Confidentiality,

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Confidentiality, Non-Competition,
and Non-Solicitation Agreements Traps for the
Entrepreneur
Presentation at the Sault Ste. Marie Innovation
CentreSeptember 15, 2009
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Confidentiality, Non-Competition and
Non-Solicitation Agreements

• All of these are different forms of restrictive
  covenants
• As such, need to ensure that they are not void as
  being unreasonable restraints of trade
• Always consider reasonableness, in the particular
  circumstances, of the provisions of such
  agreements

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Confidentiality, Non-Competition and
Non-Solicitation Agreements

• Consider fundamental principles of
• contract law
• Consideration
• In order for a contract to be enforceable, the
  party providing the agreement must receive some
  consideration
• Past consideration is no consideration
• No consideration makes an agreement unenforceable
• Consider the timing of when the contracts are to
  be entered into

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Confidentiality and Non-Disclosure Agreements

• What is an NDA?
• Agreement between parties to keep specified
  information confidential for a set period of time
• Sometimes called confidentiality or secrecy
  agreements

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Why Use an NDA?

• They perform several functions
• Protects sensitive information
• Defines what is considered confidential
• Limits the use of confidential information
• Can prevent the forfeiture of patent rights
• Forms a record in case of a later dispute

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The Content of a Typical NDA

• An NDA should contain the following terms
• Definition of Confidential Information
• The existence of the agreement
• The fact that negotiations are ongoing?
• Identification of the Confidential Information
• Exceptions
• Requirements for safeguarding Confidential
  Information
• Permitted access/distribution
• Permitted uses

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The Content of a Typical NDA (contd)

• An NDA should contain the following terms
• Duration of the obligations
• Non-solicitation of employees
• Standstill arrangements (in an MA context)?
• Terms addressing breach of the obligations
• Damages
• Equitable relief injunction
• No warranties relating to information provided
• Obligations upon termination

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Content (contd)

• The content of an NDA is critical
• The scope and wording of its terms will depend on
  whether you are the disclosing or receiving party
• Content of NDAs are becoming an important focus
  of negotiation

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Typical occasions to use NDAs and/or
Non-Competition Clauses

• Employment, contracting or consulting
  arrangements
• Post-employment obligations of a typical employee
  may not be meaningful in the absence of a
  contractual arrangement
• Cant always rely on employees implied duties
• Trade secrets vs. confidential information
• In the case of an executive, it is more likely
  that a court will find a heightened common law
  obligation absent a contract
• Licensing, financing or merger/acquisition
  negotiations (due diligence)

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Is an NDA Mandatory?

• No, a duty of confidence may arise even in the
  absence of a written contract
• Some companies do not wish to receive
  confidential information
• They want to avoid conflicts in areas they are
  already working on

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But

• Sharing confidential information requires a high
  degree of trust
• and
• A written agreement is a serious reminder of
  obligations
• An NDA can form the basis for a legal action in
  the case of misuse

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Consequences of breaching an NDA

• The remedy is generally based in contract against
  the person who signed the NDA
• May include monetary damages, an injunction
  preventing the use of information, or even a
  constructive trust to reverse any profits of
  the misuse
• Importantly, however, confidential information
  can be traced into the hands of knowing or
  innocent third party recipients

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Public Policy in Favour of Enforcement

• Two recent Ontario Superior Court decisions
  suggest a heightened trend in Ontario in the
  enforcement of NDAs as a matter of public policy
  
• Certicom Corp. v. Research In Motion Ltd., 2009
  O.J. No. 252 (Ont. Sup. Ct.)
• Gold Reserve Inc. v. Rusoro Mining Ltd., 2009
  O.J. No. 533 (Ont. Sup. Ct.)

