Confidentiality for intellectual property developments

Have you considered confidentiality for intellectual property that you develop? As your company develops intellectual property it also creates material that, if disclosed, could prevent patent or design registration at a later date or would be of significant value to competitors. It is therefore necessary to evaluate the importance of that material for your company and take appropriate steps, such as the use of Confidentiality Agreements (also known as Non-Disclosure Agreements or NDAs) and practical measures, to ensure that it remains confidential.

What can be protected as confidential information?

The law of confidential information protects information that is confidential in nature and that has been disclosed in circumstances in which an obligation of confidentiality arises.

The requirement that the information is confidential in nature requires that the information is not trivial and is not within public knowledge. This can include something new that has been created from information that is in the public domain by a person using thought, effort and skill such as a spreadsheet or report.

Provided that it meets these criteria, the nature of information that can be protected by the law of confidence is open-ended, protecting most information that has commercial value and is not in the public domain. Classic examples of the type of information that can be protected as confidential information include:

• customer lists
• business plans
• recipes
• formulae
• the source code for computer programs

This makes the law of confidential information particularly useful as it arises automatically and provides protection for information that may not qualify for protection as another type of intellectual property right, such as a design or patent, and can last indefinitely so long as it remains confidential.

Trade secrets and confidentiality

In 2018, the Trade Secrets (Enforcement, etc.) Regulations 2018 (SI 2018/597) came into force, implementing the EU Trade Secrets Directive in the UK. These Regulations create a new statutory claim for unlawful acquisition, use or disclosure of trade secrets, providing an alternative and additional cause of action for breach of confidence for certain confidential information that also fulfils the definition of Trade Secret under the Regulations.

Under the Regulations, a Trade Secret is defined as:

‘information which

(a) is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among, or really accessible to, persons within the circles that normally deal with the kind of information in question,

(b) has commercial value because it is secret, and

(c) has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.’

A key difference between Trade Secrets and confidential information more generally is that it will be necessary for businesses to have taken proactive steps to protect the information in order to obtain protection under the Regulations. It remains to be seen precisely how this new cause of action will be used and applied by the Courts in practice and whether other distinctions become apparent.

You can find further information about the new Regulations and the protection of Trade Secrets specifically in our Trade Secret FAQs.

Confidentiality considerations for different forms of IP

The main issues around confidentiality when developing material that can be protected using the various categories of intellectual property are outlined in the table below:

How to protect confidential information during the development phase

To be protected by the law of confidential information, the information must only be disclosed in circumstances that give rise to an obligation to keep the information confidential. These obligations may be:

• imposed by entering into a contract (whether orally or in writing); or
• implied from the circumstances surrounding the disclosure of the information or particular relationship between the parties involved, such as the duty that arises between employers and employees.

The test is whether ‘a reasonable man standing in the shoes of the recipient of the information would’ve realised that upon reasonable grounds the information was being given to him in confidence’ (Coco v. A N Clark (Engineers) Ltd).

The best way to ensure (and prove) that the recipient of information knows that they are receiving information in confidence is to only disclose that information after entering into a formal written confidentiality agreement, which is also known as a Non-Disclosure Agreement (or NDA).

The signature of a properly drafted confidentiality agreement by both parties means that there can be no doubt of the obligation to keep information confidential and provides an opportunity for the parties to give careful consideration as to precisely what needs to be disclosed, to whom and how the information is to be protected when in the hands of the recipient to avoid unintended or unauthorised disclosure.

Although confidentiality agreements are commonly used, it is important to take care over the drafting to ensure that they provide adequate protection for the circumstances. Confidentiality agreements and their drafting are considered in more detail in our Non-Disclosure Agreement (NDAs) and Confidentiality Agreements FAQs.

However, confidentiality agreements do have limitations and cannot provide complete protection for confidential information, for example in circumstances where the recipient does not intend to comply with the agreement. Once confidential information has been made public even in breach of confidentiality obligations it is not possible to make that material confidential once more. Although the Courts will grant an injunction to prevent the disclosure of confidential information in appropriate circumstances, it will be rare to know about the disclosure of information until after it has happened. In this situation, the only available remedy will be damages for breach of contract.

It is therefore important to combine the use of confidentiality agreements with the use of internal policies implementing practical and technological measures to protect confidential information and minimise the risk of inadvertent disclosure. Third parties can be requested to comply with the same steps when entering into a confidentiality agreement.

These practical steps might include:

1. clearly marking information and any copies as being confidential;
2. restricting access to the confidential information to particular named individuals;
3. taking security measures such as keeping confidential information in locked cabinets or as encrypted or password protected digital files;
4. placing restrictions on the copying of confidential information and maintaining a record of copies made;
5. employee training as to the importance of confidentiality and measures required to ensure its protection; and
6. taking steps to monitor employee activities so that behaviour causing concern can be identified in advance of a disclosure of confidential information (see further our Employer’s guide to monitoring employees in the workplace).

