Intro to Confidentiality and Non-Disclosure Agreements

There are numerous instances where you may want to share confidential information with another party. But the key to doing so safely is making sure that the other party has already been bound to respect the confidential information you provide them and not use the information to your detriment.

One common way to protect the secrecy of confidential information given to another party is through the use of a Confidentiality Agreement, which is sometimes also referred to as a Non-Disclosure Agreement (“NDA”).

In this Guide, we discuss when it makes sense to have a Confidentiality Agreement and what the key terms of this agreement need to include.

When Does a Confidentiality Agreement Make Sense?

When does it make sense to require another party to sign a Confidentiality Agreement? Well, there are probably many instances where it may be appropriate. But the principal situations are those where you wish to convey something valuable about your business or idea, but you want to ensure that the other side doesn't steal the information or use it without your approval.

Here are some typical situations where you may want to use a Confidentiality Agreement:

Presenting an invention or business idea to a potential partner, investor, or distributor
Sharing financial, marketing, and other information with a prospective buyer of your business
Showing a new product or technology to a prospective buyer or licensee
Receiving services from a company or individual who may have access to some sensitive information in providing those services
Allowing employees access to confidential and proprietary information of your business in the course of their job

Mutual vs. Non-Mutual Agreements

Confidentiality Agreements come in two basic formats—a mutual agreement, or a one-sided agreement. Use the one-sided agreement when you are contemplating that only one side will be sharing confidential information with the other side. The mutual form is for situations where each side may potentially share confidential information.

Although there is always some appeal to using a mutual form of Confidentiality Agreement, you should shy away from the mutual form if you are not planning to receive confidential information from the other side. One way to decide this early on is to let the other side know that you don't want to receive any of their confidential information, so you don't see the need for a mutual form if they ask for one.

The Key Elements of Confidentiality Agreements

Confidentiality Agreements don't have to be long and complicated. In fact, the good ones usually don't run more than a few pages long. The key elements of Confidentiality Agreements include:

Identification of the parties
Definition of what is deemed to be confidential
The scope of the confidentiality obligation by the receiving party
The exclusions from confidential treatment
The term of the agreement

The parties to the agreement

The parties to the agreement is usually a straightforward description set forth at the beginning of the contract. If it's an agreement where only one side is providing confidential information, then the disclosing party can be referred to as the disclosing party and the recipient of the information can simply be referred to as the recipient.

The one tricky part here is to think about whether any other people or companies may also be a party to the agreement. Does the recipient expect to show the confidential information to a related or affiliated company? To a partner? To an agent? If so, then consider asking those other parties to also sign a Confidentiality Agreement or become parties to the one being signed by the main company.

What is deemed confidential?

This section of the agreement deals with defining what confidential information means. Is it any information? Is it information that is only marked in writing as "confidential"? Can oral information conveyed be deemed confidential?

On the one hand, you as the disclosing party want this definition to be as broad as possible to make sure that the other side doesn't find a loophole and start using your valuable secrets.

On the other hand, if you are the recipient of the information, you have a legitimate desire to make sure that the information that you are supposed to keep secret is clearly identified so that you know what you can and can't do.

Oral information in particular can be tricky to deal with. Many recipients of information may insist that only information conveyed in writing need be kept confidential. And, of course, the party giving oral information may say that that is too narrow. The usual compromise is that oral information can be deemed confidential information, but that the disclosing party has to confirm to the other side in writing sometime shortly after it is disclosed so that the receiving party is now on notice as to what oral statements are deemed confidential.

Scope of the confidentiality obligation

The core of the Confidentiality Agreement is a two-part obligation on the receiver of the information: to keep the confidential information in fact confidential and not use the confidential information itself.

So the first part is that the receiver of the confidential information has to keep it secret. And this usually means that the receiver has to take reasonable steps not to let others have access to it. For example, reasonable steps could include that only a few people within the receiver's company have access to the information and they are all informed of the nature of the confidentiality restrictions.

The second part is also crucial—that recipients can't use the information themselves. After all, the last thing you want is for them to take your great idea or mailing list and make a bazillion dollars from it.

If the scope of the Confidentiality Agreement is broad enough, then you can sue for damages or to stop the recipients if they breach either their confidentiality obligations or their non-use agreement.

Exclusions from confidentiality treatment

Every Confidentiality Agreement has certain exclusions from the obligations of the receiving party. These exclusions are intended to address situations where it would be unfair or too burdensome for the other side to keep the information confidential.

The common exclusions include information that is:

Already known to the recipient.
Already publicly known (as long as the recipient didn't wrongfully release it to the public).
Independently developed by the recipient without reference to or use of the confidential information of the disclosing party.
Disclosed to the recipient by some other party who has no duty of confidentiality to the disclosing party.

