Hey Innovators, Employers, and Business People!-Embrace NDA's (Non-Disclosure Agreements)!

Long Read; This is a synthesis of NDAs and their enforceability in law. When you discuss a detailed business "deal" with your friend, what stops them from implementing the same? Employers, what stops a former HR from leaking all salaries of the organization once they leave?

We are in the age of information, the internet of things and big data. Some of us, including our legal systems, are still playing catchup with the new disruptive technological developments such as Artificial Intelligence (AI) and 5G that appear smarter and more complex. The upshot of digitization is that information now travels at the speed of light. With the advent of social media platforms, sharing information has now become relatively streamlined with platforms such as Twitter, Facebook, and LinkedIn. No wonder the European Court of Justice (ECJ) has come out strongly protecting the right to data privacy such as a recent ruling stating that Facebook can be forced to delete content anywhere worldwide. Considering we are always sharing information, how then do we protect what we consider as confidential information?

The world was the other day treated to drama when a CIA agent turned whistleblower leaked a telephone conversation of the USA President Donald Trump. What is the fine balance of protecting the sacrosanct freedom of free speech while maintaining respect for confidentiality? Considering a country like Kenya does not have a robust data protection legal regime, contracting parties have no option but to embrace Non-Disclosure or Confidentiality Agreements to protect sensitive information, trade secrets and maintain a competitive advantage. In respect to corporations, the NDA's should target employees who perform roles of a confidential nature such as Directors, Senior Managers, HR e.g payroll officers, Service Providers, and potential business partners. Controversially, individuals working in the Public Service have also been made to sign NDA's. Case in point is the famous NDA battles between the USA President Trump Administration, and former campaign aides and white house staffers. The unfolding situation was aptly captured by an article by the Newyork Times titled “White House Job Requirement: Signing a Non-Disclosure Agreement” "https://www.nytimes.com/2018/03/21/us/politics/trump-nondisclosure-agreement.html

Introduction

Most NDA's will assume the title "Non-Disclosure Agreement (NDA)", "Confidentiality Agreement (CA)", Proprietary Information Agreement (PIA) or "Secrecy Agreement". In the case of additional restrictive obligations, it is also commonplace for such agreements to bear titles such as "Non-Disclosure Agreement and Non-Solicitation/Non-Compete" Agreements. However, these are different as discussed below.

Non-Compete and Non-Solicitation Agreements Differentiated

Non-compete and Non-Solicitation Agreements are restrictive covenants that prohibit former employees or business partners from setting up rival businesses or enticing former customers. These restrictions are limited within a fixed geographical location e.g. 20 miles radius or universally and for a fixed duration of time such as 6 years. The downside of these non-compete/non-solicitation agreements is that they are largely unenforceable in many jurisdictions. In as much the language may be colorful, courts have held that such restrictive covenants are against public policy and the right to fair labor practices vis a vis (compared with) the freedom of contracting parties. In the Kenyan context, restrictive trade practices are against Article 41 of the Constitution –Fair Labor Practices. In Credit Reference Bureau Holdings Limited v Steven Kunyiha [2017] Eklr( https://kenyalaw.org/caselaw/cases/view/135375 ) the court held that: “In a country like Kenya where unemployment is soaring every single day, subjecting the defendant to loss of employment on the basis of a restrictive clause would be unreasonable and not in the interest of either party. Indeed such an action would be contrary to public policy.” However, restrictive trade covenants may be enforceable if the disclosing party receives a certain payment in consideration of keeping the future promises.

Back to our topic on NDAs and why you should consider having one. The NDA just like any other agreement will have a section on Parties, Scope of what is to be considered Confidential, Duration, Exemptions, Boiler Plate Clauses e.g on Dispute Resolution and Governing Law.

Did you know that Faulu sued Safaricom for using its confidential information to develop the now-famous MSHWARI mobile application? (Faulu Kenya Deposit Taking Microfinance Limited vs Safaricom Limited [2013] eKLR)

Parties to an NDA

Based on the number of parties involved, an NDA may be unilateral (one-sided), bilateral (between two parties)/mutual or multilateral (between many parties). The Party that owns and provides the confidential information is known as the "Disclosing Party" while the party that receives the information is referred to as the "Receiving Party". As such, it is imperative that parties be clearly identified where the NDA is entered into by a Holding Company whose subsidiaries/affiliates/associates will also be in receipt of the confidential information. In such eventuality, there can be a master agreement between the disclosing party and the Holding Company while the subsidiaries can enter into deeds of adherence to be bound. This is normally the case in major deals and transactions such as mergers and acquisitions.

