When to use Confidentiality Agreement?

You should use Confidentiality Agreement when you want to share some proprietary information about your business but you want to ensure that the other party doesn’t steal your proprietary information or use your proprietary information without your approval. Following are some common scenarios to use Confidentiality Agreement:

  1. Sharing information about your product or services to potential vendor, supplier, or partner
  2. Demonstrating your product to a potential buyer or a licensee
  3. Sharing strategic, financial or marketing information with a potential buyer of your business
  4. Receiving services from a service provider who needs access to your proprietary information to deliver those services
  5. During the course of their employment, allowing your employees to access your proprietary information

If you are a start and are talking to venture capitalists to raise money, Confidentiality Agreement may not work as most of them won’t sign one.

What is a Confidentiality Agreement?

A Confidentiality Agreement is a legal contract between the two parties for them to agree to not disclose any proprietary information or trade secret that is covered by the agreement. Both the parties, Disclosing Party and Receiving Party, understand and agree that the proprietary information or trade secret, being protected by the contract, is valuable for commercial purpose and wish to restrict its access by third parties.

A Confidential agreement could be (i) one-way, where only one party is disclosing proprietary information, or (ii) mutual, where both the parties disclose proprietary information. In the event of a breach of the agreement, a Confidentiality Agreement could not only provide for monetary remedies but also provide injunction relief to stop any further breaches from occurring.

Confidentiality Agreement is also known as Non-discloser Agreement (NDA), Confidentiality Clause or Proprietary Information Agreement.

What is an Employee Confidentiality Agreement?

A Confidentiality Agreement, between an employer and an employee, is a legal contract between them for the employee to agree to not disclose any proprietary information or trade secret of the employer.

Proprietary information may include trade secrets, customers or suppliers information, product details, strategic and growth plans. In addition, it may also claim company ownership for anything that is written, developed, built, invented or produced during or as a result of employment. That also includes anything that an employee may have developed in his spare time and away from his workplace.

Such an agreement is in effect for the duration of employment and may be extended to 1-3 years after leaving employment. Even after leaving, some agreement may prohibit an employee from working in the same industry or working with the same vendors and suppliers.

In addition to full-time employment, such Confidentiality Agreement may also be used in other circumstances such as (i) interviews for senior management positions during which a company may disclose some proprietary information, (ii) contracts with consultant, vendor or contractor that may require a company to disclose some proprietary information for completion of the work.

Overly broad and restrictive Employment Confidentiality Contracts may not hold in a court of law as a court won’t enforce contracts that unduly restrict an employee’s right to getting a job and earning a living in his field.

Why it is important to have employees sign a Confidentiality Agreement?

An Employment Confidentiality Agreement helps an employer protect its proprietor information during and after the term of the employment.

There have been cases that, without such an agreement, some unscrupulous employees may engage in competitive business activities. For example, a certain employee of a cell phone refurbishing company was doing his own cell phone refurbishing business from his garage, by procuring from the same suppliers. Another is, a certain sales person of a marketing agency took away all the clients, whom he brought in, to a competitor after leaving the company.

To protect its business interests, a company must get all the employees sign a Confidentiality Agreement at the time of joining the company. This sets the expectations right from the very beginning of the employment relationship. Getting existing employees to sign a Confidentiality Agreement is often difficult and may result in some high-valued employees quitting the company.

Is Confidentiality Agreement legally binding?

Yes, it is. That’s the whole purpose of signing a Confidentiality Agreement. It requires that both the parties keep confidentiality of the information, being protected, for a period of time, defined in the agreement. Now it’s up to the parties, signing the agreement, to decide what information – proprietary information, trade secrets etc – would be protected by their agreement.

Can a Confidentiality Agreement last for ever?

Some Confidentiality Agreements are made explicit last forever. Another approach is to clearly state at the end of the Term of the contract (usually 2-5 years), the disclosing party still owns its rights under copyright, patent or other intellectual property laws and the other party can’t disclose the information.

How long should an NDA last?

Usually an NDA contract is made for 2-5 years, i.e Term of the contract, and should address the following two scenarios:

  1. If the information, being protected, is made public, it looses its confidentiality and parties are free to disclose that information.
  2. If the information is not public even after the end of the Term of the contract, the disclosing party still owns its rights under copyright, patent or other intellectual property laws. Hence, the other party can’t just disclose the information at the end of the Term of the contract.

Does an NDA need to be notarized?

It’s not necessary to notarize an NDA. However, the parties may want to notarize their NDA to have a witness to ensure that validity of their NDA is not questioned later.

What happens if you break an NDA?

If the NDA that you signed states the penalty for violating the NDA, the other party can sue you to enforce that penalty. Even if the NDA doesn’t specify any penalty, you can still be sued for the breach of contract.

Is NDA enforceable?

Overly broad and restrictive Non-discloser Agreements may not hold in a court of law as a court won’t enforce contracts that unduly restrict an individual’s right to work or seek work for his living in his field.

In states like California non-compete contracts are unenforceable by law and voids automatically unless you are selling a business.

