Confidentiality Clause: Everything You Need to Know
A confidentiality clause is generally set forth in many agreements, especially confidentiality agreements. 5 min read
A confidentiality clause is generally set forth in many agreements, especially confidentiality agreements. Such agreements, also known as nondisclosure agreements (NDAs), are legal agreements between parties that state information to be kept confidential, thus barring the receiving party from disclosing the information. One of the most common types of relationships entering into an NDA is employer and employee. Such secrecy agreements are also common with suppliers, independent contractors, and inventors.
In addition to confidentiality agreements, confidentiality clauses can be stated in any type of agreement, including the simplest contract. Such clauses can be simple and straightforward, or specific and detailed.
If you are choosing to input a confidentiality clause into an agreement, you can find several sample clauses online that can help you draft one that fits well for your agreement. Should the parties choose to hire an attorney, having legal assistance can help both parties tailor a solid confidentiality clause to prevent any legal issues in the future. Some samples include:
- The terms and conditions of this Agreement are confidential between both parties and shall not be disclosed to anyone else.
- Any disclosure in violation of the confidentiality clause shall be deemed an automatic breach of this Agreement.
- Both parties agree to treat the terms within this Agreement as strictly confidential.
- No information identified within this Agreement shall be disclosed to anyone else unless legally obligated.
- Confidentiality is a material part of this Agreement, and this confidentiality clause shall be binding upon both parties.
- The existence, nature, terms, and conditions of this Agreement are strictly confidential and shall not be disclosed by Employee in any manner or form.
From time to time, confidential information may require disclosure depending on the situation and circumstances. Each party to the agreement should use reasonable efforts to prevent the disclosure of any information identified in the Agreement for three years after the termination of the Agreement. However, if the information must be disclosed, the party must disclose to the other party that the information is being disclosed and to whom. The disclosing party must also indicate why he or she is disclosing such information, whether it is due to legal or regulatory reasons.
There are two types of obligations, including unilateral and mutual obligations.
These types of obligations are used when one party is disclosing information to another party, i.e. a potential investor in a new invention.
These types of obligations are used when both parties to the agreement are disclosing information to one another, i.e. when a business hires a third party vendor to create an online selling platform for the business, in which the vendor also provides confidential information relating to the software itself.
What Should Be Put in a Confidentiality Clause
A general description is a great strategy so to keep all information kept private. Sometimes, the more specific you get, the more problematic it can become. If you keep the clause broad, it will cover all items in the agreement. A specific description can, however, be helpful in shorter-term agreements, i.e. such as between a temporary independent contracting position between a software company and a computer consultant. When entering into a long-term agreement, a specific clause is not a good idea since the protected information will change over time. The main idea of a confidentiality clause is to ensure that everything is stated in its entirety.
In addition to a confidentiality clause, an exclusion clause may be a good idea. This is important for the receiving party since it excludes certain information from the definition of “confidential information.”
Protect Confidential Information
Additional language should be set forth in the agreement indicating that the receiving party of the information must use specific care in managing the confidential information. Some clauses may in fact indicate that the information must be locked away. However, if the information is stored electronically, the receiving party may need to ensure its privacy by having it password-protected.
Most confidentiality agreements contain clauses barring both parties from assigning the agreement to someone else. However, the clause may sometimes permit the receiving party to assign the agreement to someone else without the need to receive consent from the disclosing party beforehand.
If the disclosing party is worried that the receiving party intends on soliciting clients from the disclosing party, then a non-solicitation term can also be included in the confidentiality agreement preventing the other party from doing so. It is important to include this clause in an agreement involving a third party contractor.
Choice of Law Clause
Confidentiality agreements tend to contain a choice of law clause, which specifically indicates that the law of the disclosing party’s state applies. Both parties should conduct research on the state’s laws that will apply in the event that any legal battles arise. If this does in fact happen, such clauses are enforceable in court if the law bears a reasonable relationship to the agreement itself and the public policy of the jurisdiction is not contrary to the subject matter of the agreement.
These provisions impact the parties’ rights under the agreement. For arbitration, any disputes regarding the agreement must be resolved through arbitration proceedings, not in a lawsuit. For the legal fees associated with such proceedings, the losing party must pay the fees. Types of boilerplate provisions include:
- Indemnity. This is a guarantee by one party that costs will be covered if a third party brings a legal action. Therefore, the one party will protect the other party financially if a third party brings a legal suit against them.
- Jury trial waiver. If a legal suit arises, the parties can waive their right to a jury trial and agree that the judge will hear the dispute.
- Notice. Each party notifies one another of a court-ordered disclosure of the confidential information.
- Publication. Whether or not either party can make public the fact that they have entered into a business agreement.
- Severability. The parties agree that any provisions in the agreement that may be deemed invalid, either partially or fully, can be struck from the agreement and the remainder of it will remain enforceable.
- Venue. This states that the court of arbitration panel has the authority to hear a dispute arising out of the agreement.
The confidential agreement must be reasonable in order for it to be enforced. Courts will look at several factors when determining reasonableness, including the interests of the disclosing and receiving parties, the length of time the information must be kept confidential, the relationship between the parties, and the interests of the public.
Acknowledgement of Irreparable Harm
This type of damage can be claimed for the breach of confidentiality under a breach of contract theory. Such damage is generally difficult to calculate. Because of this, the parties can consider adding a liquidated damages provision by settling on a specific sum of money that will be awarded to the injured parties upon breach of the agreement. However, if the parties input a liquidated damage clause, a court will likely throw out the irreparable harm element since the clause itself will be the most appropriate remedy since it was previously agreed upon in the contract itself.
Other Facts Regarding Confidentiality Agreements
- The agreement doesn’t give absolute protection to the owner of a trade secret
- The confidentiality agreement can only be enforced against the parties who are bound by it.
- A confidentiality agreement is only as effective as what the court determines
If you need help determining what to put in your confidentiality clause, you can post your legal need 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.