What type of information is considered as Confidential or Proprietary?

The Court of Appeal, Kenya has expressed itself on this matter in the recent case of Hoswell Mbugua Njuguna t/a Fischer and Fischer Marketing Concepts v Equity Bank Limited & another [2017] eKLR reiterating, that the law of confidence and confidential information has no statutory underpinning and is based on common law principles.

Gurry, in his book, 'Breach of Confidence (2nd edn)' posits, at Pg 5-14: that “The basic attribute which information must possess before it can be considered confidential is inaccessibility. Information must not be common knowledge, ie in the public domain. This attribute is fundamental to the action for breach of confidence.”

In light of the above, I would draft a confidentiality definition clause as follows:

“Confidential Information, shall mean and include all data, materials, products, technology, computer programs, specifications, manuals, business plans, software, financial information and any other information disclosed or submitted, orally, in writing, or by any other media, to the Recipient by the Owner. The Recipient agrees not to use any Confidential Information as a basis upon which to develop or have a third party develop a competing or similar product.”

Similarly, Lord Greene MR in Saltman Engineering Co Ltd & Others vs. Campbell Engineering Co Ltd [1963] 3 All ER 413 said:

“The information, to be confidential must . . . have the necessary quality of confidence about it, namely, it must not be something which is public property and public knowledge. On the other hand, it is perfectly possible to have a confidential document, be it a formula, a plan, a sketch, or something of that kind, which is the result of work done by the maker upon materials which may be available for the use of anybody; but what makes it confidential is the fact that the maker of the document has used his brain and thus produced a result which can only be produced by somebody who goes through the same process.”

In the same vein, Lord Goff of Chieveley in Attorney General vs Guardian Newspapers Ltd (No 2) [1988] 3 All ER 545 stated: “I realize that, in the vast majority of cases, in particular those concerned with trade secrets, the duty of confidence will arise from a transaction or relationship between the parties, often a contract, in which event the duty may arise by reason of either an express or an implied term of that contract. It is in such cases as these that the expressions “confider” and “confidant” are perhaps most aptly employed. But it is well-settled that a duty of confidence may arise in equity independently of such cases; and I have expressed the circumstances in which the duty arises in broad terms, not merely to embrace those cases where a third party receives information from a person who is under a duty of confidence in respect of it, knowing that it has been disclosed by that person to him in breach of his duty of confidence, but also to include certain situations, beloved of law teachers, where an obviously confidential document is wafted by an electric fan out of a window into a crowded street, or where an obviously confidential document, such as a private diary, is dropped in a public place, and is then picked up by a passer-by. I also have in mind the situations where secrets of importance to national security come into the possession of members of the public …” 

Copyright and Confidentiality Distinguished

In the case of Fraser & Others vs Thames Television Limited & Others (1984) 1 Q.B. 44 which distinguished Copyright from Confidence, emphasizing that: "Copyright law is, in essence, connected with the negative right of preventing the copying of physical material existing in the field of literature and the arts". Per Copinger and Stone James on Copyright 12th edn. (1980). Copyright is also good against the world generally, protects published as well as unpublished works but not confidentiality, and has a statutory time limit. On the other hand, under the general law of confidence, the information relied upon may be either written or oral. It protects against those who receive information or ideas in confidence but the obligation in confidence ceases the moment the information or idea becomes public knowledge.

Enforceability of NDAs

NDAs are generally enforceable in law. Parties can seek reliefs such as injunctions and damages and also invoke the equitable jurisdiction of the court. As such, Halsbury's Laws of England 4th Edn. Vol 8 (1) at paragraph 401 outlines the threshold to determine when a party may be held liable for breach of confidence. It must be shown that:-

i) the material communicated to him had the necessary quality of confidence;

ii) It was communicated or became known to him in circumstances entailing an obligation of confidence; and

iii) There was an unauthorized use of the material

Lord Walker of Gestingthorpe in the case of OBG Ltd vs Allan, Douglas vs Hello! Ltd (No 3), Mainstream Properties Ltd vs Young [2007] 4 ALL ER 545 at 276 said that:

“the equitable jurisdiction to restrain… breach of confidence… does not depend on treating confidential information as property, although it often referred to, loosely or metaphorically, in those terms.”

