You are thinking of marketing a new product or service. You decide you need help from a marketing consultant. The consultant does great work, but you believe she may do work for your competitors and you are worried about the possibility that your ideas may be used to help out the competition. How do you protect yourself?
You have decided to hire that hot new salesperson that the sales manager has been touting to beef up your gross margin. You know this person will learn everything about your business: customer information, sales forecasts, volumes, profitability, product lines, contract terms; in other words, everything a competitor needs to put you out of business. What happens if the new employee leaves after six months?
You want to raise capital for expansion. You've located a potential investor, who, of course, wants to look at your books and your business plan. However, you worry that if you can't strike a deal, the investor might just decide to use your plan to start a competing business. What's the solution?
The answer to each of those questions is to use a confidentiality agreement, possibly in combination with other agreements, such as covenants not to compete. Although the situations are very different, the need is the same: preserving the confidentiality of your critical and proprietary business information to keep it from being used against you by the competition.
Why do I need this? Can people just steal my information?
It depends. Some types of information are protected by intellectual property laws, such as patent, trademark and copyright. However, most business information, such as customer lists, sales forecasts and financial information, is not protected by those laws.
Some types of confidential information may be afforded protection by the Uniform Trade Secrets Act (La. R.S. 51:1431, et seq.). That statute protects 'trade secrets' from 'misappropriation' by persons who have no right to the information.
For purposes of the Act, a trade secret is information (including formulas, patterns, compilations, programs, devices, methods, techniques or processes) which derive actual or potential independent economic value from not being generally known by other persons and not being ascertainable by 'proper means' and which is the subject of reasonable efforts to maintain its secrecy.
Courts have held that such diverse types of information as pipe handling systems, chemical formulae, customer lists and special pricing lists can under the right circumstances, constitute 'trade secrets' entitled to the protection of the Act. If particular information satisfies the requirements for 'trade secret' status, and if it is 'misappropriated' within the meaning of the Act, the law provides remedies, including injunctive relief to prevent or rectify the misappropriation, payment of a royalty to the owner of the information, and damages, either in lieu of or in addition to injunctive relief.
However, what is more important to most business owners is that many types of information and many common situations where business information is disclosed, do not qualify for protection under the Act. For example, if the information does not fit the technical definition of a trade secret or if it disclosed to someone who is not obligated to maintain the secrecy of the information, then the statute may provide no remedy.
Improper use or theft of information by employees or others may also constitute a breach of fiduciary duty or a violation of the Louisiana Unfair Trade Practice and Consumer Protection Law, La.R.S. 51:1401, et seq. in some cases. However, that statute only comes into play after the damage is done, and requires that the owner of the stolen information incur the cost in time and money to prosecute a lawsuit. Then, injunctive relief is not available to prevent the ongoing misuse of the information or to require its destruction or return; the available remedies are actual monetary damages and, in some cases, attorney's fees and treble damages.
The bottom line is that even in situations where statutory laws provide some protection, that protection is often inadequate, incomplete and costly to implement. That is why in many cases, indeed, in most cases where truly sensitive business information is disclosed to persons who may have no legal duty to keep it secret, confidentiality agreements make sense.
More popular than ever
In fact, with the increase in competitive pressures being experienced by virtually every business, such agreements have become more popular than ever before. The reason is simple: They are an effective deterrent to the misappropriation of information and they both can complement and bolster a claim under the Trade Secrets law by providing evidence of the owner's efforts to keep the information secret.
So, what is a confidentiality agreement? Many are stand-alone documents, although they are also frequently incorporated into other business agreements such as letters of intent, distributorship agreements, employment agreements, and purchase agreements. Nevertheless, all confidentiality agreements share some basic features: They identify the parties and the nature of their relationship, whether principal-agent, employer-employee, independent contractors or buyer and seller. In the case of consultants and employees, they often describe the types of services that the consultant or employee will be performing for the business. They define the types of information that are considered confidential and create the specific obligations to keep that information confidential under specified terms and to not to use the information for purposes other than those having to do with the specific relationship between the parties.
They also typically set forth exceptions to the obligation of secrecy, such as when the information becomes public other than through breach by the party bound to secrecy, or when the party is compelled to disclose information under court order.
Finally, most confidentiality agreements set forth a term during which the information must be kept confidential, and specific remedies available in the event of the breach of the agreement, such as injunctive relief, damages and attorney's fees. Contractual injunctive relief clauses are typically broader and easier to use than statutory injunctive relief.
Are they Enforceable?
When the facts warrant, the courts definitely will enforce confidentiality agreements, and a well-drafted agreement is powerful protection. In fact, the Uniform Trade Secrets Act expressly states that it does not apply to, and does not displace, contractual liability for breach of an agreement not to disclose confidential information.
The key to enforcement of any contract, especially agreements which tend to restrain the use of information or limit the right of someone to compete is make them clear and specific. Always consult with a knowledgeable practitioner to make sure that your contract is the best that it can be. This is an ever-evolving area of the law, and it is essential to get good legal advice.
