In today’s business climate, confidentiality agreements (otherwise known as nondisclosure agreements or NDA’s) are essential to remaining competitive. They are contracts whereby the signing parties agree to not reveal confidential, secret, or proprietary information. Should one of the parties to the agreement misappropriate the information defined as confidential, the owner of the information usually can request a court to issue an injunction against further disclosures and award monetary damages.
In this blog entry, we are going to cover four critical elements to consider when creating confidentiality agreements for your business:
1.The parties to the agreement;
2. Definition of what is confidential;
3. The scope of the confidentiality obligation; and
4. The term of the confidentiality agreement
The Parties to the Agreement
The parties to the agreement (usually the disclosing party and the recipient, although there can be multiple instances of each) generally are identified at the beginning of the contract. If the recipient will be expected to show confidential information covered in the contract to another party, such as a partner or affiliate, these entities should either become parties to the original agreement or be required to sign NDAs of their own.
There are three types of confidentiality agreements with respect to signing parties:
- Unilateral: when only one party will be disclosing sensitive information
- Mutual: both parties will be sharing confidential information with each other
- Multilateral: three or more parties will be disclosing and receiving confidential information
Definition of What is Confidential
The definition of what is and isn’t confidential information under the agreement needs to be clear and specific. The disclosing party will naturally want the definition to be as expansive as possible in order to eliminate potential loopholes. But the agreement shouldn’t be worded so generally that the recipient cannot clearly identify what is to be kept confidential. The parties should also be able to easily understand what they can and cannot do under the terms of the agreement.
Scope of the Confidentiality Obligation
The receiver’s obligation under a confidentiality agreement is twofold. They cannot disclose any of the information deemed to be confidential, and neither can they use or benefit from that information themselves. They are also expected to take reasonable steps to protect the private information from others.
Every NDA will detail certain conditions under which the receiving party is excused from their obligations. Exclusions are meant to address situations where keeping the information confidential would be unfair or pose undue hardship, such as a court order.
Examples of common exclusions include:
- Information already in the public domain; or
- Information that the recipient receives from another party who has no confidentiality obligations to the disclosing party.
Term of the Confidentiality Agreement
The term, or duration, of a confidentiality agreement is generally one to five years. The issue at stake is what constitutes a reasonable term. Agreements that last indefinitely can be pointless because most information loses its value as the years pass, especially in the technology industry. But a confidentiality agreement can state that the disclosing party retains all rights it may have under applicable intellectual property laws even after the term ends.
In addition to these four critical elements, a confidentiality agreement may also contain certain provisions, such as:
- Non-solicitation of the disclosing party’s employees for a certain term
- The right to injunctive relief if the recipient breaches the agreement
- Disputes will be handled exclusively under the laws of the disclosing party’s state
If you’d like to discuss this subject further, let’s talk. Give us a call today!
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