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Care with Confidentiality Clauses

By Albert J. Derbes, IV

Parties to a contract too often sign without a careful review of the miscellaneous, or boilerplate, clauses at the end of the document.  One of the most problematic instances concerns confidentiality clauses in contracts. A confidentiality clause obligates one, both, or more parties to a contract to maintain the terms as confidential.

Reasons for Confidentiality

Such clauses grow in important in contemporary times where the electronic transmission of information, via email, text, and especially via social media, speeds its spread. There can be many reasons for a confidentiality clause, important to at least one party to the contract. For example, pricing information might offer a competitor an advantage, were the information to become known within the industry. A second, common context would include settlement agreements . The paying entity or person to the settlement would not wish the amount known, else such information might spur litigation by others.

Reasons to Constrain Confidentiality

However, several contexts exists where an overly broad requirement of confidentiality can hurt the parties. Upon breach of a confidentiality provision, the offended party may often obtain injunctive enforcement as well as damages against the breaching party because the confidentiality clause might so provide. Accordingly, in drafting or redlining a confidentiality clause consider (1) making the obligation bi- (or, if applicable, multi-) lateral, and (2) including exceptions. Having the provision apply to all parties tends to induce the parties to fairness in negotiation. Fairness is easier to see if mirrored. The more important aspect is the inclusion of the often-needed exceptions.

The Exceptions to Confidentiality

A robust set of exceptions should usually include the following. First, disclosure should be allowed in response to a bona fide subpoena or subpoena duces tecum, or court order. Second, CPAs, accountants and tax preparers should be able to receive or review the agreement. Third, as the parties may need to prove the source(s) of their income, a bona fide lender in connection with a bona fide loan application might legitimately need the document. Likewise, fourth, a taxing authority such as the Internal Revenue Service or a state taxing authority such as the Louisiana Department of Revenue may want proof of income source or amount. Fifth, it is always advisable to be able to seek advice of an attorney to avoid a breach after the agreement. Finally, sixth, in obtaining insurance a party might wish to discuss the contract. It is not unusual to require some of the above recipients to have to execute an agreement to themselves be bound to the terms of the confidentiality agreement prior to receipt.

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