What is a Non-Circumvent Agreement
While some relationships between parties are built on trust and mutual respect, often times there are business reasons to want to document the relationship between the parties before they start any business dealings. It is important to ensure that the existence of the relationship itself, as well as the nature of the dealings that the parties are undertaking, are not misused by one party. Non-circumvention agreements are designed to offer protection to businesses from having their ideas or connections stolen away by a counterparty.
A non-circumvention agreement protects the entire relationship between the parties by prohibiting the parties from circumventing the entire relationship in favor of directly dealing with a third party . This protects the disclosing party from the counterparty attempting to cut off the disclosing party from communication on a deal, which would allow the counterparty to take the good deal that the disclosing party identified and have the benefit of a finder’s fee or commission for identifying the deal on his or her own.
Because it is a legally binding agreement that all parties need to abide by, a non-circumvention agreement requires a great deal of trust between the parties. A counter-party’s violation of the non-circumvention agreement can have significant negative impacts on the business of the aggrieved party, and causes trust and other problems between the parties.
Parties typically use non-circumvention agreements for several scenarios, including: Parties may also use a non-circumvention agreement in connection with a non-disclosure agreement as a way to explicitly prevent one party from trying to circumvent the other party’s finding of a business opportunity.
A Deep Dive into Non-Disclosure Agreements (NDAs)
For those who may not know, a non-disclosure agreement is, in general, an agreement among parties to keep information shared between them confidential. It is more about the sharing of information than prohibiting one party from engaging in some conduct that the other party prohibits. It can be mutual or one way, and can apply to all business dealings between the parties or just those described in the agreement.
Examples of when a non-disclosure agreement is entered into include, among others, where one party who is hiring another wants to disclose proprietary information (e.g. patents, trade secrets, copyright materials, etc.) to the other. It can also be used where one party wants to disclose proprietary information in order for the other party to evaluate a prospective investment, joint venture, sale or similar business transaction. Non-disclosure agreements are frequently used in the context of public offerings, loans or financing in commercial finance settings, intellectual property licensing, buyouts, employment relationships, technology transfers, real estate and similar situations.
The Role of Confidentiality Clauses
The most common, and generally the most important, clause found in NCND/CA and in settlement as well as stand-alone confidentiality agreements, is the confidentiality clause itself. Generally, contracts are enforceable when seen as a bargained-for exchange of legally binding promises. When an agreement is broken, a party may sue for breach of contract. So long as there is a contract in place, a party who can show that the promise of the other side was not kept in some way can likely prevail on a breach of contract claim. But breach of what promise? Among the most important promises found in NCND/CA’s is the promise of confidentiality. Although client-specific circumstances underlie the need for different versions of NCND/CA’s, the general subject matter they address deals with private information and how it may be used or disclosed between the parties. Throughout the agreement the parties have exchanged promises, and these promises are mirrored by corresponding considerations in the form of reciprocal promises. The promise to keep private information confidential is meant to mirror consideration in the form of information and other promises that are exchanged under the same agreement. Confidentiality provisions serve both to keep valuable and sensitive information confidential, and, equally as important, "going dark" silently signals to the person or entity in possession of that information that the time has come to shut out others who may otherwise hear or get wind of what has been learned. If a confidentiality clause contained within an NCND/CA or stand-alone confidentiality agreement is violated and confidential information is disclosed, claiming a breach of contract is one of the legal remedies available to the non-breaching party. But for the remedy of damages to be available, the breach typically must be material. Contracts should be precise so that parties have a clear idea of what the other side can do and what behavior is or is not conforming to the contract. In the context of NCND/CA’s there may be vast differences between information that is deemed confidential and information that is not. And therefore, the obligations of the parties to use (limited or otherwise), disclose (permissibly or impermissibly) and protect (reasonably and unreasonably) that information. When drafting a confidentiality clause in NCND/CA it is important to weigh how specific or broad the confidentiality clause will be in terms of how the information protected by the clause will be used, disclosed and protected. If the scope of the clause is vague it may be breached if the activity of the breaching party does not technically violate the letter of the clause. For example, under a so-called reasonable standard, the standard of care used to protect confidential information is not always the same, particularly in the absence of a clear understanding of the parameters of the confidentiality obligation. Making a confidentiality provision too open-ended under NCND/CA may outweigh the benefit of assuring the confidentiality of the information exchanged. Efforts to comply with a contractual requirement should be legally reasonable, consistent with any reasoned understanding of the circumstances, within the contemplation of the parties and in line with common practices. As in all efforts to draft NCND/CA, the interplay between what a client might seek to achieve with the information, and what a client is willing to commit to under the NCND/CA and related enforceable agreement should be carefully considered.
