Here's a question I received about Confidentiality Agreements. My answer follows below.
Question:
I am the owner of a food manufacturing business and I am talking to a large food company that is looking to outsource the manufacture of their signature frozen entrée dish. They don’t want any one party to have access to the entire secret recipe, so they plan to enter into subcontracts with multiple manufacturers to make the different parts of the dish. My company will be the subcontractor to make the special sauce part of the dish for them. They want me to sign a secrecy agreement where I promise not to disclose (forever) the secret recipe of the sauce. Since I’ve not yet seen the recipe, I have to take their word that the recipe is truly unique and secret.
The secrecy agreement states that “Confidential Information includes any information disclosed by Disclosing Party [that’s them] to Receiving Party [that’s me], whether in written, tangible or verbal form, including, but not limited to, business, financial, sales, marketing and technical information. An exception is made for any information that is or becomes a part of the public domain.”
Is this language pretty standard, or can I try to negotiate it?
Sincerely,
Bob
Amarillo, TX
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Dear Bob,
“Standard” is a relative term.
Keep in mind that, like the price you pay for your home or car, most contract provisions can be negotiated.
Whether your counterparty budges depends a lot on your relative bargaining power.
I assume in this case that there will only be a one-way flow of information - the secret recipe from your counterparty to you. In other words, I assume that you don’t have any of your own confidential information that you will be furnishing to them. If you do, then that will change the dynamics of the negotiations because you’ll need to enter into a mutual confidentiality agreement. In that case, what’s good for the goose becomes good for the gander because it’s hard to negotiate less stringent confidentiality obligations for yourself at the same time you try to bind your counterparty to more stringent confidentiality obligations.
Here is some general information that may help you. Remember that this is not legal advice, and I’ve made no attempt to look at your entire contract or gather any additional information about your specific situation. Consider hiring an experienced attorney in your state to help you to formulate a plan of action tailored to your specific situation.
Definition of Confidential Information
The quoted language appears to state the definition of Confidential Information, along with one exception. The first question you want to ask yourself is how much and what kind of information will be disclosed to you. Is it just the secret recipe or is it a bunch of other information? Right now, the draft’s definition of Confidential Information is very, very broad, and designed to encompass a wide range of information. The draft also makes no attempt to distinguish between information disclosed in written or tangible form (such as on disk or via samples) on the one hand, and information that is verbally disclosed on the other hand. This means that even information that is mentioned in passing conversations becomes subject to the agreement (which may be what your counterparty intended, as onerous a burden that might be for you).
From your perspective, it’s best to tighten up the definition to limit “Confidential Information” to information disclosed only in written or tangible form and clearly marked or stamped as “confidential”. If they insist that verbal information also be protected, then try to negotiate language that limits the protection to only verbal information that they clearly indicate is “confidential” at the time of verbal disclosure, and that they reduce to written form or summary written form within a very short time period after the verbal disclosure. Have them stamp these written documents as “confidential” as well. This will help you to keep track of what’s confidential, and what’s not. Basically, you want to shift to your counterparty the burden of proving that they disclosed something to you – if it’s not stamped, then it’s not confidential. As currently drafted, you have the burden to prove that they didn’t disclose something to you. Another way to try to limit your liability is to eliminate categories of information you don’t want or need to see. For example, if all you need is the secret recipe, then try to negotiate to eliminate the financial information and other categories listed in the definition.
Public Domain Exception
You mention that your secrecy agreement requires you to keep the Confidential Information secret “forever”. This is a logical and reasonable requirement from a “secret recipe” owner’s perspective (think cola or franchise fried chicken). If you want to work with them, you may have no choice but to agree to keep the recipe confidential indefinitely. But it’s also logical and reasonable for you to question why you have to continue to keep something confidential that may already or may in the future become widely known. You alluded to this possibility when you mentioned that you have no idea if the recipe is unique. If, for example, it turns out that the recipe can also be found in dozens of cookbooks, then the recipe isn’t a secret. Fortunately, their draft already contemplates this situation by containing an exception to the definition of Confidential Information – roughly translated, the exception states that if the information, in this case the secret recipe, becomes generally known to the public (part of the public domain), then the recipe is no longer deemed “Confidential Information”. If the recipe is no longer deemed “Confidential Information”, then it follows that it is no longer protected. Interestingly, your counterparty failed to qualify the words “An exception will be made for any information that is or becomes a part of the public domain” with the words “through no fault of the Receiving Party” or “other than as a result of a violation of this Agreement by the Receiving Party”. It’s not likely, however, that a court would let you get away with purposely revealing the secret recipe, and then claiming that the recipe legally has become part of the public domain.
Many confidentiality agreements also contain the following additional exceptions to the definition of Confidential Information:
An exception for any information that becomes known to the Receiving Party via disclosure from a third party, provided that the third party has the lawful right to make such disclosure. This means that the information is not deemed Confidential Information if the Receiving Party receives the information from somebody else, as long as that party didn’t obtain or disclose the information illegally (for example, industrial espionage) or contrary to a confidentiality agreement it is a party to.
An exception for any information that is independently developed by the Receiving Party, as shown by written records of the Receiving Party. This means that the information is not deemed Confidential Information if the Receiving Party independently develops the secret recipe. Most secret holders are going to be reluctant to grant this exception because they don’t want to give the impression that they are encouraging this type of activity. On the other hand, if you turn the tables and reverse roles, most large companies that are the Receiving Party in confidentiality agreements will probably want to have this exception. They’ll claim to have well-established “Chinese walls” to keep your secrets from reaching other employees (in other divisions, etc.) that may be working on similar projects.