There are a number of situations where it will be particularly important to pay close attention to the protection of your company’s confidential information arising during the course of intellectual property development. Below, we’ll explore four of them: employees, selling a company, working together in a collaboration or joint venture and during litigation.

Confidentiality for intellectual property and your employees

Employees involved in the development of intellectual property have ready access to your company’s confidential information and many will gain knowledge during the course of their work that might constitute confidential information. This raises questions upon the departure of those employees as to what information they can take with them to a new employer, particularly if they are moving to a competitor.

In the leading case on confidentiality obligations arising out of an employment relationship, Faccenda Chicken Ltd v. Fowler, the Court of Appeal determined that there were three categories of information used by employees during their employment:

• Information that can be classified as a trade secret, such as secret manufacturing processes, and other information which of a sufficiently high degree of confidentiality as to amount to a trade secret when considering all of the circumstances of the case.
• Mere confidential information, which is information that is not so confidential as to be a trade secret, but is still proprietary information belonging to the employer. Although employees must keep this information confidential during their employment, once learned it can become part of their general skill and knowledge.
• Information that is in the public domain and therefore cannot be considered to be confidential.

Confidential information arising in connection with the development of IP is likely to be classified either as a trade secret, such as an invention that might be the subject of a patent application at a later date, or mere confidential information.

During Employment
During employment, there is a duty implied into all contracts of employment that an employee will conduct themselves with fidelity and good faith. This duty includes an obligation to respect the confidentiality of the employer’s commercial and business information.

The extent to which information is protected by the implied duty of confidence will depend on the type of information and the particular circumstances. For example, the implied duty is likely to apply where an employee has been made aware that the information is confidential, the information is subject to internal processes to maintain the confidentiality of information, or the information is of a type (such as a trade secret) that is obviously confidential. It is important to be consistent as to the treatment of confidential information; if some information is not subject to the same internal processes, this could indicate that it is not deserving of the same level of protection.

Despite the existence of this implied duty, it is still worthwhile ensuring that those employees that have access to confidential information arising from the development of intellectual property are also subject to express duties of confidentiality in their employment contracts. By detailing in the contract of employment that specific types of information are confidential and that disclosure is forbidden, the situation where the nature or circumstances of disclosure of the information are such that a court could find that the information falls outside the scope  of the implied duty of confidentiality may be avoided.

Termination of Employment
After the termination of employment, confidential information in the nature of trade secrets will continue to be protected by the implied duty of confidentiality.

However, this is not the case for ‘mere’ confidential information. In particular, where confidential information remains in the employee’s head and becomes part of their skill and knowledge, the employee is free to use or disclose this information once their employment has ended, even to another employer that is a competitor of their former employer.

Consequently, it is particularly important to ensure that relevant employees are subject to express duties of confidentiality once their employment has terminated. While the Court of Appeal in Faccenda Chicken Ltd v. Fowler indicated that it was not possible for express obligations of confidentiality to extend to confidential information beyond trade secrets, express duties have been upheld in relation to broader confidential information in subsequent cases, provided that the information that the employer seeks to protect does not amount to the skill and knowledge or professional expertise of an employee. Where a former employee appears to be acting unconscionably, the Courts are more likely to uphold an express duty of confidence.

As there is a category of information that employees may be able to take with them to a new employer, companies are advised to consider whether additional measures are appropriate in relation to certain employees that will have regular access to confidential information. These measures might include:

• The incorporation of restrictive covenants in the contract of employment restricting the soliciting of employees, poaching customers and/or dealing with certain customers for a limited period post-employment. Restrictive covenants must be specifically tailored to the relevant circumstances and go no further than reasonably necessary to protect the employer’s interests or they will be susceptible to being found to be unenforceable on public policy grounds.
• The incorporation of a clause in the contract of employment that allows an employee to be placed on garden leave, which can protect know-how and confidential information by preventing the employee from accessing confidential information and from working from anyone else during the period of garden leave. The sensitivity of the information may become less current during the period of garden leave, lessening the potential impact of the employee’s departure.

Confidentiality for intellectual property when selling a private company

Particular care will be required to maintain confidentiality during a potential sale of the company to a third party. Whether the sale is taking place by way of asset purchase or share sale, any potential purchaser will need to have a full understanding of the intellectual property owned by the company and will conduct detailed due diligence, which could well involve disclosure of confidential material surrounding new developments to the purchaser and its advisors.

