Confidentiality agreement and NDA drafting resources

Legal terms • NDA • confidentiality agreement

 

Nearly all businesses have valuable confidential information, and for many, confidential information is a dominant asset. Companies also share, receive, and exchange confidential information with and from customers, suppliers, and other parties in the ordinary course of business and in a wide variety of commercial transactions and relationships.

Contractual confidentiality obligations are fundamental and necessary to help protect the parties that disclose information in these situations. Depending on the circumstances, these obligations can be documented in either:

• A free-standing confidentiality agreement (also known as a nondisclosure agreement or NDA)
• Clauses within an agreement that covers a larger transaction

 

Jump to ↓

Confidentiality agreements vs. NDAs/Similarities

---

Confidentiality agreements vs. NDAs/Differences

---

Forms of confidentiality agreements

---

Nondisclosure obligations

---

What to do in case of a breach?

---

Limitations and risks of confidentiality agreements

---

Templates and Practical Law Resources

 

 

What is a confidentiality agreement?

A confidentiality agreement is a contract between two or more parties where the parties agree not to disclose information, including trade secrets, proprietary data, and other sensitive business-related information (such as business plans, internal documents, and financial records) that are deemed confidential. These agreements can be mutual or unilateral.

 

Term of agreement and survival of nondisclosure obligations

Confidentiality agreements can run indefinitely, covering the parties’ disclosures of confidential information at any time or can terminate on a certain date or event.

Whether or not the overall agreement has a definite term, the parties’ nondisclosure obligations can be stated to survive for a set period. Survival periods of one to five years are typical. The term often depends on the type of information involved and how quickly the information changes.

Examples of when confidentiality agreements are needed

A range of commercial transactions and relationships involve either the disclosure of confidential information by one party to the other or a reciprocal exchange of information. In both cases, the parties should have a confidentiality agreement in place.

For example, confidentiality agreements may be used when evaluating or engaging a business or marketing consultant or agency, where the hiring company will necessarily disclose confidential information to enable the consultant to perform the assignment. They can also be used when soliciting proposals from vendors, software developers, or other service providers, which usually involves the exchange of pricing, strategies, personnel records, business methods, technical specifications, and other confidential information of both parties.

Finally, your company may need a confidentiality agreement when entering into a co-marketing relationship, as an e-commerce business, with the operator of a complementary website or a similar type of strategic alliance.

What is an NDA?

A Non-Disclosure Agreement (NDA) is a contract where one or more parties agree not to disclose certain proprietary or confidential information they receive during negotiations or employment. NDAs are designed for specific purposes and are not much wider in perspective, as they protect only proprietary information, such as trade secrets, intellectual property, or sensitive data that is exchanged in specific situations.

Confidentiality agreements vs. NDAs/Similarities

Confidentiality agreements and NDAs share the same purpose: They both aim to protect the sensitive information of businesses. The following are some of the aspects of similarity:

Confidentiality agreements vs. NDAs/Differences

Confidentiality agreements and NDAs are often used interchangeably due to their similarities, but they have distinct differences, some of which are outlined below.

When is one needed?

Confidentiality agreements are more appropriate for some use cases, and NDAs are more appropriate for others.

When to use a confidentiality agreement

• When the information to be protected is broader in nature and involves various aspects of business, partnerships, or employment.
• If a long-term relationship is expected, such as in joint ventures or employment, where both parties may share sensitive data.
• Where ongoing protection of proprietary business processes and data is required beyond the termination of a relationship.

When to use an NDA

Here are some instances where an NDA might be the better option:

• NDAs are better suited for specific instances where proprietary or sensitive information is shared during short-term business transactions, negotiations, or projects.
• When engaging in preliminary discussions for mergers, acquisitions, or collaborations, NDAs can provide focused protection of trade secrets or intellectual property.
• NDAs can help a company protect a particular type of information, such as technological designs or business plans, during the course of discussions or product development.

Why written agreements are necessary

There are numerous reasons to consider entering into written confidentiality agreements, such as:

• Avoiding confusion over what the parties consider to be confidential.
• Allowing more flexibility in defining what is confidential.
• Delineating expectations regarding treatment of confidential information between the parties, whether disclosing or receiving confidential information.
• Enforcing written contracts is easier than oral agreements.
• Memorializing confidentiality agreements is often required under upstream agreements with third parties (for example, a service provider’s customer agreement may require written confidentiality agreements with subcontractors).
• Maximizing protection of trade secrets, because under state law this protection can be weakened or lost (deemed waived) if disclosed without a written agreement.
• Covering issues that are indirectly related to confidentiality, such as non-solicitation.
• Maintaining standards that are expected of most commercial transactions and relationships.

Forms of confidentiality agreements

Depending on the type of transaction or relationship, only one party may share its confidential information with the other, or the parties may engage in a mutual or reciprocal exchange of information.

Unilateral confidentiality agreements

In unilateral confidentiality agreements, the nondisclosure obligations and access and use restrictions will apply only to the party that is the recipient of confidential information, but the operative provisions can be drafted to favor either party.

Mutual confidentiality agreements

In mutual confidentiality agreements, each party is treated as both a discloser of its — and a recipient of the other party’s — confidential information (such as when two companies form a strategic marketing alliance). In these situations, both parties are subject to identical nondisclosure obligations and access and use restrictions for information disclosed by the other party.