Exemptions

Confidential Information does not include information that the Recipient can demonstrate:

a.   was in Recipient's possession prior to its being furnished to Recipient;

b.   is now, or hereafter becomes, through no act or failure to act on the part of Recipient, generally known to the public;

c.   is rightfully obtained by Recipient from a third party, without breach of any obligation to Owner; or

d.   is independently developed by Recipient without the use of or reference to the Confidential Information.

e.   Is requested or required by any court of competent jurisdiction or any competent judicial, governmental, supervisory or regulatory body;

f.     is required by the rules of any stock exchange on which the shares or other securities of the Receiving Party are listed;

However, NDA’s cannot be used a waiver of the right to legal redress for violations such as sexual harassment. On the other hand, an illegal agreement cannot be protected by the law due to the legal doctrine of Ex turpi causa non-oritur actio and the maxim that equity follows the law. A federal judge in the USA tossed a lawsuit by porn star Stormy Daniels, which sought to invalidate a non-disclosure agreement intended to stop her from talking about her alleged affair with President Donald Trump. https://www.pulse.ng/bi/politics/judge-tosses-out-stormy-daniels-lawsuit-to-tear-up-the-nda-to-stop-her-from-talking/m7z49w3 Attached is a link to the judgment https://pmcdeadline2.files.wordpress.com/2019/03/trump-clifford-may-7-2019-1-wm.pdf

Permitted disclosures

The Recipient may disclose the Owner's Confidential Information to the Recipient's responsible Representatives with a bona fide need to know such Confidential Information, but only to the extent necessary to evaluate or carry out its obligations in the business relationship with the Owner. Ordinarily, such employees would be advised of the confidential nature of such Confidential Information by the recipient and the terms of the Agreement.

Duration

Most NDAs have a term of 2 to 5 years while others have a “perpetuity clause” to survive the obligations of the Agreement. As discussed earlier, NDAs are contractual as opposed to intellectual property rights which have statutory time limits. It is recommended that the NDAs be customized to the requirements of the parties.

During preliminary negotiations, it is advisable to have a clause that if the Recipient does not proceed with the business relationship with the Owner, the Recipient shall notify the Owner of that decision and shall, at that time or at any time upon the request of the Owner for any reason, return to the Owner any and all Confidential Information immediately on the written request of the Owner.

Governing Law and Dispute Resolution

It is prudent to have a clause providing which law governs the Agreement e.g Kenyan Law. In respect to dispute resolution, it is recommended that any dispute is subjected to the processes of arbitration to maintain the secrecy and confidentiality of the information in dispute.

Privileged Documents        

Have you ever taken the time to read through the email disclaimers? Most of them warn third parties of revealing information that is privileged and which only they attain by virtue of mistake. What of the documents handled by employees in a law firm. Does the information cease to be confidential once employees such as clerks cease to be employees of the firm?

This issue was dealt with In Webster vs James Chapman & Co [1989] 3 All ER 939, at 943, Scott, J. said:

“Calcraft vs Guest and Lord Ashburton vs Pape are examples of two independent and free standing principles of jurisprudence. The former case related to privileged documents and to the scope of the protection provided by legal privilege. The latter case related to confidential documents and to the protection that equity will provide to that category of documents. I think it is important to notice the different principles on which protection of confidential documents on the one hand and privileged documents on the other hand are based.

Once a privileged document or a copy of a privileged document passes into the hands of some other party to the action, prima facie the benefit of the privilege is lost: the party who has obtained the document has in his hands evidence which, pursuant to the principle in Calcraft v Guest, can be used at the trial. But it will almost invariably be the case that the privileged document will also be a confidential document and, as such, eligible for protection against unauthorized disclosure or use.”

Conclusion

I would recommend that Corporations, Businessmen, Innovators embrace the use of NDAs in their business dealings to avoid future conflict. Information has easily become the most valuable gem in the world. Change with the change. Protect your business, protect your ideas.

William Karoki-The author, is a qualified Attorney, Advocate of the High Court and is a Regulatory and Compliance Specialist with a bias in Corporate Commercial Law, Employment Law , Dispute Resolution and Construction Law. He strives to communicate in plain English. Time: 7.09 #corporatelaw#employmentlaw#contract law

In case of any queries or clarifications kindly contact the author: [email protected]