7.1.5 Non-disclosure agreements

Now we are going to learn about non-disclosure agreements which are a formal method of protecting trade secerets. This chapter of the component is based on the Non-disclosure agreement documents of World Intellectual Organisation.1 
Worldwide, the law protecting confidential business information (or trade secrets) is very varied.

What can be protected?

All companies have secrets. Some are technical such as the detailed specification of a manufacturing process; some are business-related such as a list of customer names and addresses, which would be useful to a competitor. Some are of enormous value, e.g. the recipe for Coca Cola; others are less valuable. Some are simple, even one word long, such as the name of a company takeover target, others are complex, such as the details of a planned advertising campaign. The common factor is that all can be protected.

In recent years, many countries have introduced laws on the protection of confidential business information along the lines proposed by the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which states that for information to be legally protectable:

  • the information must be secret, i.e., not generally known or readily accessible to persons that normally deal with that kind of information;
  • it must have commercial value because it is secret;
  • the owner must have taken reasonable steps to keep it secret.

The most important thing is for SMEs to have a basic understanding and sensible internal rules, so that their valuable information retains that value and remains confidential.
An important factor in protection is proper management control. Managers should restrict access to secrets to the staff who need to know them - the biggest loss of confidential information from a company occurs when its staff leave and move to another firm in the same area of business. Also it is important to mark documents with a word such as "confidential" if this is the case, but avoid the tempting mistake of marking every document, because such marking will have no real meaning and will be ignored. Other security precautions may be needed, such as imposing password protections on access to information.

Please take 10 minutes to name the people in your organisation who you should involve when setting up your proper management control. Why do you want to involve them in handling confidental information? Make sure that not all the information is available to every member of the staff: for example on company server!

Sharing a secret – The non disclosure agreement In a normal business it is sometimes necessary to share a secret with another company. A manufacturer may need to have specialised tests carried out on a prototype, and does not want competitors to know details of the new product. An assembly company may wish to know if a supplier can meet a new, tough specification which will give a quick market advantage, but does not want anyone else to use the same specification. In both of these examples the prototype and the new specification must pass out of the owner's hands, but the owner will of course wish to retain control. The solution is to get the company to which the confidential information is to be disclosed to sign a Confidentiality Agreement, sometimes called a Non-Disclosure Agreement (NDA).2

Model Non-Disclosure Agreements

Please CLICK here for downloading a simple example of an NDA with instructions. You can also use it as a model.

Two-way NDAs

Sometimes the flow of information is two-way, with both parties disclosing confidential information to the other, such as when a joint venture is being set up between them. A few changes to the model one-way NDA can cover such an arrangement.

When to use NDA

Companies should not use a Non-Disclosure Agreement too often. The best way to keep a secret will always be: don't tell anyone. If a secret really must be shared, tell as little as necessary to achieve the commercial objective; sometimes a general outline is all that is needed, although for a technical appraisal the full detail of the knowhow will need to be passed over for review.
Sometimes an NDA sets out a period of time so that information disclosed, say within a defined year, falls within the agreement. This is useful for complex technical deals, such as joint ventures (JV), although a separate JV agreement will eventually be needed.
Also, chose the recipient very carefully - are you as sure as you can be that a promise of secrecy will really be kept?
One weakness of legal protection for secrets is that once they have been published in some way they cannot be "made secret" again. Even if the owner of the secret goes to Court and wins a payment for the damage suffered, this will not be as good as having the information kept confidential. Your competitors will be free to use your hard-won secrets. So the best practice is to make sure that the secret is kept in the first place.
This summary of confidential information, what it is, and how it can be protected, is based on English law. However, the principles of English law in this context can be applied to good effect in many other countries.3

1 www.wipo.int/sme/en/documents/disclosing_inf.htm#P53_4509
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