Simply stated, a Confidentiality Agreement is a legal contract where at least one party agrees not to share or inappropriately use certain information.
These agreements are often called nondisclosure agreements, but other than the name, there is no difference. Both agreements prohibit the disclosure of information.
When to use a Confidentiality Agreement?
Confidentiality agreements are used whenever you want to protect the information you will share with another person or business. Here are some common examples:
- When sharing information with a prospective buyer.
- When negotiating a joint venture or starting a business with another person or company.
- When looking for a manufacturer for your product.
- When discussing the licensing of your product.
- When sharing sensitive information with your agents, such as marketing partners.
- When divorcing your business partner.
- When employees, independent contractors, and consultants will have access to particularly sensitive information about your business.
- When settling disputes or lawsuit on confidential terms.
- When protecting trade secrets, patents, sales data, marketing plans, product designs, and much more.
Don’t rely on trust or instinct.
We want to trust our friends and neighbors. However, consider the possible consequences of not having a confidentiality agreement.
For example, your friend expresses interest in buying your business. You share information about your sales, marketshare, employees, etc. What happens when your friend decides not to buy your business and then uses your confidential information to compete against you? Now, not only has your friendship ended, but you are in a very difficult position to sue for damages because you didn’t have a written, signed agreement.
Similarly, your neighbor may be the perfect candidate to do some freelance work for your company. Beware. Without a confidentiality agreement, your wonderful neighbor could walk away with a lot of confidential information about your business. Additionally, she could now own the work product she developed (but that’s another legal matter, not to mention you should have an independent contractor agreement).
Essential Clauses to Protect your Data.
1. Define the confidential information.
A well-written agreement defines ‘confidential information’. Too often, people use a generic form from the internet or borrow one used for a previous agreement. This may save you money but it increases your risk. Your agreement must be specific to the information to be protected.
For example, let’s say you are seeking a manufacturer for your Grandma’s Secret Apple Pie. You find a generic template agreement from the internet. Unfortunately, this template was designed for another situation, such as an employee confidentiality agreement or a litigation settlement agreement. The language might not protect your secret recipe. It could be too broad, too vague, or only prohibit disclosure of the ingredients (your secret spices) but not the baking process, such as how caramelizing the apples with brown butter adds the mysterious umami flavor.
Your definition of ‘confidential information, should not be too vague or too broad.
It should not refer to information unrelated to your purpose.
For example, if you are sharing your pie recipe, you don’t need to prohibit disclosure of ‘drawings, models, and apparatus’ since baking pies doesn’t involve drawings, etc.
The agreement should not require information to be marked ‘confidential’ in order to be protected. No one ever remembers to stamp ‘confidential’ across everything they share, including e-mails. And how do you put a confidential stamp on a verbal conversation?
Remember, a poorly written agreement is as bad a not having an agreement.
2. Define the prohibited disclosures and uses.
Does the agreement only prohibit disclosure or does it also restrict the use of the information?
Though they seem to be about the same, there are important differences between ‘prohibition’ and ‘restriction’.
- Prohibited Disclosures: Here, you cannot disclose information to any other person (other than a few exceptions, such as your accountant, attorney, and government officials).
- For example, prohibitions against disclosing secret ingredients, secret manufacturing processes, or profit-per-item.
- Restricted Disclosures: Here, not only are you prohibited from disclosing the information, but you are also restricted in how you can use the information.
- For example, you want to sell a business. A potential buyer wants to inspect your business records. If the buyer backs out of the sale, you don’t want certain information (such as pricing, customer lists, or trade secrets) to be used to compete with you. This restriction on the use of the information is just as important as prohibiting disclosure of the information.
3. Identify all persons covered by the agreement.
Is the obligation of confidentiality unilateral or mutual?
- A unilateral obligation means that I share information with you and you cannot disclose it.
- A mutual obligation means that we both share information and we both must keep it confidential.
Don’t forget about third parties. Who are these people? They are the people who are involved in any part of the transaction. They are contractors, employees, boards of directors, lawyers, accountants, bankers, etc.
In short, the party receiving the confidential information must also require its contractors, employees, etc. to keep the information confidential.
4. What happens if someone breaches?
Let’s be honest. An agreement is an exercise in trust. Signing an agreement does not prevent someone from disclosing information, it just defines the penalty for the disclosure.
Each situation is unique, but possible penalties are:
- injunction (court order) to prevent disclosure
- liquidated damages (a fixed amount of monetary damages)
- clawback of the profits received due to the breach
- remedies available under trade secret laws
Despite these remedies, be aware that you might not receive anything when a breach occurs. This happens when the breach doesn’t cause financial or repetitional harm. Also, the expense of suing the breaching party might not be worth it.
5. How long does the agreement last?
Confidentiality agreements rarely need to last forever. Most information loses its importance over time. Instead, be realistic about how long the information is valuable to you.
For example, business plans are likely not very useful after three or five years. The business atmosphere changes rapidly and either the plan was instituted or it wasn’t. Likewise, the proposed name of your new product will only be confidential until the product launches to the public.
On the other hand, trade secrets (like the secret recipe for Coca-Cola) have no expiration date and should be confidential indefinitely.
So, keep it realistic.
Concerto Law can help.
Skip the generic (free) template. A small amount of money spent on a customized confidentiality agreement can save you from future headaches and expenses.
Remember, a generic confidentiality agreement template you obtain from the internet:
- will rarely protect your particular situation,
- will inadequately protect your confidential information, and
- may not provide the remedies you want if your information is disclosed.
Luckily for you, Attorney Christine Kuntz is a contract geek and loves to protect your business secrets with tailored agreements. Attorney-drafted confidentiality agreements are inexpensive (in relation to other attorney services, such as suing for a breach) and it will be money well spent.