Confidentiality Agreements in International Transactions
An international confidentiality agreement is a contract between parties in two or more countries that establishes the terms under which parties must protect certain confidential information. This contract is fundamental to building trust with international counterparts and is crucial for protecting information when entering foreign markets. Most often, these international confidentiality agreements are created as non-disclosure agreements (NDAs), mutual NDAs, or confidentiality agreements. They may be included in broader contracts, but should always be viewed as a stand-alone agreement. While NDAs and confidentiality agreements create legally enforceable obligations , such agreements may not be effective in banning other uses of the information.
International confidentiality agreements have several purposes: they can define trade secrets and confidential information; they can prohibit disclosure of confidential information or agreement on the criteria of protection; they can preserve information under the condition of non-disclosure; they can establish the method of resolving disputes that arise from breach of contract; or they can allow a party to maintain independence and statistical controls in its country of operation.
Elements of a Confidentiality Agreement
Most confidentiality agreements regarding the protection of confidential information are standard contract terms that will apply to any cross-border confidential information arrangements. These typical terms are: the definition of confidential information (i.e., by category and by enumerating specific information); what obligations are owed by the parties with regard to that information; and what is the term of that undertaking.
In a particular case, one would want to include a definition of confidential information that includes such categories as "proprietary processes and practices; business, technical and financial knowhow, information and data; trade secrets; customer lists; current, contemplated, pending or withdrawn applications for patents for inventions; issued patents for inventions; copyrightable material; improvement and enhancement ideas both industrial and technical; marketing, sales, research and development data; sales, manufacturing, purchasing and service records; engineering, parts and configuration lists and drawings; and any other information that either party deems, on a reasonable basis of trust, as a trade secret or private and proprietary business, technical or financial information."
Regarding the undertaking in respect to that information by the receiving party (the party who is the recipient of the confidential information), the obligations can typically be listed as: (1) to keep the information secret; (2) to treat it like it is your own secret; (3) not to use that confidential information for any commercial or business purpose; (4) to take all reasonable steps to protect and preserve the confidentiality of that information; (5) not to disclose that information, directly or indirectly to any third party without prior written consent; and (6) to require all of its employees and agents to undertake similar confidentiality obligations.
Regarding the duration of the undertaking, a standard term is five years. In addition, firms will want to include language about what happens to confidential information at the end of that term (i.e., to return or certify destruction of confidential information); and if the information ceases to be confidential by the reason of it becoming commonly known through no fault of the receiving party.
Choice of Law Considerations in International Agreements
Navigating the legal contours of a confidentiality agreement can be tricky and fraught with potential exposure for the buyer that often is not apparent at the outset. Generally speaking, courts in the United States will enforce confidentiality agreements in the commercial context provided that such agreements are reasonable, in writing, do not impose an undue hardship on the producing party to comply with the restrictions and are not contrary to public policy. However, regarding restrictions on trade or competition, most jurisdictions require that such restrictive covenants satisfy the adequacy of a legitimate business interest. And most jurisdictions require that trade or non-compete restrictions cover a reasonable time limit after the termination of employment and a reasonable geographical area. What constitutes a "reasonable" time limit or geographical area is something that must be determined on a case-by-case basis, but the admittance of evidence of the damages that were actually suffered as a result of a breach of a confidentiality agreement and/or a competitive violation may make enforcement of a confidential agreement much more probable.
Some jurisdictions maintain a public policy to discourage restrictive covenants designed to protect business information interests, but generally speaking this applies to restrictive covenants imposed on employees not trade secrets. Requires large investment in time and money to develop relationship commercial secret. Courts generally enforce confidentiality agreements imposing a duty of secrecy on employees. Courts recognize that employers are entitled to the benefit of employees’ experience and training by imposing some limitation on an employee’s use of confidential information acquired during employment.
Enforcement Issues for International Confidentiality Agreements
The issue of scope presents itself in two types of situations. The first is the scope of what the information subject to confidentiality protections consists of; the material may be defined too broadly or too narrowly. The second is the scope of the obligations created by an agreement; a company may attempt to avoid liability for use or disclosure of confidential information by excluding certain indirect actions from protection or by setting the geographic scope of the agreement within particular countries. Foreign companies which are potentially subject to a U.S. action may be able to avoid liability by committing acts abroad that they would otherwise be prohibited from doing within the borders of the United States or the United Kingdom.
An additional challenge with respect to enforcement is the difficulty in enforcing a judgment given the differing enforcement regimes of different countries. An agreement with a foreign entity can require binding arbitration under the FAA. Some require the governing law to be the law of the United States, requiring that a court enforce the agreement as an implied contract notwithstanding a failure in the agreement to state a law which will govern the interpretation of the agreement. For agreements involving only the United States and its territories and possessions, courts have held that a choice of law provision, whether express or implied, is an adequate basis for enforcing confidentiality provisions.
