Wednesday, March 26, 2008

The Limitations of Trust in Confidentiality Agreement

I consider information to be the man’s greatest tool of the modern age. The future of modern society always nearly depends on the right use of resources and information that can either contribute to society’s development or downfall.

Just by reading the article, “Misuse of Information in Confidentiality Agreements”, posted in January 30, 2008, one can actually see the danger posed by some people when information is misused.

The article discusses two cases involving breaches in confidentiality agreements. One of the cases involves the sharing of information between a company and a prospective investor. Because the transaction between the two would require sharing of information from electronic documents in a secured website, the two entities agreed to sign a confidentiality agreement.

The agreement required the following actions from the investor:

  • maintain confidentiality of certain information confidential

  • return or destroy it at an agreed time

  • Refrain from using the sensitive material for any purpose other than evaluating the potential transaction.

According to the article, no transaction ever materialized between the two but one of the investors who gained access to the company’s vital information proceeded to conduct business, competing with the company in the same line of services.

As a result, the company sued the investor for breach and was later ordered by the court to pay $ 80 million for damages covering the amount of lost revenues and costs suffered by Hawaiian

The court decision in the said case is highly important in private equity deals because of the type of information covered by the confidentiality agreement.

According to the article, the information were vital to the company hence the damage was gross. Among the information in the agreement contained the following:

· Projections of future operational and financial performance of the business

· A list of contracts with third parties, identifying the other party to the contract and listing the starting and ending dates of each contract

· Customer profile

· Details about expansion plans, marketing strategy and pricing policies

· Details about credit card relationships

The court decision in this case underscores the importance of honoring the provisions of agreements we sign. It also highlights the need for close scrutiny when entering into confidentiality agreements. It also shows the potential for confidentiality agreements to be the subject of litigation.

In this respect, I think it is often a necessary first step in business transactions to evaluate documents we sign and think about the consequences of our future actions.