WHAT IS A CONFIDENTIALITY AGREEMENT?
A confidentiality agreement is a legally binding contract between two or more parties in which at least one of the parties agrees not to disclose certain sensitive information. The name of this kind of an agreement may depend on the industry; they are often also called an NDA or non-disclosure agreement.
Most companies derive substantial value from their confidential information and data, both by having exclusive use of it in their own businesses and by sharing it selectively with customers, suppliers, and others. A confidentiality agreement is used by individuals or businesses to protect information, data, ideas, trade secrets, intellectual property, transaction details, and more from being revealed to a third-party during the course of a business deal, project, or employment agreement with another party.
In larger transactions or relationships, there are usually confidentiality clauses within an agreement, such as in an influencer agreement. If you want to prevent the receiving party from misusing your business contacts, you should include a non-circumvention clause or agreement.
WHAT IS THE PURPOSE OF A CONFIDENTIALITY AGREEMENT?
A confidentiality agreement is used to protect the disclosure of various types of information. Confidential information takes various forms in different businesses and industries, but it includes:
- Customer information (any information relating to customers or clients, including client lists)
- Employee and contractor lists and records
- Supplier and vendor lists and information
- Pricing and discount structures; financial budgets, projections
- Marketing information (campaigns, projects, plans)
- Business methods and operations
- Intellectual property (IP) (including patents, trade secrets, trademarks, software, copyrights)
- Recipes and chemical formulas and compositions
- Blueprints, designs, and drawings
- Terms of commercial contracts
- Product and service information (production processes, procedures, packaging, equipment, and techniques used to produce a product or service)
- Accounting information
- Software algorithms and source code
WHEN SHOULD I USE A CONFIDENTIALITY AGREEMENT?
A confidentiality agreement is recommended as the first step in situations when an individual or business needs to disclose sensitive information in the context of specific business negotiations, such as:
- When an employer wishes to keep company information protected while negotiating a position with a potential new hire
- Evaluating or engaging a business or marketing consultant or agency
- Considering an independent contractor or consultant for hire and the client wishes to keep some of the disclosed information private
- Soliciting proposals from vendors and other service providers, which usually involves the exchange of pricing, strategies, personnel records, business methods, technical specifications, and other confidential information of both parties
- During a pending company acquisition to keep the proposed terms of the agreement and company information private
- When two or more businesses or individuals wish to begin working together (for example, a joint venture, merger, etc.) and the parties involved want to hold certain information discussed in negotiations in confidence
WHY IS IT NECESSARY TO HAVE WRITTEN CONFIDENTIALITY AGREEMENTS?
There are several reasons why parties should have a written confidentiality agreement, including
- Avoiding confusion over what the parties consider to be confidential
- Enforcing written contracts is easier than oral agreements
- More flexibility in defining what is confidential
- Demarcating treatment of confidential information between the parties
- Ensuring protection of trade secrets, because in some jurisdictions this protection can be weakened or lost (deemed waived) if disclosed without a written agreement
WHAT TYPES OF CONFIDENTIALITY AGREEMENTS EXIST?
The three main types are 1) fully mutual confidentiality agreement, 2) unilateral confidentiality agreement and 3) reciprocal confidentiality agreement.
In the first situation, each party is both disclosing and receiving confidential information on a fully mutual basis. Each parties have the same set of rights, restrictions and obligations. An example could be where two companies form a strategic alliance. However, mutual confidentiality agreement can be used in transactions and relationships where the confidential information to be exchanged is not of equivalent kind or value.
In the second situation, only one party is disclosing confidential information. For example, where a consultant will have access to the client’s business information in the course of the service. The nondisclosure obligations and access and use restrictions will apply only to the party that is the recipient of confidential information but the operative provisions can be drafted to favor either party.
In the third situation, both parties are disclosing confidential information but not on a fully mutual basis. In that kind of an agreement, the scope and nature of the confidential information that each party will disclose is separately defined and their respective nondisclosure obligations and access and use restrictions may differ accordingly.
Many confidentiality agreements have similar structures and share key provisions, but there is still great variation in the form, structure, and substantive details that should be customized to the specific circumstances of each agreement.
WHAT ARE THE KEY PROVISIONS OF A CONFIDENTIALITY AGREEMENT?
While the form and structure of confidentiality agreements vary, they usually include at least the following provisions:
- The persons or entities that are parties to the agreement
- The business purpose of the agreement
- The definition of confidential information
- What is excluded from the definition of confidential information
- All nondisclosure obligations
- Any use and access restrictions
- Any safekeeping and security requirements
- Any provisions relating to the return or destruction of confidential information
- The agreement’s term and the survival of nondisclosure obligation
In addition, condidentiality agreements usually have some boilerplate clauses such as an entire agreement clause.
WHEN SHOULD I SIGN A CONFIDENTIALITY AGREEMENT?
The parties should sign a confidentiality agreement as early as possible in their relationship, preferably before any confidential information is disclosed. If a party discloses information before signing the confidentiality agreement, it is important that the agreement specifically covers prior disclosures.
HOW LONG DOES A CONFIDENTIALITY AGREEMENT LAST?
The confidentiality agreement’s term is up to the persons who write the agreement. Confidentiality agreements can run indefinitely, covering the parties’ disclosures of confidential information at any time, or they can terminate on a certain date or event.
It is also possible to state that the rights and obligations (mostly, not disclosing the information received) shall survive the expiration or termination of the agreement for a period of time – the typical survival period ranges between one and five years.