What is a Confidentiality Agreement?

A confidentiality agreement is a legally binding contract that states two parties will not share or profit from confidential information. A business usually gives a confidentiality agreement to an employee or contractor to make sure its trade secrets or proprietary information remains private. A confidentiality agreement (CA) may also be known as a confidentiality statement, a confidentiality clause, a non-disclosure agreement (NDA), a non-disclosure form, a proprietary information agreement (PIA), or a secrecy agreement (SA).

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Reasons to Consider Using a Confidentiality Agreement

There are a number of reasons why different people might consider using a confidentiality agreement:

  • Maintaining a competitive advantage. Confidentiality agreements can help make sure proprietary information such as intellectual property or trade secrets don't reach industry competitors, the media, or the public. For this reason, confidentiality agreements are very common in rapidly changing industries, such as information technology.

  • Explaining each party's responsibilities. A confidentiality agreement creates a confidential relationship between two parties and should explain what that means. For example, a confidentiality agreement can help a consultant clarify how proprietary information from a new client can and should be used.

  • Setting standards for handling information. Usually, the parties agree to treat each other's confidential information the way they treat their own. However, this arrangement only works if the recipient already has standards for dealing with confidential information. These standards might include limiting access to information or using other methods, like password-protecting files, to preserve secrecy.

  • Protecting patent rights. In many countries, including the United States, an inventor loses patent rights when an invention's details are publicly disclosed.

  • Protecting information during mergers. Confidentiality agreements can protect information about the business and the purchase agreement until a merger or acquisition is finalized. Similarly, confidentiality agreements are useful for protecting business interests during joint company ventures.

  • Laying the groundwork for legal action. Since confidentiality agreements are legal documents, they may be used as evidence during legal cases.

Reasons to Consider Not Using a Confidentiality Agreement

However, confidentiality agreements aren't for everybody. Here are some reasons they might not be appropriate for your situation:

  • They can't protect some information. The information not protected by a confidentiality agreement includes:

    • Information the recipient knew prior to signing the agreement.

    • Information the recipient learns from alternative sources or information that is public knowledge.

    • Information that's in the public's best interest. For example, a company cannot use a confidentiality agreement to hide information that it's polluting a local waterway and putting residents' health at risk.

    • Information subject to a subpoena or needed for a court case, in some cases. An attorney can advise whether your information is protected or not.

  • They can hurt businesses in some circumstances. Some entities may decide not to use a confidentiality agreement if they stand to lose more than they will gain. For example:

    • Start-up companies often don't ask venture capital investors to sign confidentiality agreements. That's because the investors are unlikely to sign the agreement and securing funding is more vital than protecting their new ideas.

    • Employers may also shy away from confidentiality agreements after employees have worked in their roles for a set period. These employees may feel their employer is changing the rules of their employment which could result in low morale and high staff turnover. For this reason, many employers get new workers to sign confidentiality agreements shortly after hiring.

What Could Happen If You Don't Use a Confidentiality Agreement?

The worst scenario that could happen is that the company may lose potential earnings, name or brand recognition, and future business opportunities from another party profiting of the ideas or confidential information. All of these losses may also take a significant mental toll.

However, while a confidentiality agreement cannot prevent someone profiting from your ideas or information, it ensures you can be legally compensated if they do.

Confidentiality agreements can also deter people or businesses from profiting from your information, as they know they'll face legal consequences — including financial penalties and a court order to stop business stemming from the information if they do. The reputation of the entity that disclosed the sensitive information may also suffer in the short and long term.

Taking the disclosing party to court is still an option, but without a confidentiality agreement, the legal battle will be lengthier and more expensive.

Information Protected by a Confidentiality Agreement

A confidentiality agreement can protect most information that isn't on public record. This can include:

  • Intellectual property and proprietary information, including:

    • Secret formulas

    • Trade secrets

    • Recipes

    • Proprietary software

    • Computer technology

    • Scientific information

    • Copyrights

    • Engineering drawings, designs, systems, or specifications for existing products or products in development

    • Prototypes and samples

    • Unpublished patent applications

    • Concepts and know-how for future products, services, or practices

  • Manufacturing processes and production methods

  • Sales plans and marketing information and materials (including marketing campaigns and projects)

  • Details regarding customers or clients and sales contacts (including client lists, contracts, and business relationships)

  • Business information, operational procedures, and strategies (including personnel data of management and employees)

  • Business communications

  • Product and service information (including procedures, packaging, equipment, tools, and techniques used to make the product)

  • Test data and test results from employer

  • Transaction details and other financial information (including internal cost information, accounting procedures, reports, software, and payroll data)

The information protected by a confidentiality agreement sets one or both parties apart. A confidentiality agreement must clearly state the information it protects.

Types of Confidentiality Agreements

While the information contained in a confidentiality agreement is always unique, these documents fall into two key categories.

  • A unilateral or one-way confidentiality agreement states one party will not disclose information held by another party. This is the most common type of confidentiality agreement. It is often used when a company hires an employee and wants the new hire to protect proprietary information.

  • A bilateral or mutual confidentiality agreement states both parties will not share the other's information. It is most commonly used when two businesses begin working together and agree to protect one another's data. As an example, this might occur when one company wants another to license its products.

