Proprietary Information

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Proprietary information is information that a company wishes to keep secret. This type of information can include everything from a recipe, to a specific formula, or a design plan that is used to make a company’s products. It can also extend to a company’s salary structure, employment contracts, and marketing plans. An example of proprietary information, in some cases, might be any information an employee learns while on the job. To explore this concept, consider the following proprietary information definition.

Definition of Proprietary Information

Noun

  1. Information that a company or other entity wishes to keep confidential.

Origin

1400-1450       Medieval Latin proprietārius

What is a Proprietary Information Agreement

A proprietary information agreement (“PIA”) is a legal contract that specifies certain information and/or materials that the parties to the agreement are to keep secret or confidential. As an example, proprietary information might be acquired by someone who is hired to work in a project development lab, should his job involve projects that the company wants to keep confidential. Should the employee break that contract by disclosing information, then the company may choose to pursue legal remedies against him.

A PIA creates confidentiality between the parties, and works to protect patent details, confidential information, and trade secrets. In essence, anything that is not considered to be public information can be protected with a PIA. While some PIAs are contracts binding employees to maintain the confidentiality of their employers, others are said to be “mutual.” This means that all parties to the agreement are held to the same standard of keeping the information confidential. This might occur when two people agree to work on a project as a partnership.

For example:

Rick and T.J. come up with an idea for an electronic device capable of keeping bugs out of a garden. Following an initial brainstorming session, the pair decide to work together on the project, and promise to keep it secret until they can develop a working model. The men draft up a proprietary information agreement, in which they specifically agree to not disclose any information regarding the product, or even the business to anyone until they are ready to seek a patent and funding.

A year later, Rick feels they have enough to start talking to investors, while T.J. wants to wait until they have at least a provisional patent. Rick meets someone with money to invest, and gives him enough information that he wants to put money into the project. Rick has violated the PIA, and has opened himself up to a civil lawsuit, should T.J. decide Rick has put their project at risk.

Provisions of a Proprietary Information Agreement

A proprietary information agreement can protect any information that the parties do not wish to be made public, and may describe any type of relationship between the parties, including at which point, if any, the restrained party may disclose information. While there may be any number of provisions of a proprietary information agreement, fewer elements in the contract means less chance for legal complications later.

Some of the more common provisions of a proprietary information agreement include:

  • Parties – Each party to the agreement must be specifically named, and each must sign the agreement.
  • Detailed List – A laundry list of the exact items that are to be considered confidential, as well as the information or materials that will not be subject to such privacy, need to be outlined in the agreement.
  • Terms and Conditions – The terms and conditions of the confidentiality agreement, such as the time period in which the information is to be kept confidential, and what conditions, if any, allow disclosure, must be clearly defined.
  • Permissions – It must be made clear that the disclosing party is permitted to seek legal remedies in the event the contract is broken.
  • Termination Clause – A description of what must be done with the tangible confidential materials once the agreement has been terminated. This might include the destruction of any tangible or digital files that contain the information.
  • Responsibilities – The responsibilities of the party receiving the information should be clearly outlined.
  • Disclosure Exceptions – The instances during which disclosure is permitted, such as by court order or subpoena, should be detailed in the agreement as well.

The parties to the agreement can also specify the exact law and jurisdiction that will govern the agreement. In the event the provisions a proprietary information agreement are breached, the parties will know which court to apply to for legal remedies, as well as the specific law(s) that governs the breach of contract.

Types of Proprietary Information Agreement

There are three types of proprietary information agreements: unilateral, bilateral, or multilateral proprietary information agreements. A brief description of each is outlined below:

Unilateral Proprietary Information Agreement

Unilateral agreements involve two parties, however only one party expects to disclose confidential information to the other party. The disclosing party specifies that the information be kept under wraps for a specific reason.

In such an example, proprietary information kept under a unilateral agreement, might limit the amount of information that is shared with the press before the company has the chance to make a major announcement. This is often the case with technology companies, who unveil their latest products through conferences and other major press announcements. Revealing those secrets too early can expose the revealing party to a lawsuit.

