Using Confidentiality Agreements to Protect Your Business

Using Confidentiality Agreements to Protect Your Business

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

Importance of Confidentiality Agreements

            In the process of conducting business, companies frequently have to share their confidential information with other parties. Confidential information, such as business strategies, customer list, and trade secrets, are valuable assets to the company. Having confidentiality agreements in place will allow the companies to share their confidential information with other parties more securely and reduce the risk of unauthorized disclosure of such information. It is advisable that parties execute a confidentiality agreement at the early stage of their relationship, preferably before any confidential information is disclosed.

Unilateral vs Mutual Confidentiality Agreements

Depending on the type of relationship or transaction, a confidentiality agreement may contain unilateral or mutual obligations. In a unilateral confidentiality agreement, only one party shares its confidential information with the other party. In this situation, only the recipient of such confidential information is subject to nondisclosure obligations. In a mutual confidentiality agreement, both parties exchange their confidential information and both parties are subject to nondisclosure obligations.

Confidentiality Agreements’ Key Provisions and Issues

            A confidentiality agreement typically includes the following key provisions: parties to the agreement, purpose, definition of confidential information, exclusions, nondisclosure obligations, and survival of nondisclosure obligations. When drafting and negotiating a confidentiality agreement, parties should carefully consider the issues surrounding each of these provisions.

  1. Parties to the agreement. This provision identifies parties who are bound by the confidentiality agreement. The Receiving Party may want to share confidential information with its affiliates, including its parent or subsidiaries, employees, contractors, legal counsel, and financial advisors. Therefore, it is important to consider whether the Receiving Party’s affiliates should be added as parties when drafting this provision.
  1. Purpose. The purpose provision describes parties’ reason for exchanging confidential information and the use of such information. Many confidentiality agreements restrict the use of confidential information to a specified purpose, such as “to evaluate a specific business transaction between the parties,” which means the Receiving Party cannot use the Disclosing Party’s confidential information for any other reason than the specified purpose. The purpose can be broad in scope or narrow, and should be carefully defined to suit the needs of the parties to the  agreement.
  1. Definition of confidential information. This provision identifies the specific types of information that will be considered confidential. Confidential information is typically defined as information that is nonpublic and proprietary, such as business strategies, financial information, trade secrets, and customer list. When defining confidential information in a unliteral confidentiality agreement, it’s generally to the Disclosing Party’s benefit to include a broad definition of confidential information. When defining confidential information in a mutual confidentiality agreement, however, a broad definition may not always be the best choice.
  • Exclusions from the definitions. The exclusions clause lays out specific types of information that are excluded from the definition of confidential information. It commonly includes information that (a) was already known by the Receiving Party before disclosure, (b) has become public other than through the Receiving Party’s breach of the agreement, (c) was received by the Receiving Party from a third party, and (d) was independently developed by the Receiving Party without using the confidential information. In order to protect itself, a Receiving Party should ensure that there is an appropriate exclusion clause in the confidentiality agreement.
  1. Nondisclosure obligations. This provision lays out the Receiving Party’s nondisclosure obligations, such as prohibitions against disclosure of confidential information to any unauthorized party or use of confidential information for anything other than for the specified purpose. It may also require the Receiving Party to protect the Disclosing Party’s confidential information in the same manner as it would its own. The parties should draft this provision carefully to ensure that confidential information is used properly.
  • Survival of nondisclosure obligations. The survival clause sets forth the duration of time that the parties are bound by the nondisclosure obligations. Parties’ nondisclosure obligations can continue to last indefinitely or for a fixed term. It is common for survival periods to range from three to seven years, depending on how quickly the information becomes public or obsolete.

Limitations of Confidentiality Agreements

            Although confidential agreements are useful tools to try and safeguard confidential information that must be disclosed to someone else, there are some limitations:

  • In the event of a breach of the confidentiality agreement by the Receiving Party, once confidential information is disclosed, there may be no practical way to reverse the impact of disclosure to unauthorized parties.
  • Proving a breach of confidentiality agreement can be difficult. The breaching party may conceal the misuse of information by destroying evidence, such as deleting emails and shredding paper copies. If the breach occurred by verbal disclosure, there might not be documentary evidence available for the damaged party to prove breach of the agreement.
  • It is often the case that the only remedy available in the event of a breach of a confidentiality agreement is monetary damages. It can be difficult to quantify the harm that has been suffered, though, and sometimes a money award is not sufficient to make you whole.

