Confidentiality agreements are among the most common types of commercial contracts.
Businesses use confidentiality agreements to protect their valuable, non-public business information in situations where that information is shared with third parties. These top five considerations will help business leaders navigate confidentiality agreements.
1. A written confidentiality agreement should be used any time confidential business information is shared with a third party.
Your business may be tempted to rely on oral undertakings from other business parties not to disclose your business’s confidential information. Such reliance, however, would be a mistake for several reasons.
First, it is easier to prove the existence of and enforce a written agreement than a non-written one. Also, a written confidentiality agreement allows the parties to specify what information is confidential and state the specific restrictions on the disclosure of confidential information and the purposes for which it may be used. Finally, the use of a written confidentiality agreement maximizes the protection of trade secrets because those protections may be waived if trade secrets are disclosed without a written agreement.
2. A confidentiality agreement may be unilateral or mutual.
A unilateral confidentiality agreement may be used where only one party (the “disclosing party”) is disclosing information to another party (the “recipient”): for example, where a consultant will receive a customer’s confidential information. In unilateral confidentiality agreements, the confidentiality obligations and use restrictions apply only to the party receiving the confidential information.
Mutual confidentiality agreements are appropriate where parties are disclosing confidential information to each other: for example, where the parties are discussing a potential strategic business transaction, such as an acquisition or joint venture. In mutual confidentiality agreements, the confidentiality obligations and use restrictions apply to each party to the extent that it receives the other party’s confidential information.
3. Confidentiality agreements are useful but not infallible.
The commercial benefits of using confidentiality agreements outweigh any potential downside. They are, however, subject to inherent limitations and weaknesses:
- Confidential information will become publicly available if it is wrongfully disclosed (you should consider not disclosing confidential information if you have any doubts about the recipient’s willingness to abide by confidentiality provisions);
- It may be difficult to prove that the recipient has breached the confidentiality agreement;
- It likely will be difficult to determine the amount of monetary damages if the recipient breaches the confidentiality agreement; and
- The recipient wrongfully may use your confidential information for its own commercial purposes even if it does not disclose the confidential information to a third party.
Stated simply, confidentiality agreements are not self-enforcing: even though you have executed a confidentiality agreement, the other party wrongfully may disclose your confidential information to a third party or use it for its own commercial purposes.
4. Certain provisions should be included in every confidentiality agreement.
A well-drafted confidentiality agreement includes:
- A definition of confidential information;
- Customary exceptions from the definition of confidential information, including publicly available information, information known to the receiving party prior to its disclosure by the disclosing party, information disclosed to the recipient by a third party not subject to a duty of confidentiality to the disclosing party, information developed by the recipient on its own without reference to the disclosing party’s confidential information, and information that is required to be disclosed by a court or other legal order;
- A restriction on the disclosure of confidential information by the recipient to unrelated third parties as well as employees how do not have a need to know such information;
- An undertaking that the recipient will use the same measures as it uses to protect its own confidential information to protect the confidential information of the disclosing party, provided that it will use at least commercially reasonable efforts to prevent the disclosure of confidential information to third parties;
- An undertaking that the recipient will use the disclosing party’s confidential information solely for the purposes agreed upon by the parties;
- A provision providing for the return or destruction of confidential information upon the disclosing party’s request;
- A provision stating that the disclosing party retains all ownership rights in its confidential information;
- A statement regarding how long the confidentiality obligations will survive: for example, forever, five (5) years or three (3) years;
- A statement that the disclosing party may obtain specific performance or an injunction if the recipient breaches the disclosure and use restrictions (the parties also may want to include a provision requiring the recipient to indemnify the disclosing party from any damages resulting from any breach of the agreement);
- A choice of law and forum selection provision: for example, Pennsylvania law with disputes resolved in the federal and state courts located in Pittsburgh; and
- In certain contexts, the parties may want to stipulate that they have no obligation to enter into any transaction other than the confidentiality agreement: for example, where the confidentiality agreement is executed for the purpose of exchanging confidential information in anticipation of a potential acquisition or joint venture.
5. Certain provisions sometimes included in confidentiality agreements should be scrutinized for undesired consequences.
Some confidentiality agreements prohibit (a) one or both parties from soliciting or offering employment to the other party’s employees or (b) establishing relationships with customers and suppliers of the other party. Any such non-solicitation provisions should be scrutinized to make sure that they will not prohibit your business from taking any actions that it intends to take in the future.
Finally, confidentiality agreements sometimes include non-compete agreements providing that the parties may not compete in certain product or geographic markets or with respect to certain customers. These likely violate the antitrust laws and should always be scrutinized by an attorney.
