NDAs and Compelled Disclosure

Non-Disclosure Agreements and contract clauses involving confidential information probably look very familiar to those involved in the business world.  It may seem like no big deal to agree to keep another party’s information confidential – you have standard policies and procedures in place to prevent unauthorized disclosures and all of your employees are required to sign their own NDAs.  However, what happens if you receive a subpoena or court order requiring that you disclose the confidential information of a third party?  Depending on what your contract says, you could be on the hook for an expensive response.

Most NDAs and confidentiality clauses expressly provide that the recipient of confidential information is permitted to disclose that information if it is required by law, whether due to a subpoena, court order, or other type of compelled disclosure.  Many such clauses also provide that in the event a recipient is legally required to disclose information, the recipient must first provide the party who had originally disclosed the information with notice so that they can determine whether to challenge the compelled disclosure.  It is customary for the agreement to expressly state that if the disclosing party wishes for the recipient to challenge the compelled disclosure, the disclosing party must do so at their own cost and expense or reimburse the recipient for their related expenses.  This prevents the recipient from having to incur its own legal fees to contest the disclosure of information that isn’t its own.

However, what happens if the challenge is unsuccessful?  Alternatively, what if the disclosing party doesn’t object to the compelled disclosure?  This is where things get tricky.  The recipient of the confidential information will then need to determine how to respond to the order requiring disclosure.  To do so properly, the recipient will almost certainly need the advice of counsel to determine what information must be disclosed, whether any information should be redacted, and to properly label, process, and produce the information.  Depending on how much information is responsive, the recipient could be on the hook for tens of thousands of dollars in legal fees simply by virtue of having access to a third-party’s information.

Accordingly, if you are about to sign an NDA or confidentiality clause in anticipation of your receipt of a significant amount of another party’s confidential information, review it carefully to determine what your obligations will be if you are legally compelled to disclose the confidential information.  If the agreement is not clear about who will be responsible for expenses incurred in connection with challenging the court order or otherwise disclosing information as required, consider amending the agreement to clarify that the disclosing party will be responsible for paying all related expenses in connection with the recipient’s response to the compelled disclosure.  And best practice is to seek the advice a competent local corporate attorney who can advise on you on the specific consequences and risks of the NDA.