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

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David Kim| PARTNER

David Kim is a Partner at Parsus LLP. He specializes in corporate and technology transactions, with an emphasis on intellectual property. David has represented a variety of clients from start-ups to Fortune 500 companies in mergers and acquisitions, cross-border investment, financing, and licensing. His clients do business in a range of industries including entertainment, financial services, consumer products, gaming, software, and technology services.

Prior to returning to Parsus LLP, David served as an in-house intellectual property counsel for NBCUniversal, advising on technology and mergers and acquisitions for the various business units of the company. He assisted the company’s corporate development teams in assessing acquisition targets and negotiated NDAs, vendor service agreements, software and hardware licenses, and trial agreements for experimental and prototype technology. David was also one of the company’s primary resources on open source software-related matters.

Before joining NBCUniversal, David co-founded and served as a Partner of Parsus LLP, worked as in-house counsel for start-ups, and was an associate at Winston & Strawn, where he represented clients in intellectual property matters including patent assessment and analysis, IP licenses, and various phases of patent and copyright infringement litigation. At Winston, David also represented clients in general business and securities litigation concerning commercial disputes and business torts.

David received his A.B. degree from Harvard University and his J.D. degree from UCLA School of Law. 

Kristen Lee
Kristen Lee
| ASSOCIATE ATTORNEY

Kristen Lee is an associate attorney at Parsus  LLP.  Her practice is focused on commercial transactions and the various day-to-day legal needs of businesses of all sizes, including business formation, corporate governance, commercial contracts, and mergers and acquisitions. Prior to joining Parsus, Kristen represented corporate clients in high-stakes litigation involving breach of contract, fraud, unfair competition, and other business torts.  

Kristen is a member of the Korean American Bar Association of Southern California.

Kristen received her B.A. degree from the University of Texas at Austin and her J.D. degree from Pepperdine School of Law.  Kristen is fluent in Korean. 

EVELYN SHIMAZAKI
| OF COUNSEL

Evelyn Aguilar Shimazaki is Of Counsel at Parsus LLP. Her practice is focused on the representation of technology companies in intellectual property licensing and commercial transactions, including joint development, manufacturing, procurement, strategic alliances, outsourcing and other services arrangements. Prior to joining Parsus LLP, Evelyn was a Senior Counsel at Apple in Cupertino, California for fourteen years. After Apple, she joined Tesla in Palo Alto, California as Chief Counsel and more recently, Oculus VR, a division of Facebook in Menlo Park, California as a Consultant.  

Evelyn is a Founding Board Member of UCLA Law Women LEAD, an Advisory Board Member of the Lowell Milkin Institute of Business Law and Policy at UCLA School of Law, and a past President and Advisory Board Member of the Philippine American Bar Association of Los Angeles.

Evelyn received her B.A. degree from the University of California, Berkeley and her J.D. degree from UCLA School of Law. A native of the Philippines, Evelyn speaks Tagalog, Spanish and some Japanese.

Ju Park
| MANAGING & FOUNDING PARTNER

Ju is a corporate lawyer by training and an entrepreneur at heart.  After attending the United States Military Academy at West Point for a year where she gained essential life skills including throwing grenades and applying a tourniquet, she graduated from McCombs Business School at the University of Texas majoring in finance.  Ju then graduated from UCLA School of Law where she focused her studies on International Business Law.  After law school, she practiced corporate law and litigation in the Los Angeles and Hong Kong offices of an international renowned law firm, Latham & Watkins, where she advised domestic and foreign clients, including Fortune 500 companies, on various corporate matters including general commercial contracts, corporate finance, IPOs and mergers and acquisitions.

Ju co-founded Parsus in 2009 with a vision to transform the legal services industry to make quality legal advice more available to and affordable for businesses of all sizes while improving the lifestyle and overall happiness of lawyers.  Over the years, and particularly since recently becoming a mother, Ju’s vision for Parsus has expanded to transform our extended community by committing a part of the firm’s profits and resources for charitable purposes.

In her role at Parsus LLP, Ju serves as outside transactional and general counsel to clients of all sizes and across a broad range of industries.  Her clients include domestic and foreign companies to whom she provides practical and cost-effective solutions to their general day-to-day business legal matters as well as major transactions such as mergers and acquisitions, corporate finance and cross-border transactions.  Ju combines her legal expertise with her business acumen to provide practical solutions to her clients’ legal issues without “over-lawyering” their contracts or deals.  Ju’s recent clients have included foreign and US companies acquiring and/or investing in US companies or assets, US companies receiving foreign and domestic investments, US subsidiaries of foreign companies going public, and foreign companies with ongoing US operations.  Ju also enjoys working with like-minded entrepreneurs and start-up executives.