The Federal Appellate Court in Texas has recently ruled on a breached confidentiality agreement which arose out of the sale of a major Mark Rothko painting.

The case was between the seller, Marguerite Hoffman and the buyer David Martinez and L&M Arts, a gallery that had acted as an agent and sold the art piece for $17.6 million. Hoffman entered into a confidential sale agreement with L&M Arts. The agreement included a provision which set out that the parties would use all “maximum efforts” to keep “aspects” of the sale confidential for an indefinite period of time. The painting could also only be displayed six months after its purchase.

The Rothko painting was resold for $31.4 million to a company known as Studio Capital at a public auction in Sotheby’s. Hoffman claimed this sale was in breach of the agreement signed initially when the painting was sold. The basis of her claim was that the sale of the painting at Sotheby’s disclosed that she had been the initial seller of the painting.

Having made a claim for $22million at the initial trial, the court found in favour of Hoffman but ruled that she should only be compensated in the sum of $500,000. It also held that Studio Capital could not be liable as they were not a party to the initial sale agreement and by extension the confidentiality clause could therefore not apply to them.

The matter went to the Court of Appeal. The main issue which the court had to determine was whether the agreement included the sale itself. In making its decision the court referred to the definition of word “aspect” as used in the agreement signed. The court stated that reference to an item’s aspects describes the characteristics of the item but not the item itself. Applying this reasoning, the court held that the confidentiality agreement did not cover the sale of the painting itself.  It also held that since the art could be displayed 6 months after its purchase, this meant that the intentions of the parties at the time of signing the agreement were not to keep the initial sale confidential for unlimited period of time. The court also noted that for such agreements to be effective, they should be limited in geographical scope and time.

Parties to confidentiality agreements should ensure that the agreements clearly set out the extent to which they apply and the duration for which they apply.

Apart from their common use in the art world, non-disclosure or confidentiality agreements can be used:

  • By entrepreneurs sharing innovative ideas with potential investors;
  • By companies sharing information with contractors, employees, data miners or analysts;
  • During negotiations for the sale or merging of businesses information. Information will need to be shared in order to assess the businesses; and
  • By designers to prevent their work being plagiarised or distributed beyond their control.

If you require a confidentiality or non-disclosure agreement reviewed or drafted, please contact our commercial team at [email protected].