Actually, before reading this article, could you sign this confidentiality agreement first, please? 🙂
Kidding, of course. But, unfortunately, that’s how confidentiality agreements have gotten their reputation: a bump in the road, a formal contract, red tape before you can gain the knowledge/insight needed in order to move forward in your undertaking.
This article attempts to dispel those myths and help you learn to appreciate a confidentiality agreement for what it is, what it says, and what binding power it may have over you and your actions/inactions after signing.
Additionally, I hope to shed some light on timing. This means when it is most opportune to use a confidentiality agreement and when it doesn’t make sense/will not provide the protection or enforcement sought.
Today, we will discuss:
- What is a confidentiality agreement?
- Key clauses terms/clauses
- When do you need a confidentiality agreement?
I’m also going to use our firm’s basic nondisclosure agreement as an example throughout this article. Note that we attorneys use it as a template for when we need to begin drafting a custom NDA. Also, note that you should not use this NDA for your own purposes without the advice of an attorney licensed in the state for which each party resides in order to assure enforceability.
Just use this article and the NDA as a generic guide for learning, not for your actual use.
What is a Confidentiality Agreement?
A confidentiality agreement is a contract between at least two individuals or entities where at least one party is agreeing to not disclose the information known or not yet known.
Here is an example excerpt from our NDA example:
An interesting point is you will hear “confidentiality agreement” (Abbreviated as CA) and “nondisclosure agreement” (also abbreviated as NDA) discussed in this article. THEY MEAN THE SAME THING. The confidentiality agreement prevents you from disclosing, and a “nondisclosure agreement” prevents you from sharing confidential information.
There are some variabilities here that probably should be expanded upon.
Individual v. Entity
Whether an individual or an entity is signing makes a big difference. Of course, an individual is identifiable and much easier to pinpoint when it comes to monitoring, disclosures, signatures, locations, etc.
An entity is constantly changing. The people that are employees/contractors/owners are always in flux which is cause for concern. Therefore, when signing a confidentiality agreement and the other party is a business, you should be cautious and concerned – especially if you are the one disclosing confidential information.
It’s true that not all parties in a confidentiality agreement will be sharing confidential information. If just one party is disclosing/sharing, it is called a unilateral agreement. If both or more than one party is sharing/disclosing, it is called a bilateral or multilateral agreement.
What is interesting is that for a contract to be enforceable, there must be an offer, consideration, and assent (usually coupled with signatures to support the writing). This is true for all parties that enter into a contract, including the party that is receiving the information.
Therefore, what is being received (the benefit) for the recipient is dependent upon whether it is a bilateral or a unilateral agreement. If bilateral, then each party benefits by receiving the confidential information in the exchange. But if it is only unilateral, the party disclosing information should be receiving some benefit or privilege for doing so, otherwise there is a risk the agreement is not going to be binding if sought to be enforced by a judge.
The benefit/consideration for the disclosing party can be as small as an opportunity to discuss or propose their idea with the other party or monetary exchange (which can come in many ways).
Known or Not Yet Known
This piece of the CA is interesting as you can actually agree to not disclose information that you already know and information that you do not yet know (but are about to learn about).
Key Clauses in a Confidentiality Agreement
Definition of Confidential Information
This section is all about defining “confidential information” for each party. Generally, you want to define confidential information as broadly as possible. Covering any conceivable format for information (as shown above) allows for unforeseen or unknown information to be protected after parties agree.
Further, by clarifying the scope in the contract, it helps a judge to see that both parties considered and stipulated the disputed information type beforehand. For example, “financial and accounting data” was stipulated in a breach of confidential price sheets.
Specific Confidential Information
So, even beyond specifying in general (as in section 1 of the example NDA), it is also important to discuss the type, kind, and quality of the data/information to further help enforce any misappropriations or breaches.
Exclusions from Confidentiality
This part of the NDA example covers ways that each party can gain knowledge outside of the relationship, and that as long as it was acquired under the agreed-upon ways (a-d in the above example), then it will not be seen as a breach of violation of the NDA.
Obligations of Receiving Party
So… as you can see, it’s not just about not disclosing. In order to be sure the receiving party knows exactly what they cannot do, it is best practice to spell it out for them exactly what they cannot do and what they are obliged not to do.
You can see that this provision is VERY important when the receiving party is a company because it puts a big burden on them to make sure that all employees and contractors are also in compliance with the nondisclosure agreement.
Non-use obligations of Receiving Party
Only for disclosure purposes! Meaning, the party that receives the information cannot use it, even for their own purposes. This clause is not beneficial to the receiving party and is added in order to help the disclosing party feel more comfortable disclosing.
What this also does is make sure that there is really a need to disclose. If it’s just a casual exchange of information that’s available to the public, or if you don’t really need to fully disclose trade secrets/confidential info to do business, then you shouldn’t be signing an NDA as it’s frivolous.
Return of Materials
Another provision here that is in favor of the disclosing party. The very nature of this clause is to protect the disclosing party’s interests down the line and to limit the exposure of confidential information beyond the recipient.
