What are the Consequences of Breaching a Confidentiality Agreement or NDA?

1. Introduction

A confidentiality agreement or non-disclosure agreement (NDA) is a contract that is used to protect confidential information that is disclosed by individuals or companies (called the parties) in a particular business relationship. It creates an obligation between the parties that they will not disclose or use the confidential information for any purpose other than the purpose of the business relationship.

Breaching a confidentiality agreement or non-disclosure agreement (NDA) can have various consequences, both legally, financially, and on the general business status of the parties involved. The specific consequences depend on the terms and conditions stipulated in the agreement between the parties thereto and the applicable laws in the Philippines.

In this guide, the details concerning a confidentiality agreement such as the definition and examples of confidential information, and the repercussions or consequences of violating a confidentiality agreement will be explained.

2. Who are the Parties to a Confidentiality Agreement or NDA?

A confidentiality agreement, also known as a non-disclosure agreement (NDA), typically involves two primary parties: the disclosing party and the receiving party. The specific roles and responsibilities of each party are outlined in the agreement.

2.1 Disclosing Party:

The disclosing party is the one that possesses and has to share confidential information with another party pursuant to an agreement or as a consequence of a business relationship.

The disclosing party is responsible for clearly identifying and specifying the confidential information that is being shared and should not be disclosed by the receiving party. This party makes use of a confidentiality agreement to have more certainty that the receiving party will not disclose or use the information for unauthorized purposes.

2.2 Receiving Party:

The receiving party is the one that receives confidential information from the disclosing party.

The receiving party agrees to receive and handle the confidential information with care and only for the purposes outlined in the agreement, and the receiving party commits not to disclose or use the information for any unauthorized purposes. This obligation extends to the employees or agents acting under the name of the receiving party which is why it is important that the receiving party adequately takes measures to ensure that the persons who hold confidential information on their behalf is aware of the confidentiality agreement between the receiving party and the disclosing party.

The agreement may be stipulated in such a manner that both of them may be a disclosing party and receiving party reciprocally to each other, meaning, there is a two-way disclosure, as opposed to one-way disclosure where only one party is the receiving party and the other party is the disclosing party. This is usually the common practice.

3. What kinds of information are considered confidential?

Depending on the type of business or industry the parties to a confidentiality agreement are in, the information can be considered confidential. Being able to distinguish what is confidential or otherwise will enable the parties to protect their own rights and interests in a given business relationship. What is confidential information may be defined and laid down clearly in the confidentiality agreement. The following are common examples of confidential information:

Trade Secrets. Trade secrets encompass proprietary information critical to a business's success. This may include manufacturing processes, formulas, recipes, customer lists, pricing strategies, and other confidential business practices that give a competitive advantage. Trade secrets are protected as long as they remain confidential.
Business Plans. Business plans outline a company's vision, mission, goals, and strategies for achieving those goals. These plans often include detailed financial projections, marketing strategies, and operational plans. Keeping business plans confidential is essential to prevent competitors from gaining insights into a company's strategic direction.
Financial Information. Non-public financial information includes budgets, revenue figures, expenses, profit margins, and other financial details. This information is confidential as its disclosure could impact a company's competitiveness, stock prices, and relationships with stakeholders.
Customer and Supplier Information. Lists of customers, clients, or suppliers along with their contact information and transaction histories are considered confidential. Protecting this information is crucial to maintaining relationships, preventing poaching by competitors, and safeguarding business operations.
Product Designs and Specifications. Technical details, blueprints, designs, and specifications for products, whether in development or production, are considered confidential. Unauthorized disclosure could lead to intellectual property infringement or competitive disadvantage.
Intellectual Property. Intellectual property, including patents, copyrights, and trademarks, is confidential until officially disclosed. Unauthorized disclosure can compromise the legal protections associated with these assets.
Software Code. Source code for software applications is highly confidential. It contains the programming logic and algorithms that give a software product its unique functionality. Protecting software code is essential to prevent unauthorized use and distribution.
Research and Development (R&D) Data. Data generated during the R&D process, such as experimental results, prototypes, and innovative ideas, is confidential until the company decides to disclose it. Protecting R&D information is crucial to maintaining a competitive edge in innovation.
Employee Information. Personal information about employees, including salaries, performance evaluations, and disciplinary records, is confidential to protect individual privacy. Unauthorized disclosure can lead to legal consequences and damage the employer-employee relationship.
Marketing Strategies. Marketing plans, market research findings, and advertising strategies are considered confidential. Disclosing this information prematurely can allow competitors to anticipate and counteract a company's marketing efforts.
Contracts and Agreements. The terms and conditions of contracts, licensing agreements, and other legal documents are confidential. Disclosing contract details could harm a company's negotiating position and contractual relationships.
Sensitive Legal Information. Communications with attorneys, legal strategies, and other sensitive legal information are confidential under attorney-client privilege. Unauthorized disclosure could waive this privilege and harm legal proceedings.
Internal Policies and Procedures. The specific operational processes, policies, and procedures of a company are confidential because this information is vital to maintaining a competitive advantage and ensuring compliance but may not be disclosed publicly.
Mergers and Acquisitions Information. Information related to potential mergers, acquisitions, or other significant business transactions is treated as confidential until the deal is publicly disclosed. Premature disclosure can impact negotiations and deal outcomes.

