Confidentiality agreement
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NDA Anatomy™
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Also known, to those for whom the glass is half-empty, as a non-disclosure agreement. An agreement whereby you promise not to tell. If Robert Plant were writing one, he would write it like the box on the right.
Anyhoo. Here are the main parts of a normal financial markets confidentiality agreement.[1]
What’s in a confi?
Confis can be “one way”, where one party discloses and the other receives, or “two way”, where both parties disclose sensitive information. A broker’s template will tend to be far more generous when it is receiving only, than when it is giving information up. I know this may come as a shock to some of you.
Length
Firstly, let’s be blunt about this: there is a special place in hell for any advisor who serves up a confidentiality agreement more than 3 pages long. Even three pages is purgatorially tedious. GET TO THE POINT. It’s a goddamn confi, not the sale of your soul. Oh hang on.
On the distinction between copyright and confidence
The key thing is to distinguish between breach of copyright and breach of confidence. The former is an intellectual property right over the form of information; the latter a contractual right over the substance of information.
- Breach of copyright: Copyright subsists in the particular articulation of the information, rather than in the information per se. To breach someone’s copyright is to deny a copyright owner the commercial benefit of its creation: e.g., by accessing for free something the copyright owner wants you to pay for. In other words I can’t copy Harry Potter and the Philosopher’s Stone without J.K. Rowling’s permission, but I can tell you the plot.
- Breach of confidence: Breach of confidence is less about the form of the information and more about its substance: If I have signed a confidentiality agreement I can copy confidential information to my heart’s content, as long as I only use it within the bounds of my licence to use it. In other words, I can do what I like as long as I don’t disclose the content of that information to anyone else. Here the forbidden action is “telling you the plot”: I could do that either by giving you a full copy of the material, or telling you the plot without copying anything at all. Breach of confidence thus creates heightened compliance issues, implying as it does that the confidential information is not public, presenting risks of market abuse and insider dealing.
- It is the substantive content and not the particular form of the information that is valuable.
Remedies for breach
Big difference here.
- Copyright — account for profits: If I breach your copyright must account to you for the profits I have made out of the misuse of your information.
- Confidence — damages: If I beach your confidence, I must compensate you for the damages you have suffered as a result. My profit from the use of the information is not part of the calculation (unless, by profiting from it, I have deprived you of the opportunity to profit, and even then you have to persuade a court that such a consequential loss was a reasonably foreseeable consequence of my breach, which courts have traditionally been reluctant to do.
Representations and warranties in a confidentiality agreement
Assiduous attorneys will drivel in some of the usual boilerplate reps[2], to no obvious point, but for the most part confidentiality agreements are characterised by the representations the parties are not making to each other. Thus, this is another one for the “I never said it was” file, a clear disclaimer that when giving you this information, I never said it was accurate or good for anything. So you can’t sue me if you rely on it and lose money. So must your NDA have a term? Some insist on a hard stop, say two years, after which confidential information ceases to be confidential. This seems to us to be artificial. Others may mediate this by “execution of final transaction documents”.
It is not clear why going live on a transaction should suddenly set the negotiating parties free to spill private beans about each other that they learned in its formation. The theory is possibly that the final deal docs will themselves contain confi provisions which will be more sophisticated and can govern — but at least in the derivatives world, typically they don’t. Go figure.
Why have a term at all? Good question.
Many inhouse lawyers profess themselves immutably bound to such a term, by internal policy. They would sooner be broken upon a wheel than let this one go. This policy, they will intuit, dates from the days of the First Men, possibly was the result of a misunderstanding, but in any case subsequently has hardened, encrusted, calcified, petrified, and finally fossilised itself into a layer so deep in the firm’s organisational substrate that there is no known means of questioning it. In the very act of questioning it invites some kind of opprobrium. If anyone ever did really understand what the issue was, they have long since moved on, or been moved on, and no-one remains who can recall, much less articulate the original reason for this policy, or why it is still needed now.
Furthermore, in the ensuing thirty odd years, generations of employees have left that firm (some voluntarily, many not), taking this deep personal conviction with them, and have circulated the market, wherever they go inculcating a strong sense that some ineffable calamity would befall them, their firm, the market or, indeed, the entire industry should this sacred covenant ever be breached.
Thus the “mandatory confidentiality term” has now become part of the folklore of the financial services markets. You have to have a term, and it can’t be longer than two years at the most.
Now perhaps the JC is that long-prophesied seal of the forthcoming apocalypse (actually that might explain a few things, come to think of it) but, personally, he has never been able to understand what this “term” covenant could possibly achieve? Why, after a couple of years, should I suddenly be entitled to blare all your darkest secrets out from the minarets around town, without so much as a by-your-leave?
While the commercial value of much information does go stale over time (blueprints for a BetaMax, anyone?), this isn’t universally true — a client list is valuable however long you hold it — and the usual justification for the hard stop (“we just don’t have the systems to indefinitely hold information subject to confidence and don’t want indeterminate liability for breach”) is a canard — a palpably false one at that, for a regulated financial institution. Whatever information security systems you do have don’t suddenly stop working after three years. And as for indeterminate liability — well, no harm no foul: if the information really is stale then no loss follows from a breach, right? No loss, no damages.
In any case, it seems to the JC that a term creates more questions than it answers. When does it run from? The date of the NDA itself, or the date of disclosure of the information in question? If the former, and the point is to exclude stale information, why is the NDA date a relevant point? If the latter, who is monitoring what is disclosed when? What is meant to happen when the term expires? Why are we even having this conversation?
What a confi shouldn't have
The following often make their way into a confi agreement, though none really have any business being there.
Special AKA
The same as a: