Wait, Is This Confidential?

[Editor’s note: In many respects, confidentiality is the core feature of the attorney-client relationship. Additionally, it is a crucial component of many business discussions, and the key provision of a non-disclosure agreement (NDA). This is particularly true in the rapidly emerging global cannabis industry, where intellectual property and relationships are often key to a venture’s success. In this article, Kight Law attorney Philip Snow discusses confidential communications in the context of both the attorney-client relationship and in business discussions. -Rod Kight]

Introduction

The cannabis industry has rapidly evolved over the last twenty years. From closet growers and tobacco farmers to commodities traders and venture capitalists, the cannabis industry has attracted all walks of life. People accustomed to doing deals based on handshakes and napkins often intersect with those needing a team of lawyers to hammer out the terms of an agreement. Regardless of your business acumen, one of the most important things you as an industry participant have is intangible, and that is your information.

This blog post examines the role of confidentiality in the cannabis industry. This includes the necessity of protecting your confidential information prior to entering into a partnership or venture with someone new, and also how to maintain that protection during a relationship. Additionally, it examines the sometimes misunderstood concept of confidentiality between a lawyer and client.

Protecting your Confidential Information

Partnerships in the cannabis industry form rapidly, and in some instances almost serendipitously. One minute you are talking to a stranger at a coffee shop or on an airplane, and the next minute you are engaging in an animated discussion about how you are going to revolutionize the cannabis industry. While these conversations and aspirations are often exciting, they must be entered into with a measured approach.

If possible, and as a matter of best practice, these off-the-cuff conversations regarding potential business ventures and product launches should be very surface level. In other words, it is important to “keep your cards close to the vest” when you are just meeting someone or speaking with them for the first time. I’ve had clients (and even some friends) lose out on opportunities because they overshared confidential business information with the wrong person, who in turn took that information and used it for personal or professional gain.

One way to protect your confidential information from being used without your knowledge is by using a non-disclosure agreement. Non-disclosure agreements or NDAs, are a mutually beneficial legal agreement created between parties that forbids them from using the other party’s confidential information without their knowledge or approval. NDAs are common practice, and in many cases, they are entered into before any serious discussions regarding partnerships take place. NDAs cover a variety of topics and can be tailored for the needs of each party. Examples of information included in NDAs are: business plans, trade secrets, product designs, production and development processes, genetic information, and terms of engagement between the parties.

This may sound like an attorney advocating for the use of his services, but entering into a properly drafted NDA before engaging in serious discussions with a potential business partner is vitally important. In this, and any industry, it is important to plan for the worst and hope for the best. Even if you are contemplating a partnership or engagement with a trusted friend or someone you think you know well, having something to legally protect you and your information is absolutely necessary.

Maintaining your Confidential Information

So, you’ve signed an NDA and decided to move forward with a partnership. Let’s say you and your new business partner are going to work together in a project where you agree to broker transactions for the purchase of hemp cultivated by your partner. You, as the broker, are obligated to secure the best possible price for your business partner’s cultivated product and in exchange, you receive a certain percentage of the sale price.

In this instance, you are responsible for connecting two parties- the buyer and your business partner. As the broker, you only get paid if you generate the transaction. If, however, your business partner and the purchaser connect with one another without your involvement, you do not receive your percentage of the transaction, likely increasing the profits to your business partner because no brokerage fees have to be paid.

Situations like this happen all the time. The best way to prevent them is to include a non-circumvention provision in the contract between you and your business partner. These provisions prevent a party from being circumvented or taken advantage of by another party to a transaction. In the example mentioned above, if you had confidential information about the potential buyer and seller, and they circumvented you as the broker, you would lose out on the money owed to you. By having a non-circumvention provision in your partnership agreement, you can protect yourself and your confidential information from being used against you to your disadvantage.

Confidentiality of Information between a Lawyer and Client

Lawyers are bound by standards unique to any other profession. Prior to being licensed to practice law, all lawyers have to pass what is called a “Professional Responsibility Examination.” This exam tests would-be lawyers on the “Rules of Professional Conduct” (Rules) that govern the legal profession. These Rules provide the standards by which all lawyers must conduct themselves during their practice.

One of the most important rules of professional conduct to which lawyers must adhere is the rule of confidentiality. This rule states, in relevant part: “A lawyer shall not reveal information relating to the representation of a client unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure if permitted by paragraph (b)[1].” Paragraph (b) goes on to provide certain exceptions when the lawyer may reveal information relating to the representation, including, but no limited to: preventing certain death or substantial bodily harm; preventing the client from committing a crime or fraud; securing legal advice about the lawyer’s compliance with the Rules; and complying with other law or court order. Additionally, lawyers are obligated to make reasonable efforts to prevent the inadvertent or unauthorized disclosure of, or unauthorized access to, information relating to the representation of a client.

What this means is that, absent a very select set of circumstances or exceptions, a lawyer may not reveal any information related to representing a client. This includes ideas the lawyer may find interesting and want to share with coworkers, family members, and other clients. It also prevents a lawyer from using any confidential information to his own advantage, whether it be for financial or personal gain.

In sum, trust is one of the most important aspects of the relationship between a lawyer and client. In fact, a fundamental principle in the client-lawyer relationship is that, in the absence of the client’s informed consent, the lawyer must not reveal information relating to the representation[2]. This trust ensures the client speaks freely with the attorney, even if the information is embarrassing or could be legally damaging. This trust works both ways. In order to represent a client effectively, the lawyer must be able to trust that the client is providing all relevant information regarding the representation.

Keep in mind, however, that there is no obligation of confidentiality between a lawyer and a person having a general conversation. In order for this duty to maintain confidentiality to apply, the lawyer must be representing the person as a client. Additionally, the duty of confidentiality does not apply when a non-client is present during, or has been granted access to, conversations or communications between the lawyer and client. In other words, if you want information that you provide to your attorney to remain confidential, you must not share it with another person or have conversations jointly with your attorney and someone else.

What This Means for You

Some of you reading this might be wondering what this blog post has to do with hemp or cannabis law. The fact of the matter is that the cannabis industry is so new and evolving at such a rapid pace that losing any type of edge over your competitors, especially your confidential information, could result in lost opportunity or worse, lost profits. To make sure you are protected from inception to exit, contact one of the attorneys at Kight Law today.

[1] https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_1_6_confidentiality_of_information/

[2] https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_1_6_confidentiality_of_information/comment_on_rule_1_6/

February 29, 2020

This post was written by Kight on Cannabis attorney Philip Snow. Kight on Cannabis is a law firm founded by attorney Rod Kight that represents legal cannabis businesses. You can contact us by clicking here.