Time limits in Confidentiality Agreements

It is not unusual for businesses to insert in a contract a time limit on nondisclosure of confidential information without giving full consideration of its effect at the end of that period. Here we will take a look at the effect of such time limits on your business.

Trade secret owners and business

If you are the owner of a trade secret you may often be required to disclose protected information to customers or joint venture partners in order to conduct business. When this occurs the parties will usually enter into confidentiality or non-disclosure agreements. The party receiving confidential information may try to limit their confidentiality burden by negotiating the shortest possible end date for the obligation to maintain confidentiality.

By agreeing to a time limit, you risk destroying the long-term value of your trade secrets. The courts are unlikely to find that the information remains a trade secret after the expiration date. This will be the case even if your business is suing an unrelated party for using your information.

You could insist that confidentiality agreements without specified time durations be used, if there is any likelihood that trade secret information will be disclosed. However, some states see confidentiality agreements without a time limit as unreasonable restraints on trade. This is particularly so if it applies to information that, although confidential, is not really a trade secret under applicable law.

Using a perpetual confidentiality agreement in these states will be risky if you intend to disclose confidential information that you consider a trade secret together with confidential information that is not a trade secret. A court may declare the agreement unenforceable. If this happens, you would lose trade secret protection for any information disclosed. In these states, it is usual to include two options of information protection:

(i)      a one or two year term covering non-trade secret confidential information; and

(ii)    a longer term protecting trade secret information for so long as the information remains a trade secret under applicable law.

Background

The key case on this topic is Maggbury v Hafelewhich had been in decided in the High Court in 2001. The court found that a time limit on not using information which entered public domain is, a restraint of trade, thus making a perpetual obligation of confidence unenforceable. However, confidential information can be subject to perpetual confidentiality obligation.

Companies operating in different states

If your company operates in numerous states and needs to disclose confidential information, it is prudent to determine the applicable state law regarding confidentiality obligation durations in each state. If your company does business in a state that accepts the enforceability of perpetual confidentiality agreements, you could designate that state as the governing law of the agreement, and use it when disclosing trade secrets.

Trade secret owners and employees

Trade secret owners also must regulate their present and former employees’ use and disclosure of trade secrets. Agreements should plainly inform employees that all of the employer’s information is confidential. It is usual for a new employee to sign an agreement to protect the confidentiality of the company’s information, including on departure from the company. Trade secrets should be treated separately. A great deal of care is needed in this regard, because courts are not keen on restricting the employee’s mobility and right to use skill and general knowledge in future employment. You may inadvertently undermine your trade secret protection by placing an expiration date on the employee’s obligation to protect confidentiality of the company’s trade secrets.

What should I do next?

Contact us if you would like to discuss time limits in confidentiality agreements in general, or if you require specific legal advice regarding your agreements please get in touch with us. Our lawyers at You Legal will be happy to advise you in this regard.

* This blog is for general guidance only.  Legal advice should be sought before taking action in relation to any specific issues.