Tuesday, 27th November, 2018

Do confidentiality agreements with time limits protect your trade secrets?

A lot of clients, particularly those based in the US, ask us about confidentiality agreements that include a time limit on the confidentiality obligations (usually between three and five years). Time limits are particularly common in the tech sector, where technology tends to move and evolve more quickly.

Although commonly used, it is worthwhile to stop and consider why we should accept time limits, and how we can include a time limit in a confidentiality agreement while also providing adequate protection for trade secrets.

Why include time limits at all?

There are both legal and commercial justifications for including time limits in confidentiality agreements.

The commercial reasoning is that large companies want to have a clear cut-off for their confidentiality obligations. They don’t want to have to track confidential information indefinitely, as that can be logistically difficult to do in a large organisation.

The legal justification is that some states in the US (for example Kansas, Illinois and Virginia) will not enforce an indefinite obligation to keep information that is not a trade secret confidential. In those states, the courts wouldn’t read down the confidentiality obligation; they wouldn’t enforce it at all. That rule only applies to general confidential information, not to trade secrets. They will enforce indefinite confidentiality obligations that apply only to trade secrets.

Other jurisdictions also place limitations on the timeframe for enforcing confidentiality obligations. For example, the Australian High Court has held that confidentiality agreements with unlimited obligations of confidence will not be enforceable without a clear proviso that the obligations of confidence no longer apply to information that enters the public domain.

The risk of fixed terms

So why don’t all confidentiality agreements have fixed terms?

In common law countries such as New Zealand, Australia and England, it is normal to see confidentiality agreements that continue to apply to information for so long as it remains confidential. In principle, this aligns with the protection that confidential information gets under equitable rules governing breach of confidence claims. If the information can remain confidential forever, it should get corresponding protection.

One risk in accepting a confidentiality agreement with a fixed term is that the discloser is implicitly accepting that its confidential information is free for the other party to use and disclose after the expiry of that fixed term. More often than not, this is not spelt out explicitly in the agreement itself. But we think it is likely to be the consequence. Otherwise, why have a fixed term to begin with?

It follows that, if you have a valuable trade secret that could remain confidential and valuable for five years, it is risky to disclose that under a confidential agreement with obligations that end after two years.

Another danger of disclosing trade secrets under a time-limited confidentiality obligation is that courts in the US have found that it can result in the loss of trade secret protection altogether. Disclosing trade secrets under anything less than an indefinite confidentiality obligation might not amount to taking reasonable efforts to maintain the secrecy of the trade secrets, and trade secret protection could be lost even if the trade secret has not been made public.

This puts parties in a bit of a bind, where it seems that an indefinite confidentiality obligation might not be enforceable and might not be accepted by large corporates, but disclosing trade secrets under a time-limited confidentiality obligation risks loss of trade secret protection or loss of protection for any confidential information disclosed.

A possible solution

One solution to this problem is to have a split confidentiality obligation, where the obligations relating to trade secrets apply indefinitely, but the obligations relating to all other confidential information apply only for a limited period. This should be generally enforceable and constitute taking reasonable efforts, as required, to maintain trade secret protection.

The agreement should still contain provisos that information that enters the public domain through no fault of the parties should cease to have protection under the agreement.

This type of drafting does need a clear definition of what is a trade secret and what is other confidential information. What will fall into each basket would depend on the circumstances, and we recommend specialist advice when drafting this type of provision.

One option would be to call out particular documents, or particular information, and list that in the confidentiality agreement as having indefinite protection as a trade secret. Obligations relating to all other information disclosed could then be time-bound. The list of information receiving indefinite protection could be added to by agreement or by notice, depending on the circumstances of the deal.

What is clear though, is that blindly accepting time-bound confidentiality agreements for your most valuable trade secrets is not a good idea.