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Certicom v. RIM

• RIM tried to buy Certicom
• Friendly, unsuccessful negotiations
• Certicom disclosed confidential information
  (CI) to RIM pursuant to 2 NDAs
• February 2007 NDA
• Limited use of CI to assessing/establishing some
  form of business combination between the parties

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Certicom v. RIM (contd)

• Contained a standstill provision (12 month bar on
  RIM making a hostile take-over)
• RIM mounted a hostile bid for Certicom and
  acknowledged it had used Certicoms Confidential
  Information in its assessment of the bid

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Certicom v. RIM (contd)

• Certicom successfully moved for an injunction
• RIM argued
• Its use fell within the defined purpose for
  which CI could be used under the 1st NDA
• Court said
• Not a form of business combination without
  Certicoms consent

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Certicom v. RIM (contd)

• RIM argued
• The confidentiality provision should not be
  interpreted to extend the standstill provision
• Court said
• Confidentiality provision was distinct from the
  standstill provision providing for separate
  obligations

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Gold Reserve v. Rusoro

• Rusoro, a Russian mining company, hired Endeavour
  as financial advisors in connection with their
  hostile bid for Gold Reserve
• Endeavour already acted for Gold Reserve and
  still had its CI in its possession
• Gold Reserve sought an injunction to prevent the
  takeover based on the misuse of its CI

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Gold Reserve v. Rusoro (contd)

• Court granted the injunction, holding
• Endeavour
• Prima facie breach of negative covenant in its
  advisory agreement
• Reasonable to infer it would be impossible not to
  rely on the CI

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Gold Reserve v. Rusoro (contd)

• Rusoro
• Can follow CI into the hands of a non-contracting
  third party
• Rejected notion that principals of Rusoro could
  compartmentalize CI

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Gold Reserve v. Rusoro (contd)

• Cummings J. wrote

Absent special measures such as
institutionalized ethical walls the reasonable
presumption is that confidential information will
be taken into account and used whether
intentionally or inadvertently, to the
disadvantage of the provider of the confidential
information.
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The Similarities

• In Both Cases
• The court granted permanent injunctions
  preventing hostile take-over bids from proceeding
  based, in part, on findings related to the misuse
  of confidential information in formulating the
  bids.
• The court acknowledged that, while standstill
  provisions provide better protection against
  unsolicited bids, confidentiality provisions can
  achieve the same goal.
• The court was concerned about maintaining a
  level playing field in the securities market.

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The Obligations Arising out of the Receipt of
Confidential Information

• In both the Certicom Decision and the Gold
  Reserve Decision, the Court

• Rejected any notion that recipients of the
  confidential information could disabuse
  themselves of the knowledge gained from the
  disclosures and
• Looked for the use of strategies on the part of
  the recipients to prevent misuse of the
  information.

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Do you have Strategies in Place?

• Accordingly, in the context of a potential
  acquisition, parties receiving confidential
  information subject to obligations of confidence
  should consider using strategies that aim to
  prevent misuse of confidential information,
  including
• Institutionalized measures (confidentiality
  provisions in employment contracts company
  policies about CI)
• Physical and electronic protection
• Use of clean design rooms

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Practical tips

• Make records of what was disclosed at meetings
  and to whom
• Mark documents (and every page thereof) with a
  Confidential legend (not required, but helpful)
• Keep good records of the negotiations surrounding
  the drafting of the NDA (it may be relevant to
  its interpretation if there is a dispute down the
  road)
• Dont use or accept boiler plate NDAs every
  NDA should be drafted to fit the circumstances
• What to do with unsolicited information?

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Non-Competition Agreements

• Non-comps in employment and MA contextsare
  exceptions to the general rule against covenants
  in respect of restraint of trade if the terms are
  reasonable
• It is in the public interest to enforce them
• Courts give more latitude to non-comps entered
  into in MA contexts than in employment contexts
• The consideration which is given is greater
• Freedom of contract among people of equal
  bargaining power
• Importance of ensuring the buyer gets certainty
  and something of value

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Non-Competition Agreements

• Must be reasonable in terms of
• Nature of the Prohibited Activities
• what cant I do?
• Territory
• where cant I do it?
• Duration of the Covenant
• how long cant I do it?
• Blue pencilling is not generally implemented by
  the Courts

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Non-Competition Agreements

• Bias in the Courts in favour of striking down a
  non-comp provision when a non-solicitation clause
  would adequately protect the employers interest

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• Jay A. Lefton
• Ogilvy Renault LLP
• Suite 3800 200 Bay Street
• Royal Bank Plaza, South Tower
• Toronto, Ontario, Canada M5J 2Z4
• 416.216.4018 (o)
• 416.998.1818 (c)
• jlefton_at_ogilvyrenault.com