The 10 Confidentiality Commandments

Judith Silver

So you’ve come up with a brilliant new concept, idea, or invention? Congratulations! Just remember one thing: as you launch down the long road of financing, planning, production, and development, the protection of your brainchild is critical.

So let’s consider the 10 commandments of confidentiality – guidelines to help you protect your ideas while progressing their commercial development.

Commandment #1. Shut Up

If I had a dollar for every time I heard ideas carelessly disclosed, I’d be so rich, I wouldn’t have time to write these articles.

Bragging, brainstorming, trying to impress the opposite sex, and blowing off steam are all bad reasons to disclose information you’re trying to protect. Think before you talk.

Commandment #2. Look Who’s Talking

Consider who you’re talking to about your product or information. Is the person:

  1. a competitor who would greatly benefit by stealing the idea or product,
  2. a customer who will be helped by the idea or product, or
  3. a business partner whose own business would be complemented by your success?

The other side’s interests should always be kept in mind. Also, be aware of the person’s role within their company. Dealing with a CEO is entirely different than dealing with a programmer or sales person.

Remember to also consider an employee’s personal interests in having the information. For example, the head of product of development might think she would get a promotion if she presented your idea for a new product line to the company as her own.

Commandment #3. Know When to Talk

Don’t disclose everything in the first meeting: disclose information in increasing amounts as the deal progresses. Be sure that the balance of power in the deal remains relatively even in terms of oral commitments, commitments through information disclosure, and money or contracts. The information disclosure should start with general concepts and progress to more detail at the contract stage.

Commandment #4. Take Note and Don’t Ramble

If you really want to protect information, be sure to keep careful notes on what, when and where information was disclosed, and who was present at the meetings. These records can be extremely helpful if you ever end up in court, but virtually no one keeps them. If you do, you’ll probably be the only one with a written record.

Always disclose the minimum degree of detail necessary to close the deal, without being fraudulent or misleading. This allows you maintain the most control over your product or idea, and protects your options to change timelines or other details if needed.

However, saying the minimum required does not mean withholding material information that substantially affects the deal. For example, if your idea requires FDA approval, and does not have it, it would be wiser to disclose this up-front rather than wait for this bomb to blow up after the deal is nearly or totally completed. If a party feels angry or mislead, then trust is broken, and, contract or not, it will be hard to proceed productively.

Commandment #5. Understand the Risks of Disclosing

The disclosing party risks (a) disclosure of such information to its competitors; (b) disclosure of the information to the public; and/or (c) use of such information to compete or gain market advantage against the disclosing party.

Commandment #6. Understand the Risks of Receiving

A surprising fact is that the party that receives information often takes a greater risk than that which discloses it.

A good example of this risk is a movie studio. Script writers are dismayed to discover that studios not only refuse to sign a confidentiality agreement, but typically make the submitter sign an agreement stating that if the studio later develops something that looks like his or her idea, the submitter agrees not to challenge this.

Consider the studio’s perspective. Studios are in the business of coming up with ideas and making them into movies. Every time the studio receives a script or a pitch, it receives an idea. If a studio were to agree to keep this information confidential and that the submitter owned the idea, the studio would be subjecting itself to potential law suits for every idea submitted, even those already developed by employees who have never seen or heard of the submission.

In court, the studio would have the burden of showing that despite the receipt of the submission, the employees who developed the similar idea never saw or received any information from the submission. This would be virtually impossible for the studio to prove, and costly when multiplied by the huge number of submissions received. For studios, venture capitalists and other groups that work with large numbers of ideas, it may simply be too risky for them to sign a confidentiality agreement. Remember that in these circumstances you are usually the less powerful party, and thus the other side will force you to assume more risk.

Commandment #7. Understand How A Confidentiality Agreement Helps

Confidentiality Agreements give a contractual legal remedy for disclosure or misuse of information. Depending on the information discussed, you may also have other legal remedies available, such as under the trade secret or copyright law.

Trade secrets are ideas or information that the creator used financial resources to create, and made efforts to keep secret. Trade secrets are protected by both state and federal laws. If you have disclosed written information or source code, copyright can often help if the other party’s disclosure or misuse involved making a copy of the information. These remedies may be in addition to the contractual remedy in a Confidentiality Agreement.

Commandment #8. Use an Agreement Before Disclosing

If you are going to disclose information and use a confidentiality agreement to protect it, be sure the agreement has the following:

  • As broad a definition of confidential information as possible, without any restrictions or exceptions.
  • A clause stating to whom, when and how, disclosure and/or use is permitted.
  • A clause stating that the information must always be kept confidential.
  • Clauses regarding destruction of the information, return of the information, legal remedies for disclosure, and others.

Commandment #9. Read the Confidentiality Agreement Before Signing or Receiving

If you are asked by another party to sign a Confidentiality Agreement to cover the information he or she is about to disclose, read the agreement before you sign it. Be sure that it contains the following clauses, which protect your business by restricting it as little as possible in the future:

  • A narrow definition of “confidential information” so that as little information as possible is covered by the agreement.
  • A clear definition of confidential information in the agreement, or as items labeled “confidential” in writing, so that what information is covered by the agreement, and what is disclosed, may be more easily proven.
  • Exceptions to the definition of “confidential information”, which include necessary disclosure to the government if required (SEC filings, investigations, etc.); information developed by your employees without reference to the disclosed information; information already publicly known (it’s posted on the Internet, has already been issued in a press release, etc.); and others.
  • A “residual knowledge” clause, which states that anything your employees remember in their heads, they can use. This is based on the presumption that it is impossible for people to keep entirely straight in their minds what information came from where.

Commandment #10. Remember Business Reality

If you find yourself negotiating heavily over the language of the confidentiality agreement, try to step back and consider how great the risk really is.

Would the costs of litigation be greater than the value of the idea, so that even if the other side breached the agreement, you wouldn’t sue them? Will the information be of any value in six months? Are lots of other parties working on the same ideas so that six months from now, there will be many ways to accomplish the task that’s addressed by the information? Will the information be available from your company, the government or from other sources six months from now?

Good luck!