Reciprocal confidentiality agreements

In some circumstances, the parties may share certain confidential information with each other but not on a mutual basis. Instead of entering into a fully mutual confidentiality agreement, the parties enter into a reciprocal confidentiality agreement. Such an agreement will separately define the scope and nature of the confidential information that each party may disclose. Each party my be subject to different nondisclosure obligations and access and use restrictions.

Nondisclosure obligations

In general, recipients of confidential information are subject to an affirmative duty to keep the information confidential and not to disclose it to third parties except as expressly permitted by the agreement. The recipient’s duty is often tied to a specified standard of care. For example, the agreement may require the recipient to maintain the confidentiality of the information using the same degree of care used to protect its own confidential information but not less than a reasonable degree of care.

Recipients should ensure there are appropriate exceptions to the general nondisclosure obligations, including for disclosures:

• To its representatives: Most confidentiality agreements permit disclosure to specified representatives for the purpose of evaluating the information and participating in negotiations of the principal agreement.
• Required by law: Confidentiality agreements usually allow the recipient to disclose confidential information if required to do so by court order or other legal process. The recipient usually must notify the disclosing party of any such order (if legally permitted to do so) and cooperate with the disclosing party to obtain a protective order.

Disclosing parties commonly try to ensure that recipients are required to have downstream confidentiality agreements in place with any third parties to which subsequent disclosure of confidential information is permitted. In these cases, either the recipient or the discloser may prefer to have these third parties enter into separate confidentiality agreements directly with the discloser.

What to do in case of a breach?

When confidential information is shared, it must be done in a manner that imposes an obligation on the recipient to treat it as confidential and not disclose it. The context and manner of communication play a key role in establishing this obligation. In the event of a breach:

1. Identify the breach

Investigate and confirm if the NDA has been violated through monitoring, reviewing, or investigation.

2. Send cease and desist letter

Notify the violator, explain the breach, request to stop further disclosures, and set a deadline.

3. Seek injunctive relief

If the breach continues, file a lawsuit and request a court order to stop further disclosures.

4. Pursue damages

Seek financial compensation if the breach caused harm, such as lost profits or damage to reputation.

5. Alternative dispute resolution

Consider resolving the issue through mediation or arbitration to avoid court and reduce costs.

Limitations and risks of confidentiality agreements

Confidentiality agreements are very useful to prevent unauthorized disclosures of information, but they have inherent limitations and risks, particularly when recipients have little intention of complying with them. These limitations include the following:

• Once information is wrongfully disclosed and becomes part of the public domain, it cannot later be “undisclosed.”
• Proving a breach of a confidentiality agreement can be very difficult.
• Damages for breach of contract (or an accounting of profits, where the recipient has made commercial use of the information) may be the only legal remedy available once the information is disclosed. However, damages may not be adequate or may be difficult to ascertain, especially when the confidential information has potential future value as opposed to present value.
• Even where a recipient complies with all the confidentiality agreement’s requirements, it may indirectly use the disclosed confidential information to its commercial advantage.

Templates and Practical Law Resources

To ensure that your confidential information will be protected in the way you intend, and to minimize any limitations and risks inherent in the agreement, it’s critical to draft the terms of the agreement correctly.

Below you’ll find relevant resources from templates, toolkits, and practice notes to help you draft strong agreements to protect confidential information.

Templates

Need a standard form to be used in connection with commercial transactions, drafted in favor of the discloser, the recipient, or simply a general standard document? All of these samples contain integrated notes with important explanations and drafting and negotiating tips.

Practical Law Standard Documents

Practice notes

Confidentiality and Nondisclosure Agreements by Practical Law Commercial Transactions

A Practice Note discussing the overall protection of a company’s confidential information and the use of confidentiality agreements (CAs), also referred to as nondisclosure agreements (NDAs) or confidential disclosure agreements (CDAs), in the context of US commercial transactions. This Note provides practical tips on developing internal systems and drafting contract provisions designed to protect a company’s sensitive information, including its business assets and relationships, data security, and trade secrets.

Confidentiality Agreements: Mergers and Acquisitions by Practical Law Corporate & Securities

The M&A Confidentiality Agreement Practice Note examines whether an agreement should be unilateral or mutual, the timing of signing, and whether it should be separate from or part of the term sheet. It also discusses the importance of defining confidential information, permitted uses, and exclusions.

The Note highlights special considerations for public companies, including standstill agreements and compliance with securities laws. It covers the limitations of NDAs, the necessity of written agreements, and the remedies available for breaches. Additional provisions often included in M&A NDAs, such as non-solicitation clauses, standstill agreements, and anti-clubbing provisions, are also discussed. By understanding these elements, parties can better navigate the complexities of confidentiality agreements in M&A transactions.

Protection of Employers’ Trade Secrets and Confidential Information by Practical Law Labor & Employment

Another Practice Note describes trade secrets and confidential information protections available to employers. It examines trade secret definitions and legal recourse, including claims under the federal Defend Trade Secrets Act (DTSA) and state law claims for trade secret misappropriation, tortious interference, breach of duty of loyalty, and breach of fiduciary duty. It also explores relevant restrictive covenants and best practices for US employers. This Note is jurisdiction-neutral.

---

Related terms: