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.
- 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.
- 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.
- 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.
- 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.