The success or failure of a business depends on its ability to maintain a competitive advantage, and a company’s competitive advantage often depends on its ability to maintain the confidentiality of its business methods, trade secrets and know-how.

A new competitor could become instantly formidable by gaining access to your customer list, pricing information and sales strategy. For example, the accidental disclosure of your secret biscuit recipe could find exact imitators popping up all over the country or indeed worldwide. Similarly, if another company gets a hold of the specification for a new machine design that allows your business to manufacture lower cost computer hardware, the competitive leg-up you enjoyed could quickly disappear.

In the course of your business, however, it will always be necessary to disclose confidential information to certain employees, independent contractors and business associates. So it is extremely important to understand the steps you need to take to make sure that any information disclosed remains both confidential and protectable.

Confidential information is not given statutory protection in the manner of intellectual property rights such as patents, trademarks and copyrights, but it is still a valuable asset that can be protected and even licensed so long as it remains undisclosed to the public. Examples of confidential information that can and should be protected include business records such as business plans, financial information and projections, customer lists and databases; trade secrets such as recipes, formulas and computer programs; and technical know-how such as manufacturing processes, devices, patterns and designs.

Trade secrets and know-how may include inventions that could eventually be the subject of a patent application, but must remain confidential prior to filing. They can also include discoveries, applications and programs that fall within one of the exceptions to patentable inventions. And in some cases may include inventions which may be patentable, but which a company has chosen not to seek patent protection over due to the sometimes lengthy and expensive patent application process, which eventually requires that the details of the invention be disclosed to the public in any event.

In addition, although some confidential information such as computer source codes may have copyright protection, this only prevents the material from being copied and used in the same form as it was created. It does not protect the idea, so if the information is disclosed to a competitor, it could use the underlying concept as long as it changed the form of expression (e.g. it could use the source code to derive an equally effective but not identical software program or could create the same software but without using identical source code).

For information to be considered confidential and protectable, the information must:

• Have a “necessary quality of confidence,” i.e. be information that if disclosed would have a harmful effect on the owner’s business;
• Be disclosed in circumstances importing an obligation of confidence; or
• Remain confidential.

Some courts and commentators have broken down a business’s commercial information into several categories, consisting of: publicly available information; day-to-day commercial information; information having some confidential element; and truly confidential trade secrets.

The first two categories, publicly available information and day-to-day business information (general information about the custom and practice of the trade), do not have the necessary quality of confidence to be protectable, and even declaring this information confidential will not make it so. Information that has some confidential element (such as per unit manufacturing costs) may be protectable, but only while the need for confidentiality remains. But truly confidential trade secrets that are critical to your business are protectable for as long as they remain confidential.

Once disclosed to public, however, even your company’s most valuable secrets are no longer protectable. As a result, one question that arises is what constitutes public disclosure. The general rule is that where disclosure to persons who are not company employees is for a specific, limited purpose, confidentiality may be preserved for all other purposes. For example, information disclosed to professional advisors, or in connection with a service contract or a potential business deal, is not considered publicly disclosed.

However, a business can only prevent persons from disclosing the confidential information they receive if the circumstances under which the information was acquired created a duty to keep the information confidential. As a general matter, there is a duty of confidentiality if a reasonable person under the circumstances would believe that one exists, which is why the best way to establish a duty of confidentiality is to have a signed Confidentiality and Non-disclosure Agreement. Such an agreement removes all doubt as to whether the person receiving confidential information understands that there is an expectation of non-disclosure and a limitation on use of the information.

However, even if there is no signed agreement in place, a duty of confidentiality can be implied from the circumstances. For example, an employee has an obligation to maintain the confidentiality of business information that his or her company clearly wants to keep secret at least while working for the company. This duty extends beyond the time of employment with respect to critical trade secrets and know-how.

What is less clear is what duty an employee has regarding the knowledge and skills he or she acquires through the course of employment. In general, this information is required to be kept confidential during employment (and for a limited time afterwards if covered by a non-disclosure agreement), but can then be used in future employment as long as it does not mean the disclosure of specific trade secrets or know-how.