Courts have recognized that, under certain conditions, confidential information has value and is entitled to protection. Information may have value, for example, because it takes time and effort to assemble, it is the result of significant experimentation, or it reflects an inventive insight. Such information may be entitled to protection if it is appropriately treated by its owner. Although the basis of the law is simple, the application of the law is not.
The Basic Law
There are two basic requirements for confidential information to be entitled to protection:
- The subject matter which is sought to be protected must be confidential;
- the subject matter must have been communicated from the disclosing party to the receiving party in circumstances which impose an obligation of confidence on the receiving party.
(1) The nature of the subject matter
First, for information to be subject to legal protection as confidential information, it must be secret (i.e., it must not be “public property and public knowledge” nor easily accessible from public sources). Protectable confidential information is exemplified by trade secrets such as formulas, details of designs, and specifications including drawings and plans. Information will not be protected by the courts if the owner of the information does not treat the information as confidential. Thus, the owner of the information should only disclose the information to those who have a need to know the information.
Information may be protected as confidential even if the material from which it is developed is in the public domain. Thus, if an individual expends time, skill, ingenuity or money to enhance the value of public information, the resulting information may be considered as confidential. But information will not be protected as confidential if it can be shown that it is generally known in the relevant trade and is freely available.
(2) Communication in circumstances of confidence
Second, for information to be subject to legal protection as confidential information, it must have been disclosed in circumstances which give rise to an obligation of confidence. If information is imparted during the course of confidential negotiations, then the information may well be protected in the absence of a written contract. Whether or not there exists a sufficient air of secrecy during the disclosure of information is a question of fact. One of the factors to be considered is the relationship between the disclosing party and the receiving party. The more intimate the relationship between the parties, the more likely it is that the court will hold there to have been an air of confidence when the information was disclosed.
Confidential Disclosure Agreements
An agreement where the main object is to restrict the use or disclosure of confidential information is often called a “confidential disclosure agreement” or a “non-disclosure agreement.”The wording of such an agreement is flexible – it will generally reflect the terms and conditions which are important to the discloser and those which are acceptable to the receiver (disclosee). A confidential disclosure agreement should be executed prior to the disclosure of the confidential information to the disclosee, and should identify the confidential information sufficiently specifically to avoid later disputes about what was disclosed.
If a person has confidential information and it becomes necessary to disclose such information to another person, that confidential information is generally best protected by a confidential disclosure agreement. A signed formal contract can provide much of the proof which would be required to show that the subject matter is confidential and was communicated in circumstances which impose an obligation of confidence.
However, the practicalities of any particular situation must be kept in mind. Information may have already been disclosed or the disclosee may be unwilling to sign a confidential disclosure agreement. It may then be best to construct the disclosure and subsequent communications with the receiving party so that it would be clear to an objective observer that the information was communicated in confidence.