A related issue is the enforcement of judgments. Even if a company successfully brings an action against a former employee, bringing the action might be futile because of the existence of differing legal systems. A company may be able to enforce its judgment in the U.S. but it may not be able to enforce its judgment in a foreign jurisdiction. In some countries, litigants from the United States are viewed with suspicion and foreigners can suffer discrimination in a foreign court system, particularly if the litigation concerns trade secrets.
Helpful Guidelines when Drafting an International Agreement
Here are some drafting tips for your international confidentiality agreements:
Definitions. Draft your agreement in broad terms. Always define "Confidential Information," so there is no doubt as to the scope of information that is confidential.
Enforceability. If you are relying on foreign law and/or using a forum outside the United States for dispute resolution make sure the agreement is enforceable under the chosen laws and in the agreed dispute resolution forum.
Language . Use the primary language of each party for the versions of the confidentiality agreement. Have it translated into the other party’s primary language. Make sure both parties have an adequate understanding of the business terms and legal protections and obligations in the agreement and its translation.
Jurisdiction. Choose forum and have the agreement signed and dated in that jurisdiction. For multi-jurisdictional agreements, it may be prudent to obtain counsel in each jurisdiction before the agreement is signed.
Examples of Breaches and Legal Remedies
International confidentiality agreements are not infallible and breaches can occur, leading to disputes and disputes lead to litigation. Whether the documents purport to protect trade secrets, protect confidential information, or some subset of those two significant pillars that govern the commercial relationship, if a dispute arises the manner in which the agreement is drafted may dictate whether a breach would have been overcome or whether the breach is forgiven in the context of been protected information in the information generally. RuggedCom, Inc. v. Lan-Tel Communications, Inc., Case No. 12-1051-LM (D.N.H. Dec. 3, 2014), dealt with a suit for judicial enforcement of a confidentiality agreement. RuggedCom, Inc. was an employer who had made a public acquisition of another company in to whom it had exposed its confidential information pursuant the confidentiality agreement. The issue in litigation was whether the defendant in the case had acted in a grounds for terminating the contract (and therefore terminated the disclosure obligation). Judge Landya McCafferty cited New Hampshire law as controlling – even though the parties were from Canada and the agreement invoked Canadian law – when it said: "New Hampshire law provides that ‘[c]ourts should not make new legal rules absent compelling reasons. When identifying the law governing a contract, a party must select one set of potentially applicable rules. Once chosen, courts will not second guess a party’s decision as to which of competing legal rules to apply.’ Grantham v. Irsik, 2011 DNH 60, at *9 (D.N.H. Mar. 16, 2011) (quoting TENC, LLC v. Amgen, Inc., 631 F.Supp.2d 1204, 1215 (D.D.C.2009)). As a result, the parties’ choice of law has been held to be the law of New Hampshire. See id." The Court held, in relevant part, that there was a material question of fact as to whether the defendant had engaged in conduct that was grounds for termination. In the absence of a jury verdict on that issue, there was no basis to terminate any disclosure obligations. RuggedCom got a partial win and was able to continue to use the confidentiality provisions of the agreement. RuggedCom received an order enforcing confidentiality agreements, but the case illustrates that confidentiality agreements and the remedies to enforce them are not ironclad.
Confidentiality Arrangements and the Protection of Intellectual Property
To fully preserve IP, it is not enough to use confidentiality agreements, which are often also called non-disclosure agreements (NDAs), contracts, statements, and declarations.
Confidentiality agreements should address IP issues as well for most IPs. The most important IPs with regard to cross-border matters are trade secrets, trademarks, and copyrights (although in Canada trade names and trade dress may sometimes be considered a type of trademark). Trade secrets are "[a] formula, practice, process, design, instrument, pattern, or compilation of information that is not generally known or reasonably ascertainable to people who can obtain economic value from its disclosure or use." Most trade secrets rely on confidentiality as their means of protection. The list of possible items that might be protected as trade secret is virtually endless. In business, trade secrets tend to include financially or technically valuable data that cannot be patented, for instance, software source code, algorithms, customer lists, samples, data sets, designs, and even complex components that require special assembly as part of a trade secret ecosystem . Accordingly, trade secrets remain among the most commonly protected forms of IP across many jurisdictions internationally. In Canada, restrictions against disclosing trade secrets are recognized and enforced in varying degrees by all provinces and the federal government.
The other most important IP assets for cross-border businesses are trademarks and copyrights. Trademarks generally protect any distinctive marks or symbols that help the public identify a source of goods or services. Copyrights protect original works of authorship that are fixed in a tangible medium of expression. Trademarks come in the form of words, sounds, graphics, and colors. Trademarks can also include trades dress, which refers to the overall impression conveyed by the distinct packaging, design, or look of a product. Trademarks tend to endure as IP assets and are often registered to receive legal, administrative, and constitutional protections in many jurisdictions. Copyrights similarly tend to endure as IP assets, but copyright could last indefinitely in some cases.