Further classifications are used to describe the parties involved in the confidentiality agreement. These classifications are:

  • Standard non-disclosure agreement: a flexible confidentiality agreement useful for almost any circumstances

  • Inventor agreement: used by inventors to protect unpatented inventions during discussions with relevant parties

  • Employee non-disclosure: used to clarify that employees should not disclose business information to people outside their employment

  • Interview non-disclosure agreement: used to make sure rejected job applicants do not disclose proprietary information learned during the interview process

Components of a Confidentiality Agreement

A legally-binding confidentiality agreement must feature the following components:

  • A definition of confidential information. This should state what specific information or types of information are protected by the agreement. Spoken information may be difficult to deal with, but a common compromise is for the discloser to confirm in writing, shortly after the original disclosure, what information was given to the receiving party.

  • Who is involved. All parties the agreement concerns should be identified: the receiving party, the disclosing party, and any representatives (directors, agents, advisors, officers, etc.).

  • Why the recipient knows the information. An explanation of why the recipient will know the confidential information, such as to perform work duties, should be included.

  • Exclusions or limits on confidential information. This could include information that was known prior to creating the agreement, information about the disclosing party that the receiving party obtained through a third-party, public knowledge, information requested by the government, and information learned independently. The recipient may need to prove the non-confidential status of this information to the discloser.

  • Receiving party's obligations. These include the non-disclosure agreement, disclosure provisions, and incorrect use of confidential information and may include not disclosing the information to others and taking steps to ensure the information remains confidential. The agreement may also state that the recipient cannot work in the same industry after leaving the disclosing party's employment for a set term or that the disclosing party owns anything the recipient develops or produces during the term of employment. Some typical disclosure provision issues include:

    • "Best Efforts" clause stating that parties use their best efforts to perform their contractual obligations

    • "Need to know" clause that may restrict access to the Recipient's employees

    • "No Use" clause to make sure the Recipient does not use the information for any purpose not defined in the agreement.

  • Time frame or term. This should include both the date that the agreement goes into effect and when it will expire. A confidentiality agreement may expire after a set term, after an event occurs (such as the end of a project), or never. A typical timeframe would be two to five years, but the disclosure may want to say that even after the term ends, the disclosing party is not giving up any intellectual property rights, such as copyright or patent rights.

  • Discloser to the recipient. This is an uncommon provision and states that because the recipient has agreed to keep the information confidential, and has the right to receive the information. The discloser should consider the degree of this provision before needing to disclose too much information.

  • Injunctive clause. This gives the disclosing party the right to stop the other side from breaching the confidentiality agreement before a breach occurs through a court order or injunction.

  • Other provisions or legal statements. These could be related to:

    • The party's relationships (clarifying that this agreement does not state the parties will enter into a partnership, joint venture, etc.)

    • The binding nature of the agreement on heirs and assigns

    • Severability (stating that even if part of the agreement is invalid, parts of the agreement that are valid can be enforced)

    • Integration (stating this agreement supersedes others and can only be amended in writing)

    • Jurisdiction (the body of government that will control the law)

    • Waiver of rights (stating that even if the receiving party fails to exercise rights in this agreement, it does not waive other rights)

    • Ownership of confidential material (discloser, agent, etc.)

    • Employee solicitation(an attempt by an employee to get extra work, customers, or other advantages from the company they work for or from other employees)

    • Recipient's rights to ideas or entering deals

    • What should happen to the confidential materials after use (return to discloser, for example)

    • What will happen if the agreement is breached (arbitration)

  • The names, signatures, and date signed of all parties. Both parties should carefully read the agreement before signing it so they know exactly what they're agreeing to.

Frequently Asked Questions

  • What happens when a party breaches a confidentiality agreement?

The disclosing party may sue the recipient for damages and insist on financial compensation to repay any profits lost as a result of the breach. In some cases, the recipient may be held in contempt of court. Criminal charges may be laid in these cases.

  • When can't a breach be pursued?

A confidentiality agreement may be dismissed if it is not specific enough. It may also be dismissed if it's so restrictive that the recipient cannot reasonably obtain work or support themselves because of it.

  • What's the difference between non-solicit and non-compete clauses?

A non-solicit clause restricts the recipient from taking business away from the disclosing party or working with its clients. A non-compete clause stops the recipient from starting its own business in direct competition with the disclosing party's business or revealing confidential information to another competing business. The confidentiality agreement may set the timeframes for non-solicitation and non-competition, but the time limits must be fair and reasonable to be enforceable.

  • Does a confidentiality agreement need to be in writing?

A document is not the only way to create this confidential relationship. Two parties may also have a verbal agreement to keep information confidential. A confidential relationship may even be implied by the conduct of both parties. However, these types of confidential relationships are much more difficult to prove.

  • What should I do before issuing a confidentiality agreement to another business?

Before issuing a confidentiality agreement, you should investigate your intended recipient's practices for keeping its own information private. If those practices aren't in place or are poor, your confidentiality agreement should contain specific clauses to limit access to confidential data.

  • How enforceable is a Confidentiality Agreement?

Enforceability varies per state, but in general, it is enforceable as long as the terms are not considered too broad, the time frames or burdens are not too high, and the information is not against the public's best interests.

Gaining a thorough understanding of confidentiality agreements and their legalities will help you, whether you are issuing confidentiality agreements to others or being encouraged to adhere to them.

If you need help with confidentiality agreements, you can post your question or concern on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.