• Due diligence
  The due diligence process starts early in the acquisition process as the information obtained will be used to assist the buyer with its decision as to whether to proceed further, the value of the company and for the drafting of the sale and purchase agreement and other ancillary documents. During the due diligence information gathering, the buyer, normally through its external advisers, will conduct a careful review of your company’s intellectual property, particularly where the IP is part of the strategic reason for making the acquisition. This will include checks of public registers for registered intellectual property rights,but will also involve an examination of potentially registrable intellectual property, trade secrets and other confidential matter that is not registrable but adds significant value to the company.In order to protect confidential information during the due diligence process and subsequent negotiations it is normal practice to enter into a confidentiality agreement with a potential purchaser at the outset of discussions, either as part of a heads of terms document or in a separate NDA. These terms can protect not only any confidential information that changes hands during the acquisition process, but also the fact that negotiations are taking place.However, confidentiality agreements do have limitations, particularly during acquisitions where a potential buyer is a competitor and may later pull out but retain some of the information obtained during due diligence, or where the company is being sold by auction, and a number of potential buyers are conducting their own due diligence enquiries when only one will go on to complete the purchase.Consequently, it is sensible to also carefully manage the way in which disclosure is given in order to protect confidentiality in the most sensitive information. Practical steps could include grading the information to identify the most sensitive material and planning the timing of the release of that information, so that it is only provided at a stage in negotiations when both parties are satisfied that the acquisition is very likely to proceed or, in an auction process, when a single purchaser has been identified. It is common to provide documents by setting up a data room that the purchaser can visit to inspect documents. Where hard copies of documents are provided, confidential material can be clearly marked as such and limitations placed on the making and retaining of copies. Virtual data rooms are increasingly common and technical measures can be used to limit the risk of documents being saved, electronically copied or printed.
• Third party confidentiality
  It is not only important to bear in mind your own company’s confidential information when a due diligence process is underway, however. Your company may be a party to business critical licences for certain intellectual property, for example, that a potential purchaser will want to inspect. Before they do so, you will need to carefully review the terms of those licences to ensure that there are no confidentiality restrictions or that it expressly permits disclosing terms in the context of a potential sale of the company. The consequences of failing to do so can be severe. In Kason Ked-Gardner Ltd v. Process Components Ltd, the Court of Appeal upheld the termination of a licence by a licensor after the terms of the licence had been disclosed to a purchaser in breach of confidentiality provisions, finding that there was no implied term allowing disclosure of the licence for due diligence purposes.

Confidentiality in collaborations and joint ventures

Where two parties decide to collaborate for the purposes of developing and exploiting intellectual property, whether that is done through the creation of a joint venture company or through more informal arrangements, the need to maintain confidentiality in both the information and knowledge brought by each party and that developed during the course of the collaboration is a key consideration.

It is appropriate for the parties to enter into a detailed mutual confidentiality agreement, either as a standalone document or as part of a joint venture agreement, setting out how confidential information will be dealt with by each party during the collaboration and once it has come to an end.

The agreement may include a schedule setting out a number of practical steps that each party agrees to take to ensure that confidential information can be clearly identified and that disclosure is limited except where necessary for the purposes of the collaboration. This might include limiting the circulation of information, keeping a schedule of copies made, making arrangements for the storage of confidential information on separate servers or in a location that has limited access for hard copy documents, and ensuring that employees have appropriate terms dealing with confidentiality in their employment contracts.

The agreement should also make provision for the return of any hard copy documents upon the termination of the collaboration and the erasure of confidential information from computer systems to the extent it is possible to do so. Where particularly sensitive information is involved, it may also be appropriate to include provisions providing that each party may, upon notice, conduct an inspection of the other party’s systems to ensure that the erasure of material has been carried out to its satisfaction.

Confidentiality for intellectual property during litigation

During litigation it is normal for the Court’s directions governing the management of the dispute up to trial to include directions requiring the disclosure of documents that support or adversely affect his own or another party’s case and there is no exception made for confidential information. Unless proactive steps are taken to ensure confidentiality of sensitive material, you will need to provide it to the other party if it falls within the scope of the disclosure required for the proceedings.

Where there is a need to disclose confidential material, for example in the context of procurement litigation where a particular confidential technical solution is part of the bid in question, it may be possible to apply to court to put in place a confidentiality ring, placing restrictions on the people that can inspect particular documents to, for example, particular witnesses and to ensure that the documents are not used in open court where the contents will become public knowledge.

Although confidentiality rings are becoming more common, they are not standard practice during litigation and can be difficult to negotiate and agree with the Court, as a balance has to be struck between ensuring confidentiality while not unduly affecting preparation for and the conduct of the trial itself. This is therefore something that should be considered at the very outset of proceedings, before the first case management conference, to minimise costs in the proceedings and to avoid delays at a later stage.