Comparing the Agreements
As mentioned above, NC/ND and CA agreements are similar in that they protect a party’s confidential information. Any information not made public by either party is deemed confidential. Confidential information includes but is not limited to business plans, sales reports, supplier and customer lists, product design specifications, computer programs, processes, drawings, charts, financial information, and pricing. Any type of proprietary information may be subject to a NC and ND Agreement.
There is an important distinction between NC/ND Agreements and CAs that should be noted. CA agreements bind one party from disclosing information to third parties. Non-disclosure agreements prevent the disclosure of information root of control. A NCA agreement on the other hand, prohibits a party from entering into similar agreements with a party’s competitor or the competitors of a party’s client. The purpose of a NC Agreement is to prevent self-dealing.
While there are variations of NC/ND and CA Agreements, the practical effect of these agreements is the same. They are both contractual instruments aimed at protecting confidential information. The difference in legal theory is that one type of agreement seeks to protect tangible property and the other protects intangible property.
Legal Enforceability & Common Challenges
Under U.S. Law, Non-Circumvention, Non-Disclosure and Confidentiality Agreements are Generally Enforceable as Long as They Meet Customary Standards for Contracts.
However, as with any contractual agreement, they may be difficult to enforce under certain circumstances. Even if a non-circumvention, non-disclosure and confidentiality agreement is properly executed, for example, it may be difficult to enforce in a jurisdiction that does not recognize the covenant not to compete as valid or where the transaction at hand, the business relationship, is not likely to span any appreciable time period. In some cases, it may be also difficult to enforce a non-circumvention, non-disclosure and confidentiality agreement if the parties do not follow up with each other as to the status of the dealings between them. Parties may agree to update each other on progress. If one party fails to update another, or if both fail to update each other, it could be argued that agreement was no longer in effect. While it may be difficult to enforce non-circumvention, non-disclosure and confidentiality agreements in some jurisdictions, in others where they are recognized, more often than not courts will uphold them unless there is some reason not to do so .
Common defenses to a claim brought by a party claiming that another party has violated a non-circumvention, non-disclosure and confidentiality agreement include:
- The agreement in question was not enforceable under applicable law as it did not meet all customary standards for a legally binding contract;
- The agreement was not enforceable because the terms of the agreement were vague and without specifics;
- The agreement was not enforceable because the party invoking the non-circumvention, non-disclosure and confidentiality agreement did not act in good faith in pursuing the pursuit of the intended business transaction;
- The agreement was not enforceable as there was no meeting of the minds with respect to the material terms;
- The agreement was unreasonably vague; and
- The agreement was not enforceable as the party invoking the non-circumvention, non-disclosure and confidentiality agreement did not fulfill its obligations under the same, thus excusing the other party of its obligations.
Top Tips to Draft Effective Agreements
As in most things, drafting is key when Formulating NCND/Confidentiality Agreements. There is no one size fits all Agreement; there may be multiple agreements to consider, given the circumstances of an individual deal. Stay away from the "standard form" NCND/Confidentiality Agreement template that you may have downloaded, since it may or may not apply to your particular transaction. Here are a few tips in drafting the NCND/Confidentiality Agreement:
Scope of the Confidential Information: Define specifically what the Information is, and who owns it. Consider placing the Information into two categories: that which is proprietary and that which is confidential and non-proprietary.
Term: Carefully consider the duration of time that the parties are bound by the Agreement. Terms of 3-5 years are common in the industry, but sometimes shorter terms are acceptable if the Risk/Reward shortens during the shorter term- on the other hand, Consider a term of 20 years if the Risk/Reward is such that the Confidential Information has a long time horizon that is valuable. Also consider the timeframe (timing) until the effective date of the Agreement, so both parties are protected. Time is short and circumstances may dictate that the parties may need a couple of months to act on the NCND/Cooperation Agreement.
No Contact Clause: This is critical in avoiding the risks inherent in a transaction. Be wary of a party that wants to avoid this Clause; this could be a warning sign that the party does not want to follow the restrictions in the Agreement!
