Tech & Sourcing @ Morgan Lewis

Contract Corner

Exceptions to confidentiality obligations are largely standardized, but in some contracts a copy-and-paste approach could, at best, lead to uncertainty and, at worst, undermine key aims of the transaction.

During the contract drafting process, confidentiality provisions are often repurposed from other agreements, like nondisclosure agreements (NDAs). At first blush, given that confidentiality is its fundamental purpose, an NDA seems like a logical, time-tested starting point. But, in many situations, the context of an NDA is relatively simple—the parties are engaging in some preliminary discussions, and each party discloses some of its own information in connection with those discussions.

Commercial and corporate transactions, on the other hand, can be much more complex. Under a development agreement (or services agreement), for example, one party may collect, generate, or develop data, materials, or other intellectual property for the other party. Another example is a transition services agreement (TSA), which often involves previously affiliated entities and is merely one piece of an M&A transaction puzzle. In fact, many contracts exist within a larger context, such as a longstanding business relationship. In these scenarios, unlike preliminary business discussions covered by an NDA, the scope of each party’s respective confidential information may not be as clear cut.

A common premise of confidentiality provisions, and often a condition precedent for confidential treatment, is that one party discloses its confidential information to the other party. But what if the other party already possessed the information because it had a prior affiliation or relationship with the first party? Or what if the other party is the one that discovered or created that information for the benefit of the first party? In that case, under the same agreement where the service provider was paid to create proprietary materials for the customer, the service provider might have no obligation to treat such materials as confidential.

Some parties take a close look at the definition of “Confidential Information” to make sure that it covers their most critical proprietary materials. And, to erase all doubt, they may state that their confidential information includes, without limitation, particular items. However, traditional confidentiality exceptions might chip away at such safeguards. As with the scope of what constitutes confidential information, the scope of the exceptions should be carefully reviewed for any gaps or unintended consequences.

A confidentiality exception provision might look something like:

Confidential Information excludes information that (i) without any breach of this Agreement by the Receiving Party, is or becomes generally known to the public; (ii) was in the Receiving Party’s possession or known by it prior to the Effective Date; (iii) is rightfully disclosed to the Receiving Party by a third party without restriction; or (iv) is independently developed by the Receiving Party without use of or reference to the Disclosing Party’s Confidential Information.

Some parties push for their own preferred phrasing of these exceptions. For example, the Receiving Party might not be 100% sure that a third party had the right to disclose certain information, so the parties might revise item (iii) to be disclosure by a third party if the Receiving Party reasonably believed such third party had the right to make the disclosure. The parties might also clarify that prior knowledge and independent development must be evidenced by the Receiving Party’s written records.

Some circumstances, though, may warrant more fundamental changes. For example, if the contract is part of a larger transaction or relationship, the parties might revise item (i) to be “through no wrongful act or omission by or on behalf of the Receiving Party” instead of tying the exception to this specific agreement. Or, if some information was disclosed between the parties prior to the applicable effective date, the parties might revise item (ii) to be knowledge or possession prior to receipt from the Disclosing Party. But even this change could be inadequate in the TSA or development settings if the Receiving Party did not technically receive the information from the Disclosing Party.

The underlying concept the parties are trying to convey is that the Receiving Party knew the information independently. Item (iv) expressly includes the “independently” qualifier with respect to information developed by the Receiving Party. But even this exception could be open to interpretation. The development activities contemplated under item (iv) are independent of what? The performance of the agreement? The parties’ relationship?

One way to tackle the risk that some of these exceptions are confusing or overly broad is to move the “independent” concept to the beginning of the provision so that this limitation applies to all of the exceptions. For example, “Confidential Information” could exclude “information that, independently of this Agreement and of any prior or other agreement or relationship between the Parties,” falls within one of the listed exceptions.

To be clear, this approach might not always be workable. For example, if one party is performing public relations services for the other party, at least some information would become publicly available through, rather than independently of, the performance of the agreement. In that case, the “independent” qualifier could be inserted in each relevant exception (rather than in the lead-in language). But the core principle remains that confidentiality exceptions should not be set in stone—as with other contractual provisions, the terms should fit the contemplated circumstances.

It is also worth noting that the exceptions could be framed as exceptions to the confidentiality obligations (i.e., the requirements and restrictions related to safeguards, use, and disclosure) instead of exceptions to the definition of Confidential Information. Although the Receiving Party may have independently obtained certain information, that information may not be widely known and may still be generally protectable as a trade secret.

Although confidentiality exceptions often look similar across contracts and although NDA language may seem bulletproof, under the right (or wrong) conditions, the standard template may prove brittle.