are some circumstances where there is an implied duty of confidentiality, it is better that the employer have a confidentiality agreement in place. One item the article recommends mentioning in a confidentiality agreement, is which information is not included in the definition of confidential information as it is in the public domain.

In particular, an employee’s social media or LinkedIn contacts may be included in information that the company deems confidential. This was considered acceptable in a UK case but has yet to be determined elsewhere. Employers should consult legal counsel when considering whether to include social media contacts in the definition of confidential information.

Read the article here.

 

Take away:

  • In a NDA, it is important to clearly define what constitutes as confidential information, especially where it may interlap with the employee’s private property.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Data Security is Essential for Company Credibility

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Wall Street Journal article

This month Home Depot announced that it was hacked and that 56 million credit-card accounts were compromised, and that around 53 million customer email addresses were stolen as well.  This Wall Street Journal article indicates that the hackers breached security in the following manner (among other things):

(1)    Took advantage of the security credentials of a third party vendor;

(2)    Entered the main system using a Microsoft operating system vulnerability;

(3)    Targeted self-checkout payment terminals data storage but avoided the cash register data storage (self-checkout was labelled in a recognizable way, whereas cash register was labelled numerically making it difficult to find); and

(4)    For five months, lurked beneath the surface, collecting and transmitting data during normal business hours and erasing evidence of its sale.

While my posts focus mainly on business law issues, prior to my legal career I worked as an IT professional (for 11 years including 3 years of coding and 7 years as an IT manager), and the Wall Street Journal article reminded me of the vulnerabilities faced by companies that are managing significant volumes of data, and the potential embarrassment and credibility issues that result from situations like the Home Depot situation.

A company and its’ data security team should be alert to news articles like this one, or legal cases, as they will help to illustrate risks which can be used to develop methodologies and protocols.  A suggested security protocol could be composed as follows:

(1)    Periodic (daily/weekly/monthly) audit of third party vendor id’s by HR, data security staff, and project managers, to ensure that they are not active longer than they need to be;

(2)    Data security and data architect collaboration to separate user information and credit card data so they are not stored together;

(3)    Data security mandated access restrictions to prevent (even restricted users) from accessing all sections of data;

(4)    Periodic (daily/weekly/monthly) audits by data security personnel of IDs that have access to sensitive information

(5)    Data security and data architect collaboration to disguise confidential parts of the site to prevent easy targeting of sensitive information by hackers;

(6)    Data security periodic (monthly) stress tests of the system to look for new techniques to breach the system (rather than relying on industry standard security protocols);

(7)    Daily alerts to multiple levels of personnel (inventory personnel, data base personnel, data security personnel) to notify when data is being extracted whether usually or unusually;

(8)    Periodic training to staff (at time of hire, and, at minimum, at quarterly training refreshers) to react quickly when alerted (and so on); and

(9)    Daily scan of news and legal articles to uncover security breach situations at other businesses, to develop a “risk database”, and to compare the security protocols to your business.

While this is not an exhaustive list, it sets out the basic elements of development of a security protocol, which are:  who is responsible, what are they doing, and how often are they doing that.

The protocol could also include the PR aspects of dealing with a hacker attack.

 The Wall Street Journal article indicates that Home Depot had developed a protocol in the event of a hacker attack – a 45 page playbook which included media messaging, and executive responsibilities.  While these are sensible points that a large enterprise should include in their protocol, the protocol should have very specific tactical measures to reduce the deleterious effects of a hacker attack.

Regardless of the size of the business, and whether the payment processing is handled internally or outside of the company, the company CTO should develop a security checklist, and should periodically report back to management on the risks inherent in the company’s existing system, with reference to current security breach situations in the news and otherwise.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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