The catch here (which isn’t spelled out) is that the receiving party would, in order to comply, need to RETAIN all of the “records, notes, and other written, printed, or tangible materials” in order to return them. This neither means destroying nor does it mean transmitting it via e-mail/fax/cloud storage, etc.
Interestingly enough, the clause is silent about electronic media/content/records. So to make this even more comprehensive, an addition/supplement could be to add a section about electronic records and how those should be transmitted, stored, and retrieved/returned.
This clause is important to clarify that by disclosing the information, there is no transfer of ownership of property rights. This means that if the recipient plans to do anything with the information, they need to get the approval/license/agreement in place with the disclosing party.
The concept of “holding information in trust” is also instructive, as it is as if there is a third party escrow of the confidential information. And while it could at some point be put to use, the receiving party has no rights to do anything with it until a further agreement is put in place.
There is a lot to understand about trade secrets in this clause, which is important to the value that time has with respect to the disclosure. While patents are only enforceable for up to 20 years after filing, a trade secret can persist forever, so long as it remains a secret.
Therefore, even if the parties decide to no longer actively share confidential information, the duties under the previously shared information remain.
Relationships, Severability, and Governing Law
These sections are fairly straightforward and do not require much discussion, as they are self-explanatory. I will pause for a moment about Governing Law, and the importance to review your NDA with a licensed attorney in each state by which the signing parties reside (or, if it’s an entity, where the company is formed/has headquarters). That way the agreement will be binding/enforceable before local courts.
This clause opens up all avenues of enforcement for the disclosing party should the receiving party violate any of the clauses/terms of the nondisclosure agreement.
There is a new law under the “Defend Trade Secrets Act” of 2016 which should also be mentioned. This added a new federal statute that will seek damages (including attorney’s fees) for misappropriation of confidential information/trade secrets. It was put into place mainly to deal with the increasing nature of business being virtual.
Wavier and Entire Agreement
Standard to most contracts is the waiver and entire agreement clauses. The NDA is no different.
When do you need a Confidentiality Agreement?
Alright! So, you now have a VERY good understanding of what does and should go into a nondisclosure or confidentiality agreement!
Now, the question becomes when to use it or when to bring it up in a conversation with a 3rd party. The key here is to make sure you don’t misrepresent the contract or what it is supposed to mean.
As mentioned above, it is not a contract to “go into business” with someone. It’s not a license or a transfer of rights, just a contract where one party (or both) is exchanging confidential information in furtherance of their business activity.
Another way to think of this is that you only want to use an NDA when it’s absolutely necessary. Many people throw “please sign my NDA” around and expect everyone who they talk with about their business to sign one. For starters, most businesses will not sign NDAs. They don’t sign them because of how many proposals/ideas they get that are unsolicited and they don’t want to have to argue with a discloser that makes a claim that their “idea was stolen”.
The other time not to use an NDA is when the 3rd party you are going to tell doesn’t really have any skin in the game and you don’t need anything from them. Don’t use NDAs to brag about your invention. Use NDAs as a tool for when you NEED that third party’s expertise, intuition, money, or network. Otherwise there is a good chance they could help you in your efforts. In many cases, you can keep the conversation high-level and not get into the details of your invention.
Another point I always make to our inventors is to WAIT to disclose your invention to anyone until you file at least a provisional patent application. This way, you have your filing date locked in and no matter what, you will win in a priority battle should another inventor or individual file the same or similar invention.
Even after filing the provisional application, you should STILL use an NDA because you may cover/discuss/disclose information that is beyond the scope of what you wrote/described in your provisional patent application. Plus, the NDA would cover any future discussions between you which will certainly contain confidential information or trade secrets surrounding the invention and how to bring it to market, not to mention all of the customer/testing feedback you will use to improve/tweak the design.
Hopefully now you have a better understanding of non-disclosure agreements/confidentiality agreements! By understanding the key clauses and terms, you will be able to more confidently approach the topic should it arise.
The most important thing to remember at the end of the day is when you need an NDA in the first place…
When to use NDAs:
- You’ve already filed your provisional patent application
- If you are stuck on your invention, and need a co-inventor
- You need to see a proof of concept or prototype and need help
- You need investors
- You are seeking talent to join your team (employees or contractors)
When NOT to use an NDA:
- You have not yet filed at least a provisional patent application
- You are looking for someone to bounce the idea off of
- You want to get your idea on a website or platform to seem legitimate
- Have anyone you meet regarding your plans sign an NDA
So… can you keep a secret? Have you encountered possible NDAs before? Do you think you’ll be needing one in the near future? Let us know your thoughts and perspectives after reading this guide to confidentiality agreements and non-disclosure agreements!
Legal Note: This blog article does not constitute as legal advice. Although the article was written by a licensed USPTO patent attorney there are many factors and complexities that come into patenting an idea. We recommend you consult a lawyer if you want legal advice for your particular situation. No attorney-client or confidential relationship exists by simply reading and applying the steps stated in this blog article.