It must be noted that once the confidential information becomes publicly known without any fault on the part of the receiving party, the confidentiality agreement cannot be breached anymore as the information is no longer considered as confidential because it is already known by the public.

4. What are the Cases that can be Brought to Court after a Breach of a Confidentiality Agreement or NDA?

Certain legal consequences may arise due to a breach of a confidentiality agreement or NDA. This generally starts with a cease and desist letter which the injured party (which is usually the disclosing party) can send to the breaching party (which is usually the receiving party). This letter demands the breaching party to stop performing further acts that are considered as a breach. After sending said letter, and if the breaching party does not comply or respond to the same, a case may then be filed in court for causes including but not limited to the following:

4.1 Breach of Contract:

Breaking a confidentiality agreement is fundamentally a breach of contract. The injured party can take legal action which may involve seeking remedies such as damages in the form of a sum of money or asking the breaching party to perform a particular act (also called "specific performance" which is a court order requiring the breaching party to do a specific act to address or undo the breach).

A confidentiality agreement can also include a penalty clause in which it is specified that the breaching party may be liable for a specified amount of money in case of breach.

Being an ordinary civil case, this involves the process of seeking the assistance of a legal counsel, informing the breaching party of such breach, and filing a complaint in a court of law. This may also be prefaced and accompanied by an injunction which is a court order requiring the breaching party to stop disclosing or using the confidential information immediately. Failure to comply with an injunction can result in further legal consequences such as other criminal actions stated in the succeeding paragraphs.

A failure on the part of a party to a confidentiality agreement to follow the terms and conditions of the said agreement can give rise to a breach of contract. Thus, for example, if in the confidentiality agreement, Party A discloses certain financial information of Party B, which is considered as a breach under the agreement, Party A can be liable for breach of contract, and be held liable for monetary damages.

4.2 Intellectual Property Laws:

The Intellectual Property Code of the Philippines covers various forms of intellectual property, including trade secrets. If the confidential information constitutes a trade secret or proprietary information, the injured party may pursue legal action under intellectual property laws.

The disclosure of a trade secret or proprietary information is considered as unfair competition and may give rise to a penalty of imprisonment and fine against the breaching party.

For example, if ABC Restaurant possesses a secret ingredient for their fried chicken which is a trade secret, and Party A, who has access to this information and signed a confidentiality agreement concerning the trade secret, discloses the same, Party A can be punished for unfair competition under the intellectual property law.

4.3 Estafa (Fraud):

If the breach involves fraudulent activities, the Revised Penal Code of the Philippines includes provisions on estafa, a crime related to fraud and misrepresentation. This could be applicable if the breach of the confidentiality agreement is accompanied by deceptive actions that result in financial loss.

Using the same example, if Party A receives money or compensation in exchange for obtaining knowledge over the confidential information, knowing that he will sell such information to XYZ Restaurant which is ABC Restaurant's competitor. Party A is liable for estafa or fraud and may be punished with a penalty of fine and imprisonment if he proceeds to sell such information to XYZ Restaurant.

4.4 Data Privacy Laws:

The Data Privacy Act of 2012 governs the processing of personal information such as names, addresses, and phone numbers. If the breach involves unauthorized disclosure of personal data protected by this law, the injured party may take legal action, and the responsible party could face penalties under the Data Privacy Act.

For example, if Party A obtains confidential information concerning the personal information of the employees of ABC Restaurant such as their names, addresses and phone numbers and disseminates said information to other persons, Party A may be liable under the law and be punished with the penalty of fine and imprisonment.

4.5 Cybercrime Laws:

The Cybercrime Prevention Act of 2012 addresses offenses related to computer systems, data, and online activities. If the breach involves unauthorized access to computer systems or data, the injured party may pursue legal action under the provisions of this law.

Using the same example, if Party A used a computer system in disseminating confidential information about ABC Restaurant, the crimes he committed may accordingly be punished under the Cybercrime laws by increasing the penalty imposed by the laws violated.

5. What are the General Business Consequences of Breaching a Confidentiality Agreement or NDA?

A breach of confidentiality can harm the trust and confidence in a business relationship. This can lead to a loss of reputation in the industry, making it difficult for the breaching party to secure future partnerships or collaborations. In some cases, details of legal disputes may become public, further damaging the reputation of the party in breach.

A party that has a history of breaching confidentiality agreements may find it challenging to enter into new agreements or partnerships. Other businesses may be hesitant to work with an entity that has demonstrated a lack of commitment to protecting sensitive information.