Bilateral Proprietary Information Agreement

A bilateral proprietary information agreement is used when both parties anticipate sharing information between them, which needs to be protected from any potential leaks. An example of a bilateral proprietary information agreement is one involving a merger between two companies.

A party might insist upon a bilateral proprietary information agreement because they consider it to be more “fair and balanced,” in that it allows for the possibility that a receiving party may later become a disclosing party, or vice versa, which happens often enough to be a legitimate concern.

Multilateral Proprietary Information Agreements

A multilateral proprietary information agreement involves three or more parties. Here, one party anticipates that he will disclose information to the other parties, and needs to protect that information from any further disclosure beyond those parties. This type of agreement covers all of the bases in a single document, rather than signing multiple PIAs between them. The downside, though, is that a multilateral agreement may be too broad to tackle the more complex issues that can impact the parties’ collective ability to come to a unanimous resolution.

Proprietary Information Example Involving a Patent

In July of 1993, Michael Dolan, an employee of Celeritas Technologies, Ltd., filed a patent application for new technology. Two months later, Dolan, along with his fellow Celeritas officials, met with representatives from Rockwell International Corporation to demonstrate Celeritas’ new technology in the hopes of obtaining a license for it. The parties entered into a non-disclosure agreement that would cover the information that was to be revealed during that meeting. Specifically, the agreement stated that Rockwell:

“shall not disclose or use any Proprietary Information (or any derivative thereof) except for the purpose of evaluating the prospective business arrangements between Celeritas and Rockwell.”

Further, the agreement specified that proprietary information:

“shall not include information which … was in the public domain on the date hereof or comes into the public domain other than through the fault or negligence of [Rockwell].”

There was also a paragraph detailing injunctive relief:

“Injunctive Relief. Celeritas and Rockwell acknowledge that the extent of damages in the event of the breach of any provision of this Agreement would be difficult or impossible to ascertain, and that there will be available no adequate remedy at law in the event of any such breach. Each party therefore agrees that in the event it breaches any provision of this Agreement, the other party will be entitled to injunctive or other equitable relief, in addition to any other relief to which it may be entitled. The parties hereby waive any requirement for the posting of a bond or other security in connection with the granting of injunctive relief.”

In March of 1994, Rockwell informed Celeritas that it would not be licensing the latter’s technology after all. Rockwell then began their own development project that incorporated Celeritas’ technology. Rockwell also went so far as employing the engineers who had learned of Celeritas’ technology under the PIA.

The patent that Dolan had filed in 1993 was finally assigned to Celeritas in January of 1995. This was also the same month that Rockwell began shipping out prototypes they had produced using the idea they had stolen from Celeritas. By the time the trial was ready in 1997, Rockwell’s sales figures were soaring past what they had projected.

In September of 1995, Celeritas sued Rockwell on the grounds of patent infringement, breach of contract, and the misappropriation of trade secrets. Celeritas offered to settle for the largest amount of damages possible in exchange for a simplified trial. The jury decided in Celeritas’ favor on all three claims, which totaled over $100 million.

Rockwell appealed, asking for a new trial insofar as damages were concerned. The court concluded that there had been an error in granting of the initial reward, and the parties agreed to a reduced award that, all told, granted Celeritas close to $59 million. Rockwell appealed once again, and Celeritas responded with a cross-appeal.

The U.S. Court of Appeals for the Federal Circuit found that the jury verdict awarding damages to Celeritas’ for its breach of contract claim was, in fact, properly supported with evidence and in accordance with the law. Further, considering Celeritas’ willingness to settle, the Court held that the district court was correct in awarding Celeritas damages on its breach of contract claim. The Court also found that the issued patent was invalid and ordered the previously awarded attorney fees to be reversed.

Related Legal Terms and Issues

  • Compensatory Damages – An award of money in compensation for actual economic loss, property damage, or injury, not including punitive damages.
  • Exemplary Damages – An award of money when a defendant willfully acted in such a way as to be violent, fraudulent, or reckless.
  • Legal Remedy – The means by which a court of law enforces someone’s rights, imposes penalties, or issues additional orders of enforcement.