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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.
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
- Computer technology
- 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.
Meet some of our Confidentiality Agreement Lawyers
William L Foster has been practicing law since 2006 as an attorney associate for a large litigation firm in Denver, Colorado. His experience includes drafting business contracts, organizational filings, and settlement agreements.
Terry Brennan is an experienced corporate, intellectual property and emerging company transactions attorney who has been a partner at two national Wall Street law firms and a trusted corporate counsel. He focuses on providing practical, cost-efficient and creative legal advice to entrepreneurs, established enterprises and investors for business, corporate finance, intellectual property and technology transactions. As a partner at prominent law firms, Terry's work centered around financing, mergers and acquisitions, joint ventures, securities transactions, outsourcing and structuring of business entities to protect, license, finance and commercialize technology, manufacturing, digital media, intellectual property, entertainment and financial assets. As the General Counsel of IBAX Healthcare Systems, Terry was responsible for all legal and related business matters including health information systems licensing agreements, merger and acquisitions, product development and regulatory issues, contract administration, and litigation. Terry is a graduate of the Georgetown University Law Center, where he was an Editor of the law review. He is active in a number of economic development, entrepreneurial accelerators, veterans and civic organizations in Florida and New York.
I'm a Washington-licensed lawyer specializing in trademark practice and with an extensive trademark education and academic background. I currently work with domestic and international businesses seeking trademark protection in the U.S. by conducting trademark searches, providing legal advice, submitting USPTO applications, and preparing responses to office actions. I'm passionate about trademark law and always looking forward to helping small and medium businesses promote their value by having a registered federal trademark. If you have questions or concerns about trademark/copyright/IP licensing and require legal advice, feel free to contact me so we can have a first chat.
Mr. Pomeranz serves as the principal of Pomeranz Law PLLC, a boutique law firm representing clients across myriad industries and verticals. Before founding the firm, Mr. Pomeranz served as Senior Vice President, Legal & Compliance and General Counsel of Mortgage Connect, LP in 2017. Mr. Pomeranz also served as Counsel, Transactions for Altisource Portfolio Solutions S.A. (NASDAQ: ASPS) beginning in 2013, and was based in the company’s C-Suite in Luxembourg City, Luxembourg. Mr. Pomeranz began his career with Mainline Information Systems, Inc. as an in-house attorney.
I have 10 years experience providing general counsel, in the form practical and timely legal advice, under strict deadlines to individuals and various business unit stakeholders, balancing commercial needs with legal concerns at large corporations and start-ups. I am skilled at reviewing, analyzing, drafting and negotiating commercial and government contracts globally for the procurement and sale of services and goods. I also help clients ensure compliance with regulations (including data privacy), laws and contractual obligations and protect, enforce and exploit intellectual property rights and support in the development of IP strategy. I am a Certified Information Privacy Professional/United States (CIPP/US) licensed by the IAPP - International Association of Privacy Professionals.
Over 15 year experience drafting, reviewing and negotiating contracts both as in-house counsel and in law firms, including my own law firm.
Rinky S. Parwani began her career practicing law in Beverly Hills, California handling high profile complex litigation and entertainment law matters. Later, her practice turned transactional to Lake Tahoe, California with a focus on business startups, trademarks, real estate resort development and government law. After leaving California, she also served as in-house counsel for a major lending corporation headquartered in Des Moines, Iowa as well as a Senior Vice President of Compliance for a fortune 500 mortgage operation in Dallas, Texas prior to opening Parwani Law, P.A. in Tampa, Florida. She has represented various sophisticated individual, government and corporate clients and counseled in a variety of litigation and corporate matters throughout her career. Ms. Parwani also has prior experience with state and federal consumer lending laws for unsecured credit cards, revolving credit, secured loans, retail credit, sales finance and mortgage loans. She also has served as a special magistrate and legal counsel for numerous Florida County Value Adjustment Boards. Her practice varies significantly from unique federal and state litigation cases to transactional matters. Born and raised in Des Moines, Iowa, Ms. Parwani worked in private accounting for several years prior to law school. Her background includes a Certified Public Accountant (CPA) certificate from Iowa (currently the license is inactive) and a Certified Management Accountant (CMA) designation (currently the designation is inactive). Ms. Parwani or the firm is currently a member of the following organizations: Hillsborough County Bar Association, American Bar Association, Tampa Bay Bankruptcy Bar Association, National Association of Consumer Bankruptcy Attorneys, and the American Immigration Lawyers Association. She is a Fellow of the American Bar Association. Ms. Parwani is a frequent volunteer for Fox Channel 13 Tampa Bay Ask-A-Lawyer. She has published an article entitled "Advising Your Client in Foreclosure" in the Stetson Law Review, Volume 41, No. 3, Spring 2012 Foreclosure Symposium Edition. She is a frequent continuing legal education speaker and has also taught bankruptcy seminars for the American Bar Association and Amstar Litigation. She was commissioned by the Governor of Kentucky as a Kentucky Colonel. In addition, she teaches Immigration Law, Bankruptcy Law and Legal Research and Writing as an adjunct faculty instructor at the Hillsborough Community College Ybor campus in the paralegal studies program.