Law on TV – “The Drop Out” and the role of the NDA

In the series, the internal workings at Theranos were portrayed as shrouded in secrecy and heavy-handed security. All new staff and investors and the like who visited the company were required to sign a non disclosure agreements (also known as a confidentiality agreement). As it turned out, they did that because they didn’t want anyone to find out that their tech didn’t work.

Of course, when the truth came out it all came crumbling down.

Elizabeth Holmes has been found guilty of defrauding investors and is currently awaiting sentencing which will happen later this year. The series is a fascinating exploration of how a person’s desire to succeed led to a little lie that became a really big lie.

In the show, Theranos used NDAs to cover up its lies but there are heaps of legitimate situations where confidentiality is critical and an NDA may be appropriate.

Firstly though, what is confidentiality?

Confidentiality

Confidentiality is an obligation imposed by law to keep certain information or knowledge a secret. The obligation of confidence arises by way of circumstances, relationships, legislation or contract. Where the obligation arises in relation to certain information, that information is confidential information. It can seem a bit circular: information is confidential if a duty of confidence arises and a duty of confidence arises if the information is confidential.

For information to be classed as confidential, it must be specific, not common knowledge or in the public domain, communicated in circumstances indicating confidentiality, and the use of the information must be unauthorised by the person disclosing the information.

An example of where confidentiality arises is in the lawyer / client relationship. As a result of the nature of the relationship, the information you provide your lawyer is confidential.

(As a side note, sometimes confidentiality and privacy are mixed up. Although they do have some common elements, they are different. Privacy obligations attach to personal information, not commercial information. The rules about disclosure of personal information is a result of state and federal privacy legislation.)

What happens if you breach confidentiality?

A breach of confidentiality can result in varying degrees of legal action. A breach must include all of the following elements:

• the information holds a reasonable quality of confidence

• an obligation of confidence existed

• the unauthorised use of the information resulted in loss or harm (not necessarily significant loss or harm)

If a breach is found, you may be liable to pay damages or compensation to the harmed party. You can also be required to pay over any profits you derive from the breach of confidence. The courts also have the discretion to order that:

• you perform a specific action like deliver or destroy copies of confidential information

• you are prohibited from doing some specific action, like disclosing or using confidential information

What is an NDA / confidentiality agreement?

Courts will often use what is called a ‘reasonable person’ test to determine the legitimacy of a party’s actions or beliefs when a breach of confidentiality is alleged. The Court looks at whether a reasonable person in the position of the recipient oof the information would presume that the information was communicated in confidence. This test can be uncertain and is influenced heavily by the specific circumstances.

An NDA is a written agreement that removes this uncertainty and articulates rights and obligations in relation to information. An NDA defines things like:

• what specific information is confidential

• how that information must be handled

• who owes the obligation of confidence and any exceptions to that obligation

• what constitutes a breach of confidence

• the consequences of a breach of confidence

Why would you need an NDA?

If you are proposing to share sensitive or valuable information with another party in a commercial setting, you should make sure that the confidentiality obligations are clearly articulated. Sometimes those obligations are already set out in provisions in another agreement like an employment agreement, supply terms and conditions or a sale contract. In those circumstances you should make sure you understand the effect of those provisions and that they are appropriate.

Often however parties wish to be able to speak freely and share information when before they enter a business relationship, venture or arrangement. For example, you may have trade secrets, designs, financial information or inventions that you want to share with a party to for a particular purpose, but otherwise keep a secret. In these situations, there is rarely any other document regulating confidentiality and an NDA is critical.

Why you would not want to sign an NDA/confidentiality agreement

Like any contract, an NDA is a legally binding agreement and there are consequences if you breach it. Just as an NDA protects the interests of the person disclosing the information it creates risk for the recipient.

You should never sign an NDA before reading it and fully understanding your obligations. There is a presumption at law that says that by signing a contract you understand and agree to the terms and conditions. If you are uncertain about the effect of an NDA you should seek legal advice.

If you identify that your obligations in the agreement are unreasonable or difficult to comply with you should get advice. In our experience, people often use standard or “boilerplate” NDAs. It’s not uncommon to negotiate the terms of an NDA to adapt the document to the circumstances and avoid foreseeable breaches or other problems.  

Final comment

As lawyers we recommend getting good legal advice before you do anything, including signing or asking someone else to sign an NDA. However, IP Australia have a pretty cool tool that generates an NDA for you here: https://www.ipaustralia.gov.au/tools-resources/ip-contract-generator

(make sure you get advice before you use it)

‍