Top Secret! ? So what?

Top Secret! ? So what?

Doron Afik, Esq.
April 2, 2022

Confidentiality agreements are something that is signed as an aside in almost every initial business engagement, but sometimes there is no attention to detail and at some point it becomes clear that even if the confidentiality obligation has been breached, no compensation can be obtained at Court.

Confidentiality agreements are extremely important when there is intellectual property that needs to be protected. In some cases this is part of a large agreement (for example, part of a complex joint venture agreement) but in many cases it is the preliminary document signed between parties who are about to disclose information to each other and fear that the other party may use the information for private purposes.

In the matter heard by the Supreme Court of Israel in 2018, there was an agreement between shareholders that stipulated that the information of the joint company could not be used for private purposes. The Court enforced an agreement that data of monetary value cannot be used, such as "supplier details, customer details, pricing methods" and so on. Unfortunately, the Supreme Court reverted the case to the District Court to determine the compensation for breach of confidentiality and a verdict given in the Tel Aviv District Court in November, 2021, and ended the procedure that commenced 12 years earlier, found - in a very peculiar manner, that the party who breached confidentiality is to pay 40% of the profits of the project carried out using the confidential information - the same percentage that the same infringer would have paid to his business partner, had the project had been done in the joint company. To the inhabitants of the Ivory Tower the finding may seem fair, but it only proves how detached the Courts are from the business world. Payment - after over 12 years of redundant legal proceedings - of what the plaintiff was entitled to on the first day, is a very strong incentive for parties to breach confidentiality agreements.

In that case (although the puzzling, to say the least, result of the verdict is not necessarily related to the correct reasoning stated therein) the Court clarified that in case of breach of confidentiality, as in any contract, the injured party is entitled to compensation which would have put him in the place he would have been absent the breach, but not to restitution of the infringer's profits. However, when the breach of contract resulted in profits to the infringer at the expense of the other party, he may also claim the profit generated by the breach of contract by virtue of the principle of unjust enrichment - a principle established by the Israeli Supreme Court in the 1980s, when the honorable Justice Gabriel Bach clarified that even if no damage was caused due to breach of contract, it is still better that the party, who in good faith sought to abide by the contract, receive the infringer's profits, "than for the infringer to pat himself on the back and enjoy the feeling that the breach was profitable; Moreover that the society surrounding the parties may realize that breach of contract is indeed worthwhile."

So what is the solution? When the Courts enforce confidentiality agreements but are unable to calculate the damage caused (and no less important, in many cases it is very difficult to show damage caused) it is important to ensure that confidentiality agreements are made correctly and clarify that any profit created to the infringer belongs to the owner of the rights. It is important to ensure that disclosure of confidential information to the other party is documented, as much as possible, and especially important not to rely on agreements found online or obtained from a friend or lawyer who does not have the required understanding of intellectual property and dispute resolution. As in many cases, saving a few bucks may cost a fortune.