When to use Confidentiality Agreement?

You should use Confidentiality Agreement when you want to share some proprietary information about your business but you want to ensure that the other party doesn’t steal your proprietary information or use your proprietary information without your approval. Following are some common scenarios to use Confidentiality Agreement:

  1. Sharing information about your product or services to potential vendor, supplier, or partner
  2. Demonstrating your product to a potential buyer or a licensee
  3. Sharing strategic, financial or marketing information with a potential buyer of your business
  4. Receiving services from a service provider who needs access to your proprietary information to deliver those services
  5. During the course of their employment, allowing your employees to access your proprietary information

If you are a start and are talking to venture capitalists to raise money, Confidentiality Agreement may not work as most of them won’t sign one.

What are the key elements of a Confidentiality Agreement?

Following are the key elements of a Confidentiality Agreement:

  • Identification of the parties: Usually the agreement starts with identifying parties of the agreement. In case the receiving party is going to share the information with his employees, vendors or agent, the agreement should cover such third parties.
  • Definition of information that is considered as confidential: Confidential information may include proprietary information such as trade secrets, customers or suppliers information, product details, strategic and growth plans. There could be some negotiation in defining confidential information. The disclosing party may want to make this definition as broad as possible so that receiving party can’t find any loophole in future and misuse information being shared. At the same time, the receiving party may want to clearly identify the confidential information so as to be clear about what he can or can’t use and protect himself from any litigation.
  • Exclusions for what is not confidential: The agreement may include certain exclusions for an information being confidential. For example, information already known to the recipient or to the public. The recipient would also be allowed to disclose the information if forced by law and that won’t count as breach of the agreement.
  • Obligations of the party receiving the confidential information: The receiving party has two primary obligations: (i) keep the information secret, and (ii) don’t use the information shared for own benefits. Upon breach of any of these two obligations, the disclosing party may sue the receiving party for the breach of agreement.
  • Term of the agreement: The disclosing party may want the agreement to last forever so that the receiving party can’t use that information in future for his own benefits. The receiving party may insist on a definite term for the agreement as after some years either information become useless or comes in public domain. Typically the term would last from 2 to 5 years. But the agreement should clearly state that even  after the end of the term of the agreement, the disclosing party still owns its rights under copyright, patent or other intellectual property laws and not giving us the same.

Some Confidential Agreements can be mutual in which each party may receive confidential information. For such mutual agreement, obligations would be mutual for both the parties.

There may be some additional clauses to tighten the agreement such as employee solicitation, injunction, jurisdiction in case of a dispute and no right to the receiving party over the confidential information.

What are common mistakes that could invalidate an NDA?

Here are some mistakes that could invalidate an NDA in a court of law:

#1 Disclosures make before signing NDA: If the Disclosing Party disclose confidential information before Receiving Party officially signs NDA, later on Receiving Party may claim that he had not agreed to confidentiality of any information disclosed prior to signing the agreement.

#2 Unfavourable jurisdiction: Different countries and states treat NDA very differently. In addition, enforcing NDA in a foreign court under foreign legal procedures and laws might not be feasible. Hence, you should always clarify which jurisdiction you want to apply to NDA agreement.

#3 Unrestricted access to confidential information: Confidential information has to be treated more carefully than ordinary business information. For example, if all employees can access, with or without authorisation, confidential information or anyone can take photocopies or the information is not kept at a secure location, then that information may lose its confidential status and any agreement protecting that information may be deemed invalid. To be on safe side, you should mark all confidential information as “CONFIDENTIAL”. Similarly, you should mark any trade secrets as “TRADE SECRET” as trade secrets can last forever.

#4 Signed by a person with insufficient or without any authority: You should ask for written confirmation from the Receiving Party that the person signing NDA is legally authorized to sign such an agreement on behalf of the Receiving Party.

#5 Information already known to Receiving Party or in Public Domain: If, without any breach or fault of the Receiving Party, the confidential information becomes public knowledge, then that information would no longer be considered confidential. For example, if your information is leaked by one of your employees or by some supplier who is not the Receiving Party, all NDAs signed to protect that information becomes invalid.

#6 Information provided by a third party: If the Receiving Party receives the information from an independent supplier with no relationship to you, you cannot demand in your NDA that the Receiving Party keep that information confidential.

#7 Scope of confidential information is too broad: You should be very specific in your NDA about what information is confidential and define it clearly. You should limit confidentiality to information that is actually important to be kept a secret. Also, you should try not to be too restrictive when covering the Receiving Party’s future behaviour after your business relationship has ended. A too restrictive example could be not allowing an employee to seek employment in the same industry for the rest of her life. A court of law may strike down an NDA that is too unreasonable or too anti-competitive.

Do you need help with drafting or reviewing Confidentiality Agreement?

Are you looking for a comprehensive Confidentiality Agreement before you share your proprietary information or trade secrets with potential supplier, customer or business partner?

We can help you draft or review your existing Confidentiality Agreement, while ensuring you are protected and get peace of mind.

Click here to reach-out to us.

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