Governing Law: Not all states treat Agreements in the same way, so choose carefully! In some states the General Plan Agreement is unenforceable. In the alternative, you may want to specify a more favorable forum to you (the Illinois Uniform Trade Secrets Act may be of great benefit here).
Provisions on Injunctive Relief: This is more important than you might think; NDNC Agreements are difficult to enforce after the fact, since the information has already been shared across company lines and among employees and owners. If an injunction is necessary to prevent such actions, this is NOT easy to obtain post-hoc. It is much cheaper to defend yourself or your company ahead of time, prior to confidential information being misused.
Ambiguities and Uncertainties: Be very careful of ambiguities in the Agreement. Any ambiguities will be construed against the party that drafted the Agreement. Plan for any contingencies that apply to your situation- each transaction is different.
Case Studies and Practical Examples
One frequently cited example of the importance of a Non-Circumvention, Non-Disclosure and Confidentiality Agreement is that of Sporting Goods Inc. v Cinder Path Ltd. In that case, Wade Rice, the principal of Sporting Goods, introduced his company to a Chinese manufacturer of sporting goods, owned and controlled by defendant Alan Cheng. Rice visited the factory in China numerous times and disclosed confidential, proprietary information regarding the multi-sport ball he wished to produce. Cheng, aware that Rice was negotiating with Sporting Goods, falsely assured Rice that Cinder Path had competitive products made in Taiwan and that it would refrain from using or sharing pricing information with other buyers for 90 days, and further, that he would pay reasonable royalties to Rice for use of his technology. Of course, Cheng later signed a non-disclosure agreement for purposes of dealing with Sporting Goods, but denied that he had learned anything confidential during negotiations with Sporting Goods. Cinder eventually produced soccer balls for Sporting Goods at a price higher than that for which it provided them to Cheng.
A second case is BAE Sys. Integration Inc. v. Foxhound Techs. In that case, the plaintiff, a defense contractor, showed prototypes to an Arab engineer named B. M. The plaintiff’s witnesses testified that, to the best of their knowledge, the engineer left the meeting with a fairly good idea of the defendant’s sensor technology. Foxhound Technologies subsequently attempted to sell observance stations to Arab armies and was awarded contracts to produce a number of booby-trap stations for the Republic of the Congo. The court held that the defendant’s use of plaintiff’s trade secret constituted theft of property in violation of federal law. The court emphasized the significance of B.A.E.’s efforts in maintaining the confidentiality of its proprietary information.
The case of Bumpus v. Newell Window Technologies (Rochester) is also instructive. There, in late 2006, a terminated employee e-mailed a competitive distributor, intending to warn the distributor of potentially dangerous product designs. Instead, the competitor began distributing the competitor’s products. After months of litigation, the two companies settled for $1 million and a halt to the sale of competing products for two years. The sales to new accounts of the competitor’s products were also effectively stopped.
Of course, there are countless other examples that underscore the importance of these agreements, such as the cases of Cookie Co. v. La Hamburger (2006), Axxiom v. Midcon (2005), Eureka Inv. v. Capewell (1997) and University Pat. v. Periodical.
Future Implications and Considerations
Potential future trends and considerations will be affected by technological advancements in the digital realm. New inventions in artificial intelligence and the digitization of the world’s information create potentially far-reaching implications for virtually all business activities, but in particular the protection of confidential information.
For example, the problems presented by the vulnerabilities inherent in cross-border technology transactions involving the use and transfer of confidential or proprietary information may be compounded substantially. Other emerging technologies arguably raise even more complex issues. In particular, technology that can automatically track the dissemination and use of digital information post-transfer raises new challenges for drafting effective non-circumvention, non-disclosure, and confidentiality agreements, and monitoring compliance . Whatever the advantages of such system may be, implementation may require modification of some traditional drafting techniques in order to prevent circumvention of the agreement content, which is the specific goal of this contract type.
Further, the availability and actions of competing businesses call into question which party is better positioned to prevent the other from gaining a competitive advantage.
As cybersecurity challenges evolve, continuous monitoring and updating of the agreed information security safeguards provision(s) in each of the NNNCA, NDCA and NCA, to meet the requirements of applicable law or best practices regarding the protection of confidentiality, will become ever more important.