Confidentiality agreements are common in real estate & business. Sometimes they are used to get an investor to get his ‘eye off the ball’. Or they are often viewed as routinized documents unworthy of close reading. WRONG! When drafting and negotiating confidentiality agreements you should be aware of broad restrictions on your actions. For example, in an acquisition deal, a “use” restriction can be the source of a creative argument for a seller seeking to prevent an unsolicited offer or other activity that arguably requires use of the seller’s confidential information.

In a confidentiality agreement, a disclosing party will want to do more than contractually prohibit a receiving party from sharing the disclosing party’s confidential information with others. A nonuse provision—a common feature of most any confidentiality agreement—restricts how the receiving party may use the disclosing party’s confidential information.

A flat prohibition on the use of confidential information would likely be overly broad in many deal contexts in Arizona. I think the Maricopa County Judges are very savvy. They really get business. For example, an employer likely wants its employee to use confidential information disclosed by the employer when it helps the employee to do a good job. In an acquisition, a seller likely wishes a potential buyer to use the confidential information disclosed by the seller for the purpose of evaluating the potential transaction. Indeed, confidentiality agreements are often put in place because there is a desire on the part of both parties for at least one party to use the other’s confidential information. Fraudsters will use items you give up absent these!

Drawing the outer bound of a nonuse restriction in terms of an agreement or transaction’s purpose will often track the parties’ mutual interests in entering into the confidentiality agreement in the first place—to provide some comfort and space for exchanging information as is often necessary for cooperative activity (be that exploring a potential acquisition, entering into an ongoing services agreement, etc.).

However, the analysis of a use restriction’s scope does not end there. The above example provision kicks the issue of devilish details over to the definition of “Transaction,” as is common, especially in acquisition contexts.

For example, if Transaction is defined as a possible business combination transaction between the parties (as it was in the confidentiality agreement at issue in Martin Marietta, Inc. v. Vulcan Materials Co., 68 A.3d 1208, 1212 (Del. 2012)), a restriction that permits the use of confidential information solely for the purpose of evaluating a Transaction could be found to prohibit a party from using that information in seeking to acquire the other party’s stock directly from its shareholders (again, as was found in Martin Marietta).

Where a use restriction is tied to the definition of “Transaction” or “Purpose” (or any other concept), as with the example provision above, the receiving party will want to consider if the defined concept is broad enough to permit the range of activities for which the receiving party might wish to use the information. (For example, in Martin Marietta, a definition of Transaction that included not just transactions between the parties but also any transaction related to the parties might have given the acquirer the scope it needed to use the target’s confidential information in connection with tendering an offer to the target’s shareholders.) The receiving party, in drafting a broad scope of use, will also consider any other activities in which the disclosing party might argue that the receiving party “inevitably” had to have used the disclosing party’s information, even if the receiving party claims it did not actually do so.

If you need one, have already signed one and want out or need one enforced, call Bill Miller of Scottsdale Arizona. He has written, litigated and enforced scores of these in Paradise Valley, Phoenix and Scottsdale for over 27 years. Bill’s number is 602-319-6899. The office is located off the 101 in Scottsdale at 8170 North 86^th Place suite 208 Scottsdale, AZ 85258.

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