A Confidentiality in Bankruptcy clause addresses what happens to confidential information and trade secrets when one party files for bankruptcy. In bankruptcy proceedings, a company's assets—including confidential information, customer lists, and proprietary data—may be disclosed to creditors, bankruptcy trustees, and potentially sold to third parties as part of the bankruptcy estate. This clause matters because it protects sensitive business information from being exposed during bankruptcy proceedings, which could harm the non-bankrupt party's competitive position or violate their own confidentiality obligations to customers. Without this clause, the bankrupt party's trustee could argue that confidential information must be disclosed to maximize the value of the bankruptcy estate, potentially exposing trade secrets to competitors or the public. This clause is particularly important in SaaS agreements because software code, customer data, algorithms, and subscription lists are often the most valuable assets and the most sensitive to disclosure.
The clause typically specifies that confidential information remains confidential even in bankruptcy, that the bankrupt party's trustee must maintain confidentiality obligations, that the non-bankrupt party has the right to seek protective orders from the bankruptcy court, and that certain information (like customer data) may not be sold or transferred without the non-bankrupt party's consent. Some clauses also address whether the non-bankrupt party can terminate the agreement if bankruptcy is filed, or whether they have special rights to retrieve or delete their data before the bankruptcy estate is liquidated. The clause may also require the bankrupt party to notify the non-bankrupt party of any bankruptcy filing and any proposed disclosure or sale of confidential information.
In a SaaS context, ensure this clause explicitly addresses: (1) customer data and user information—specify that customer data cannot be sold, transferred, or disclosed without customer consent, and that you retain the right to retrieve or delete your data; (2) source code and proprietary technology—require that these remain confidential and cannot be transferred to competitors; (3) notice and consent rights—require the bankrupt party to notify you of any bankruptcy filing and obtain your consent before disclosing or selling confidential information; and (4) termination rights—clarify whether you can immediately terminate the agreement upon bankruptcy filing and what happens to your data and access rights. Additionally, consider negotiating for a "data escrow" arrangement where critical customer data or source code is held by a neutral third party and released to you if bankruptcy occurs. Finally, ensure the clause survives termination of the agreement and applies to any successor or assignee of the bankrupt party's assets.
Frequently Asked Questions
What does this clause mean in simple terms?
A Confidentiality in Bankruptcy clause addresses what happens to confidential information and trade secrets when one party files for bankruptcy. In bankruptcy proceedings, a company's assets—including confidential information, customer lists, and proprietary data—may be disclosed to creditors, bankruptcy trustees, and potentially sold to third parties as part of the bankruptcy estate.
Why should I care about this clause?
This clause matters because it protects sensitive business information from being exposed during bankruptcy proceedings, which could harm the non-bankrupt party's competitive position or violate their own confidentiality obligations to customers. Without this clause, the bankrupt party's trustee could argue that confidential information must be disclosed to maximize the value of the bankruptcy estate, potentially exposing trade secrets to competitors or the public.
What are my options?
This clause is particularly important in SaaS agreements because software code, customer data, algorithms, and subscription lists are often the most valuable assets and the most sensitive to disclosure. The clause typically specifies that confidential information remains confidential even in bankruptcy, that the bankrupt party's trustee must maintain confidentiality obligations, that the non-bankrupt party has the right to seek protective orders from the bankruptcy court, and that certain information (like customer data) may not be sold or transferred without the non-bankrupt party's consent.
How does this affect small businesses?
Some clauses also address whether the non-bankrupt party can terminate the agreement if bankruptcy is filed, or whether they have special rights to retrieve or delete their data before the bankruptcy estate is liquidated. The clause may also require the bankrupt party to notify the non-bankrupt party of any bankruptcy filing and any proposed disclosure or sale of confidential information.