Business Development > Starting a Business > Contracts & Agreements
Updated September, 2013
Overview of Confidentiality Agreements
Conﬁdentiality agreements, also referred to as non-disclosure agreements, are used when the owner of conﬁdential information wishes to disclose that information to another party, usually in the course of business negotiations, and wishes to protect this information. By signing a conﬁdentiality agreement, the recipient undertakes the obligation not to disclose the conﬁdential information as deﬁned in the agreement. While the terms of a conﬁdentiality agreement can typically be detailed in 3 to 4 pages, a conﬁdentiality agreement could be 15 or more pages when it covers, for example, jointly developed, patentable technology.
This summary discusses in more detail the basic terms of the Information File C5-81, Sample One-Sided Conﬁdentiality Agreement and the legal rights and obligations created under the agreements, as well as provisions that could be adapted to speciﬁc circumstances and arrangements. The terms detailed below, however, should be considered as basic requirements for any conﬁdentiality agreement. With the key terms detailed in a written agreement, the parties will have reasonable expectations about services to be performed under the agreement and the consequences if those expectations are not met.
This summary does not constitute legal advice. Parties negotiating and contemplating entering into a conﬁdentiality agreement should consult with competent legal advisors.
Duties and Obligations Created
Following is a discussion of the more important issues to be considered when negotiating and drafting a conﬁdentiality agreement.
Deﬁnition of Conﬁdential Information. The parties must deﬁne "conﬁdential." The party disclosing the conﬁdential information most likely would want the deﬁnition to be very inclusive and the recipient would like the deﬁnition to be very narrow. The deﬁnition provided in Information File C5-81, Sample One-Sided Conﬁdentiality Agreement is fairly inclusive and illustrates the breadth of items that can be deﬁned as conﬁdential.
Obligation of Conﬁdentiality. The agreement must detail how the conﬁdential information will be handled by the recipient. The recipient’s failure to treat the conﬁdential information in compliance with these requirements will result in a breach. Typical requirements include not disclosing the object and scope of the discussions between the parties, not using the conﬁdential information other than for the speciﬁed purpose agreed to by the parties, and not disclosing the conﬁdential information to persons or entities other than the employees or agents of the recipient without the prior written consent of the disclosing party. If employees or agents of the recipient are provided access to the conﬁdential information, the disclosing party should expressly require that the recipient require those persons to be bound by the same obligation of conﬁdentiality, and yet remain responsible for the acts of those recipients.
Exceptions to Obligation of Conﬁdentiality. Conﬁdentiality agreements typically exclude certain information from the deﬁnition of conﬁdential information. Some common exceptions include information that is or becomes public through no act of the recipient, information that was already in the possession of the recipient as of the date of disclosure, and information that is disclosed by court order. Prior to the recipient disclosing conﬁdential information pursuant to court order, the conﬁdentiality agreement should specify that the recipient is obligated to notify the disclosing party of the court’s request and detail the disclosing party’s rights to intervene to protect the release of its conﬁdential information.
Ownership of Conﬁdential Information.The disclosing party should also require the recipient to acknowledge that the conﬁdential information is the property of the disclosing party and that the disclosure of the information does not convey any right, title, or license in the information to the recipient. This is necessary to prevent ambiguity as to what rights, if any, the recipient has in the conﬁdential information. Typically, the transfer of rights would not be the subject of a conﬁdentiality agreement, but rather a development or joint venture agreement should the parties determine to work together using the conﬁdential information. Even then, however, it may not be in the best interest of the owner of the conﬁdential information to transfer any portion of its ownership rights in the conﬁdential information.
Term. The conﬁdentiality agreement must also specify the time period during which conﬁdential information will be disclosed and the time period during which the conﬁdentiality of the information is to be maintained. These periods may or may not be the same, and they need not be speciﬁed by exact dates (years, months, weeks, etc.). For example, the Sample One-Sided Conﬁdentiality Agreement form and Sample Mutual Conﬁdentiality Agreement form provide that disclosure will occur for so long as the parties are discussing a possible business relationship, but the obligation of conﬁdentiality survives until an exception to the obligation of maintaining conﬁdentiality arises. Other agreements may quantify the time periods and, for example, provide that the disclosure period is for one year and the obligation to maintain the confidentiality of the information is for a two-year period thereafter. If the disclosure period is quantiﬁed, the disclosing party should require that the agreement provide for termination by either party at any time prior to the end of the term, subject to reasonable notice as negotiated by the parties. This allows the disclosing party to terminate its obligation to disclose conﬁdential information if it does not wish to proceed with working with the recipient.
Miscellaneous Provisions.After spending considerable time negotiating and deﬁning what constitutes conﬁdential information and the obligations to keep the information conﬁdential, it is often easy for parties to neglect the miscellaneous provisions that one typically ﬁnds at the end of the agreement. The parties should always pay careful attention to what law will govern the agreement, how disputes will be resolved, and the assignability of the rights and obligations under the agreement.
Consequences of Breaching a Conﬁdentiality Agreement
When a conﬁdant breaches his or her obligations under a conﬁdentiality agreement, he or she is subject to remedies available to the disclosing party. These remedies may include equitable relief and monetary damages. An injunction against the breaching conﬁdant helps prevent any further breach of the agreement. The court may also award monetary damages if damages can be quantiﬁed.
It is often difﬁcult and expensive to enforce a conﬁdentiality agreement even though the agreement, on its face, is detailed as to what is conﬁdential information and what constitutes a breach of the obligation of conﬁdentiality. This is so because of the proof necessary to demonstrate a breach by the other party. Also, while an injunction prohibits future dissemination of the conﬁdential information, it is difﬁcult to contain the information once it has been disclosed and it is difﬁcult to quantify monetary damages. Because of the enforcement issues, the sound advice is to not enter into a conﬁdentiality agreement or share conﬁdential information with a party you do not trust to keep the information conﬁdential.
Joe R. Thompson, Barnes & Thornburg, LLP 225 S. 6th Street, Suite 2800, Minneapolis, MN 55402, 612-367-8736