The Confidentiality Agreement can also deal with the situation where the recipient of the information is forced to disclose the information through a legal process. The recipient should be allowed to do that if forced by court order without breaching the Confidentiality Agreement as long as the recipient has warned the disclosing party in advance of the legal proceeding.

Term of the agreement

How long should the Confidentiality Agreement last? Some attorneys may argue that the Confidentiality Agreement should last forever. Why should someone have the right to use your confidential information at any time?

But if you are the recipient of the confidential information, you probably want to insist on a definite term where the agreement ends. After all, most information after a certain number of years becomes useless anyway, and the cost of policing confidentiality obligations can become expensive if it is a "forever" obligation.

So if you agree to a term, what is reasonable? Well, it really depends on the industry you are in and the type of information conveyed. In some businesses, a few years may be acceptable because the technology may change so fast as to render the information pretty much worthless.

Most agreements (if they have a term) have a time limit of two to five years. But your Confidentiality Agreement also can say that, even if the term is ended, the disclosing party is not giving up any other rights that it may have under copyright, patent, or other intellectual property laws.

More provisions that may make sense for the Confidentiality Agreement

You may also want to add some other bells and whistles to your Confidentiality Agreement to protect your company from further infringement issues, depending on your situation. Here are some ideas:

Employee solicitation. If the recipient has significant access to your employees, you may want to insert a clause that prevents the recipient from soliciting or hiring your employees for 12 months. The other side may sometimes agree to that, with some carve-outs. For example, the recipients may want the limitation to apply only to those employees that they have come into contact with during their review of information or interviews.
Jurisdiction in case of a dispute. If you are the disclosing party, you want to make sure that if there is any dispute as to whether the other side has lived up to its obligations, then the dispute will be handled exclusively in your city. You don't want to have to travel far away and incur additional costs to enforce your Confidentiality Agreement.
Injunction. Make sure that you have a clause that gives you the right to injunctive relief to stop the other side from breaching the agreement. This clause simply says that you can get a court order stopping the other party from doing the breaching act (as opposed to just getting money damages after it is too late).
No rights in the receiving party. It is sometimes helpful to have a clause that says that because you are going to share confidential information with them, the other side does not get any rights to your ideas or even a right to enter into a deal with you.

Confidentiality & Invention Assignment Agreements With Employees

Employees, especially if the business is high-tech-oriented, often have access to lots of the company's confidential information. Companies also expect their employees to come up with ideas, work product, and inventions that are useful to the business.

To make sure that employees keep the company's proprietary information confidential, require them to sign a Confidentiality and Invention Assignment Agreement, This agreement deals with the confidentiality issue, but it can also provide that the ideas, work product, and inventions that the employee creates belong to the company - not to the employee.

This seems fair, doesn't it? Because the company is paying the employee to produce such items, you want to make sure that the company has the legal right to these developments.

A good Employee Confidentiality and Invention Assignment Agreement covers the following key points:

The employee may not use any of the company's confidential information for his or her own benefit or use.
The employee must promptly disclose to the company any inventions, ideas, discoveries, and work product related to the company's business that he or she makes during the period of employment.
The company is the owner of such inventions, ideas, discoveries, and work product.
The employee's employment with the company does not and will not breach any agreement or duty that the employee has with anyone else, nor may the employee disclose to the company or use on its behalf any confidential information belonging to others.
The employee's confidentiality obligations under the agreement will continue after termination of employment.
The agreement does not by itself represent any guarantee of continued employment.

Confidentiality & Invention Assignment Agreements with Consultants

Your consultants may have access to significant amounts of the company's confidential information. And you may expect the consultants to come up with ideas, work product, and inventions useful to your business.

In areas where you are particularly sensitive about confidentiality and the company's ownership of the product developed, you should require consultants to sign a Confidentiality and Invention Assignment Agreement. This agreement deals with the confidentiality issue, but can also provide that the ideas, work product, and inventions that the consultant creates in connection with services performed for your business belong to the company (not the consultant).

A good Consultant Confidentiality and Invention Assignment Agreement covers the following key points:

The consultant may not use any of the company's confidential information for his or her own benefit or use.
The consultant must promptly disclose to the company any inventions, ideas, discoveries, and work product related to the company's business that he or she makes during the period of work.
The company owns such inventions, ideas, discoveries, and work product.
The consultant's work with the company does not and will not breach any agreement or duty that the consultant has with anyone else, nor may the consultant disclose to the company or use on its behalf any confidential information belonging to others.
The consultant's confidentiality obligations under the agreement will continue after termination of the relationship.

To download samples of these and hundreds of other free forms, visit the Forms & Agreements section of AllBusiness.com.