Confidentiality Agreements: A Comprehensive Guide

What is A Franchise Agreement?

The purpose of a confidentiality agreement is to ensure that certain information remains confidential and is not disclosed to any unauthorised individuals or entities.

By signing a confidentiality agreement, or an agreement that includes confidentiality provisions, the parties involved agree to keep the information private and use it only for the intended purpose.

Are Confidentiality Agreements enforceable?

Not all confidentiality agreements or confidentiality clauses are enforceable.

The Australian Federal Government in its April 2024 Issues Paper: Non-competes and other restraints: understanding the impacts on jobs, business and productivity states -

Determining what kinds of information can be protected from disclosure and used to enforce a restraint on a worker after termination is complex and can depend on many factors, including how the information is stored and used, what the information cost to acquire or is worth and how easily it could be duplicated by others.¹

To be enforceable, it is important that a confidentiality agreement or a confidentiality clause:

• identifies what information is confidential;
• specifies how you are allowed to use the confidential information (and the restrictions are reasonable relative to the type of information to which the agreement or the clause relates);
• addresses the disclosure of confidential information during the term of the agreement and after termination;
• ensures that the confidential information is handled securely.

What types of information can be protected by a Confidentiality Agreement?

The types of information that can be protected by a confidentiality agreement includes trade secrets, financial information, customer data, intellectual property, or any other sensitive information that needs to be safeguarded.

One of the key elements of a strong confidentiality agreement is clearly identifying the information to be protected.

If a confidentiality agreement does not clearly identify the information to be protected, the confidentiality provisions will be limited to information that is confidential in character [Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181].

In order to assess whether information is confidential in character the following factors will be taken into account:

• the extent to which the information is known outside of the business [De Casale v Artedomus (Aust) Pty Ltd [2007] NSWCA 172]
• use of the confidential information;
• permitted disclosure of the confidential information;
• security of the confidential information.

The recent case of Native Extracts v Plant Extracts (no 2) [2024] FCA 106 considered a confidentiality clause contained in a deed of settlement.

In that case, the business involved the extraction of essential oils from plants. The dispute concerned whether information about the extraction machine was included in the category of documents that were required to be kept confidential.

The deed of settlement contained the following confidentiality clause:

Ross, Phytoverse, FPI and all employees, agents and contractors of Ross, Phytoverse and FPI shall keep confidential and not disclose to any third party any knowledge, records or understanding of any information, processes, trade secrets, client records, or any other intellectual property used by Lisa's Entities in the conduct of their businesses and Ross, Phytoverse and FPI will use their best endeavours to ensure compliance with this clause by any applicable person.

The Court noted that the "knowledge, records or understanding of any information, processes, trade secrets, client records, or any other intellectual property " were not defined in the settlement deed and ultimately found that information concerning the extraction machine did not fall within the categories of  information set out in the confidentiality clause.

Consequently the Court found that the confidentiality provisions had not been breached.

Similarly, in Luvalot Clothing Pty Ltd v Dong [2022] FCA 1411 an employer sought to enforce a confidentiality provision in an employment agreement. The dispute concerned the use of customer information.

Confidential information was defined in the employment contract to include "customer lists". However, the term "customer list" was not defined in the employment contract.

The Customer Details List defined in the Statement of Claim as being the information that Luvalot sought to protect, was not a consolidated list of customers.

The Court found that the Customer Details List as defined in the Statement of Claim did not fall within the category of a "customer list", included in the definition of confidential information in the employment contract .

How do I define the scope of the information to be protected?

In addition to clearly identifying the information to be protected, a confidentiality provision which seeks to protect information that is not protected by an equitable duty of confidence, must be reasonable.

In Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458, the Court stated that the circumstances which a Court may consider in order to determine the scope of information that is reasonably protected by a confidentiality obligation include:

1. the extent to which the information is known outside of the business;
2. the skill and effort which was put into collecting the information;
3. the extent to which the information was treated as confidential by the person seeking to protect the information;
4. the value of the information to competitors;
5. the ease or difficulty with which the information can be duplicated;
6. whether it was made known to the recipient of the information that the information was confidential;
7. whether the usages and practices in the industry support the claim of confidentiality.
   
   

In Zomojo, the Court considered each of these factors, finding at [193]:

1. while some individual components of the information may be known outside of Zomojo, the combinations were not;
2. significant skill and effort was expended to collect and develop the information;
3. the information was treated as highly confidential by Zomojo: it required potential customers to enter into NDA's;
4. the information would have been very valuable to Zomojo's competitors;
5. while individual components of the information could be and were duplicated by others ... there were no other examples of the combinations of technology employed by Zomojo in the low latency trading field;
6. Hurd was of course aware that the information was confidential; and
7. there was no evidence of usage or practice in the industry generally.

The Court concluded, on the basis of the factors set out above, that the scope of the information that the confidentiality provision sought to protect was reasonable.

Information that is already in the public domain cannot be protected by a contractual confidentiality provision. Consequently, confidentiality provisions will generally exclude information which is in the public domain.

How long should a Confidentiality Agreement last?

In considering the length of a confidentiality provision, a Court will consider what is reasonable given the type of information which is being protected.

In Zomojo Pty Ltd v Hurd (No 2) [2012] FCA 1458, the confidentiality provision was unlimited. While the Court stated that an unlimited restraint on the disclosure of confidential information was not prohibited , it found that the information which Zomojo sought to protect had "a limited shelf life". Consequently the unlimited time period for which the information was required to remain confidential was not reasonable.

For a further discussion about reasonable restraints, see our article Restraint of Trade Clauses in Franchise Agreements.

Defining obligations and responsibilities

In order to create an effective confidentiality agreement, it is essential to clearly define the obligations on the party who is required to keep the information confidential.

The agreement should specify how the information can be used, whether it can be shared with third parties, and how it should be stored and protected.

Additionally, the agreement may include provisions for returning or destroying the confidential information after the agreement expires or is terminated.

By clearly defining the obligations and responsibilities, the confidentiality agreement establishes a framework for protecting the information and ensures that all parties understand their role in maintaining confidentiality.

Takeaways

Confidentiality agreements play a crucial role in protecting sensitive information in various business transactions and collaborations.

For these agreements to be enforceable, it is essential to clearly define the confidential information, specify usage restrictions, and ensure reasonable obligations and responsibilities. By understanding the scope of information to be protected and the duration of the agreement, parties can establish a framework for maintaining confidentiality effectively.

If you are involved in any business relationships where confidentiality is key, consider seeking legal advice to draft a strong confidentiality agreement that meets your specific needs. 

1 Australian Government - The Treasury Non-competes and other restraints: understanding the impacts on jobs, business and productivity - Issues Paper page 11 - reference to footnote 51 Stewart, Stewart's Guide to Employment Law, 7th edn, pp 320-321

Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.