Using Confidentiality Agreements to Protect Your Business

A confidentiality agreement, often called aNon-Disclosure Agreement or NDA, is a legal agreement that protects discussionsbetween parties by specifying what information will be considered confidentialand how such information should be used by the recipient. The party disclosing theinformation is commonly referred to as the “Disclosing Party” and the partyreceiving such information is referred to as the “Receiving Party.” In order toproperly prevent the unauthorized disclosure of any confidential information, eachconfidentiality agreement should be carefully drafted and negotiated.

Importance ofConfidentiality Agreements

            In the process of conducting business, companies frequently haveto share their confidential information with other parties. Confidentialinformation, such as business strategies, customer list, and trade secrets, arevaluable assets to the company. Having confidentiality agreements in place willallow the companies to share their confidential information with other parties moresecurely and reduce the risk of unauthorized disclosure of such information. Itis advisable that parties execute a confidentiality agreement at the early stageof their relationship, preferably before any confidential information isdisclosed.

Unilateral vs Mutual ConfidentialityAgreements

Depending on the type ofrelationship or transaction, a confidentiality agreement may contain unilateralor mutual obligations. In a unilateral confidentiality agreement, only oneparty shares its confidential information with the other party. In thissituation, only the recipient of suchconfidential information is subject to nondisclosure obligations. In a mutualconfidentiality agreement, both parties exchange their confidential informationand both parties are subject to nondisclosure obligations.

Confidentiality Agreements’Key Provisions and Issues

            Aconfidentiality agreement typically includes the following key provisions:parties to the agreement, purpose, definition of confidential information, exclusions,nondisclosure obligations, and survival of nondisclosure obligations. Whendrafting and negotiating a confidentiality agreement, parties should carefullyconsider the issues surrounding each of these provisions.

1. Parties to the agreement. Thisprovision identifies parties who are bound by the confidentialityagreement. The Receiving Party may want to share confidential informationwith its affiliates, including its parent or subsidiaries, employees, contractors,legal counsel, and financial advisors. Therefore, it is important to considerwhether the Receiving Party’s affiliates should be added as parties whendrafting this provision.

1. Purpose. The purpose provision describes parties’ reasonfor exchanging confidential information and the use of such information. Manyconfidentiality agreements restrict the use of confidential information toa specified purpose, such as “to evaluate a specific business transactionbetween the parties,” which means the Receiving Party cannot use theDisclosing Party’s confidential information for any other reason than thespecified purpose. The purpose can be broad in scope or narrow, and shouldbe carefully defined to suit the needs of the parties to the  agreement.

1. Definition of confidential information. This provision identifies the specific typesof information that will be considered confidential. Confidentialinformation is typically defined as information that is nonpublic andproprietary, such as business strategies, financial information, tradesecrets, and customer list. When defining confidential information in aunliteral confidentiality agreement, it’s generally to the DisclosingParty’s benefit to include a broad definition of confidential information.When defining confidential information in a mutual confidentialityagreement, however, a broad definition may not always be the best choice.

• Exclusions fromthe definitions. The exclusions clause lays out specific types of informationthat are excluded from the definition ofconfidential information. It commonly includesinformation that (a) was already known by the Receiving Party before disclosure,(b) has become public otherthan through the Receiving Party’s breach of the agreement, (c) was received bythe Receiving Party from a third party, and (d) was independently developedby the Receiving Party without using the confidential information. Inorder to protect itself, a Receiving Party should ensure that there is anappropriate exclusion clause in the confidentiality agreement.

1. Nondisclosure obligations. This provision laysout the Receiving Party’s nondisclosureobligations, such as prohibitions against disclosure of confidentialinformation to any unauthorized party or use of confidential information foranything other than for the specified purpose. It may also require theReceiving Party to protect the Disclosing Party’s confidential informationin the same manner as it would its own. The parties should draft this provision carefullyto ensure that confidential information is used properly.

• Survival ofnondisclosure obligations. The survival clause sets forth the duration oftime that the parties are bound by the nondisclosure obligations. Parties’nondisclosure obligations can continue to last indefinitely or for a fixedterm. It is common for survival periods to range from three to seven years,depending on how quickly the information becomes public or obsolete.

Limitations ofConfidentiality Agreements

            Although confidential agreements are useful tools to try andsafeguard confidential information that must be disclosed to someone else, thereare some limitations:

• In theevent of a breach of the confidentiality agreement by the Receiving Party,once confidential information is disclosed, there may be no practical wayto reverse the impact of disclosure to unauthorized parties.

• Proving abreach of confidentiality agreement can be difficult. The breaching party mayconceal the misuse of information by destroying evidence, such as deletingemails and shredding paper copies. If the breach occurred by verbaldisclosure, there might not be documentary evidence available for thedamaged party to prove breach of the agreement.

• It isoften the case that the only remedy available in the event of a breach ofa confidentiality agreement is monetary damages. It can be difficult toquantify the harm that has been suffered, though, and sometimes a moneyaward is not sufficient to make you whole.

Regardless of the limitations, if you have todisclose sensitive information to an outside party, you should definitelyensure that you have a confidentiality agreement in place before you do so.Given the complexities, we strongly advise you to speak to an experiencedattorney before drafting or negotiating a confidentiality agreement.