Confidentiality Agreement

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What Is a Confidentiality Agreement?

A confidentiality agreement is a legally binding contract between two or more parties in which the parties agree that they will not share or profit from confidential information. Also known as a nondisclosure agreement or NDA, confidentiality agreements can be mutual, where both parties are required to maintain secrecy, or unilateral, where only one party must maintain secrecy.

Confidentiality agreements are particularly important in situations where the information is only valuable when secrecy is maintained. These trade secrets could be business-related or invention-related information. The confidentiality agreement obligates the recipient to keep the secret because once it's generally known, it's no longer holds the same value.

Information that's communicated orally can be challenging to enforce. Some recipients of oral information insist that only information that's conveyed in writing needs to be kept confidential. The usual compromise is that oral information can be considered confidential, but that the disclosing party has to communicate to the receiving party in writing after the disclosure that the oral statements are deemed confidential. It's generally a good idea to avoid relying on an oral confidentiality agreement.

Types of Confidentiality Agreements

The information that is covered under a confidentiality agreement is always unique. There are two main types of confidentiality agreements:

  • Unilateral confidentiality agreement: This is where one party, such as a prospective licensee or investor, agrees that they won't disclose information from another party.
  • Mutual confidentiality agreement: This type of confidentiality agreement is typically used when multiple parties, such as two businesses, begin working together and acknowledge that they will not share one another's information.

While there are two primary types of confidentiality agreements, they can be further divided into other categories depending on the situation:

  • Standard nondisclosure agreement: This is the most common type of confidentiality agreement and can be used in almost any circumstance.
  • Employee nondisclosure agreement: Companies use this type of confidentiality agreement when they hire new employees to ensure they will not discuss proprietary information outside of work.
  • Inventor agreement: This type of confidentiality agreement is commonly used by inventors to protect their unpatented inventions when they are discussing what they created with relevant parties.
  • Interview nondisclosure agreement: Companies use this type of NDA prior to interviews so they can speak more openly with candidates without worrying about information being later shared by rejected candidates.

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Benefits of a Confidentiality Agreement

A confidentiality agreement, or NDA, helps individuals and businesses protect confidential information they may have to share with others for the sake of their business arrangement. The primary benefits of having parties sign confidentiality agreements include:

  • Helps set and enforce consequences: A confidentiality agreement ensures that you can take legal action if the other party discloses proprietary information.
  • Defines what's confidential: Every good confidentiality agreement should specify what information is confidential to protect proprietary information, trade secrets, and other details shared for the sake of the business arrangement. It is important to keep in mind that in certain circumstances, federal legislation gives immunity to whistleblowers.
  • Preserves business relationships: Because confidentiality agreements make it clear what information is protected and what the consequence is for sharing confidential information, misinformation that could have damaged or even ended a business relationship can be avoided.

When a Confidentiality Agreement Makes Sense

While there may be many instances when having another party sign a confidentiality agreement may be appropriate, the primary situations are those where you want to share valuable information or an idea about your business that you would not want the other party to share or use without your approval.

You may want to use a confidentiality agreement if you are:

  • Sharing marketing, financial, or other types of private information with prospective buyers
  • Sharing technology or a product to a prospective licensee or buyer
  • Presenting information or a business idea to a potential investor, partner, or distributor
  • Receiving services from a contractor or company that could have access to sensitive information about the company
  • Giving employees access to proprietary information during the course of their job

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Information Protected by a Confidentiality Agreement

As a general rule, a confidentiality agreement can protect any information that isn't available on public record. This could include proprietary information and intellectual property information, such as:

  • Trade secrets
  • Scientific information
  • Secret formulas
  • Recipes
  • Computer technology
  • Copyrights
  • Prototypes and samples
  • Proprietary software
  • Concepts for future services, products, or practices

Other types of information you can protect with a confidentiality agreement include:

  • Business communication
  • Manufacturing processes
  • Production methods
  • Business information, strategies, and operational procedures
  • Sales plans, materials, and marketing information
  • Marketing campaigns and projects
  • Test data and employer test results
  • Transaction details and other financial information
  • Details about sales contracts, clients, and customers, including business relationships, contracts, and client lists

Components of a Confidentiality Agreement

A confidentiality agreement must have the following components:

  • Definition of confidential information: The confidentiality agreement should state the type of information that is being protected by the NDA.
  • Involved parties: The agreement should clearly identify the receiving party, disclosing party, and any other officers, directors, agents, or representatives involved.
  • Why the recipient will know the information: Confidentiality agreements should include a statement explaining why the receiving party must know the confidential information. For example, they may need to know the information to interview for a role successfully or to perform work duties.
  • Exclusions on confidential information: This part of the confidentiality agreement could include information known prior to the agreement, such as information obtained through public knowledge, a third party, or information learned independently. The recipient may be required to prove that this information is nonconfidential or explain how they learned it.
  • Time frame: This states the date that the agreement goes into effect and when it expires (if it does). The NDA could expire after an event occurs, after a set length of time, or never. A typical time frame for a confidentiality agreement is two to five years, although you can modify it for whatever terms you need. You could also include that the disclosing party isn't giving up intellectual property rights even when the term ends.
  • Receiving party's obligations: This part of the confidentiality agreement states the receiving party's obligation, including the nondisclosure agreement, incorrect use of proprietary information, and steps that they must take to ensure the information remains confidential. It could also state that the recipient is prohibited from working in the same industry for a set period of time if they leave the company's employment.
  • Injunctive clause: This clause gives the party disclosing the information the right to stop the receiving party from breaching the agreement before the breach occurs through an injunction or court order.
  • Names, dates, and signatures: Finally, all parties must carefully read, sign, and date the agreement.

Consequences of Not Using a Confidentiality Agreement

In the event that you do not use a confidentiality agreement, the worst-case scenario is that your company could lose potential earnings, brand recognition, or possible business opportunities, as another party might profit off your confidential information and ideas. While a confidentiality agreement cannot guarantee that someone will not try to profit off your information or ideas, it does ensure you will be legally compensated if it does happen.

If you need help putting together a confidentiality agreement, we have a team of lawyers with experience in over 30 different industries to help you protect your information.

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