19 May Confidentiality Agreements Explained
Drew EricksonSenior Associate
Confidentiality Agreements, commonly known as Non-Disclosure Agreements or “NDA’s” are incredibly important documents designed to protect businesses, specifically to protect a business’ valuable, non-public, and proprietary information from being used by or disclosed to third parties. Every business owner should be familiar with Confidentiality Agreements as most will encounter one at some point. This Article will shed light on Confidentiality Agreement usage, key provisions to carefully review, and optional provisions that are less common but should be considered when entering into a Confidentiality Agreement.
The purpose of a Confidentiality Agreement is to allow a party to receive and evaluate confidential information on the condition that such party will not use or disclose such information to the detriment of the disclosing party. This provides the receiving party with the opportunity to review non-public material that they would otherwise not have access to in exchange for the disclosing party receiving legal protections to ensure its confidential information is not misused or improperly disseminated.
An important point to note is that Confidentiality Agreements can be a stand-alone document, or a confidentiality provision incorporated into a separate agreement. Confidentiality Agreements as stand-alone documents are typically used prior to negotiating a business deal, such as a merger or acquisition, while confidentiality provisions are very common in many different kinds of agreements, including subcontractor / vendor agreements and master services agreements.
While the form of the confidentiality is important, this Article’s analysis applies to both a stand-alone Confidentiality Agreement and a confidentiality provision incorporated into a separate agreement.
The first important provision to understand in a Confidentiality Agreement is how “Confidential Information” is defined, with certain provisions benefiting the parties differently. Some agreements list specific information that is to be considered confidential or state only information clearly marked as “confidential” can be considered confidential (benefiting the receiving party), others will say all information disclosed to the receiving party is confidential, regardless of any markings (benefitting the disclosing party). It should also be noted when confidentiality occurs. A Confidentiality Agreement could say all information disclosed after signing the agreement is confidential, and another might say all information disclosed to the receiving party prior to and after signing is deemed confidential.
Equally important to defining the confidential information is considering what may be explicitly excluded from the definition of confidential information. It’s common for a Confidentiality Agreement to exclude information already in the public domain or becomes public due to no fault of the receiving party. Other common exclusions include information already in the receiving party’s possession prior to disclosure by the disclosing party, and information independently developed by the receiving party without utilizing the confidential information.
Confidentiality Agreements should have two main restrictions regarding the receiving party – that the receiving party will not “use” the confidential information and will not “disclose” the confidential information. These restrictions should be used in conjunction to best protect the information. Conveying only a “use” restriction, leaves the receiving party free to disclose the information to any third party. Similarly, conveying only a “disclosure” restriction means receiving party can now incorporate the information into its own business and utilize it for their own benefit.
While non-disclosure of confidential information is a common restriction, it is also common to allow the receiving party to disclose the information to certain people the parties agree “need to know” the information to effectuate the underlying purpose of entering into the Confidentiality Agreement. For example, attorneys and accountants should be allowed to review the confidential information. In addition, the receiving party’s employees and contractors likely need to have access to this information, but the receiving party should be obligated to require these individuals also sign Confidentiality Agreements protecting unauthorized use or disclosure.
Lastly, there should always be a reference in a Confidentiality Agreement that the disclosing party is not licensing the confidential information to the receiving party. The disclosure of information to the receiving party is only for their evaluation to effectuate a possible transaction, not to be transfer ownership rights in that information to the receiving party.
Potential Inclusions – Restrictive Covenants
It’s not a tall ask for a disclosing party to request additional restrictions on the receiving party, given the valuable nature of confidential information. One of those restrictions might be a non-circumvention provision. These types of provisions make it clear that the receiving party cannot review the confidential information and then disrupt the disclosing party’s business by taking advantage of them, whether it be going to a customer or vendor of the disclosing party to offer a better deal, attempting to divert business that would otherwise go to the disclosing party, or interrupting any other business deals the disclosing party has that the receiving party would not have known about but for the disclosure of confidential information.
Another provision that would greatly benefit the disclosing party is a non-solicitation provision. Here, the receiving party would agree that, in addition to confidentiality, they will not solicit (or reach out to) or hire any employee or independent contractor of the disclosing party for a period of years. The idea is that a business’ workforce can be just as important as its confidential information. Preventing a receiving party from poaching your employees and independent contractors is a concern many business owners have when entering into these types of agreements with third parties.
While the importance of Confidentiality Agreements cannot be overstated, the bright side is that these agreements are typically short and are relatively standardized. However, like most contracts, anyone can put uncommon or detrimental provisions in a Confidentiality Agreement. Therefore, it can be beneficial for business owners to engage with experienced professionals to review or prepare Confidentiality Agreements to ensure their proprietary information and their business are protected.
ABOUT THE AUTHOR: Drew Erickson is a Senior Associate at Rapp & Krock, PC in the Corporate Law and Business Transactions group.
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