What is a Confidentiality Contract?

Confidentiality contracts, or non-disclosure agreements (NDAs), confidential disclosure agreements (CDAs), or proprietary information agreements (PIAs), are agreements made between parties to protect information, ideas, transaction details, and trade secrets from being revealed to third parties, either by one or both parties in the agreement, during or after a business deal or employment period.

Confidentiality contracts are commonly presented to employees, potential employees, potential investors, suppliers, and independent contractors to ensure confidential information remains so. For businesses, the ensuring of such discretion is necessary to enable the free-flow of information within and around the organization to maximize business productivity. If other parties cannot be held to confidentiality, then a business cannot operate effectively for fear of valuable information being disclosed without consequence.

With a confidentiality contract, the consequence of revealing sensitive information is that the aggrieved party can bring legal action against the offending party for breach of contract, often seeking monetary damages and sometimes criminal charges, as well. For the party that disclosed the sensitive information, such action will also be damaging to their trust and reputation amongst potential business partners.

When to Use a Confidentiality Contract

Some times when a confidentiality contract can be recommended include:

  • When one desires an employee, potential employee, independent contractor, or other party to maintain the confidentiality of sensitive business information.
  • During the acquisition of a company, at which time the selling company’s proprietary information should be protected, along with the purchase agreement details.
  • When two organizations work together in a joint venture, with both companies agreeing to not disclose the details of the venture.
  • At any point when access to valuable, confidential information will be given to another person or entity and the continued confidentiality of that information is desired.

Types of Information Confidentiality Contracts Can Protect

There are several types of information that confidentiality contracts are often used to protect. These include:

  1. Customer information. Such information includes that which relates to clients or customers of a business, including contracts, business relationships, and client lists.
  2. Proprietary information and intellectual property (IP). Information falling under these headings includes intellectual property that is owned by the employer, such as trade secrets, patents, production methods, proprietary software, test data, and copyrights.
  3. Marketing information. Any information related to marketing campaigns, projects, or research can be protected by confidentiality agreements.
  4. Business operations. An employer’s personal data and that of its employees, along with data relating to its operating procedures and internal cost information can be protected by confidentiality agreements.
  5. Product and service information. This relates to information regarding packaging, procedures, and the equipment/techniques used to produce a product, along with what planning, employees, and management methods are used to provide a given service.
  6. Accounting information. The accounting methods, payroll information, software used, and reporting methods of a company are covered under this heading.

Limits of Confidentiality Contracts

Confidentiality contracts cannot offer complete protection against the disclosure of all confidential information. Key points regarding the limits of confidentiality contracts are:

  1. Confidentiality agreements only have power over those who are bound to them. If a party does not sign such an agreement, then they are not required to refrain from disclosing information. For instance, if confidential information is disclosed to a supplier bound by a confidentiality, but that supplier must share the information with a third party to fulfill its contract with the disclosing party, this third party will not be bound by confidentiality unless it too signs a contract. Thus it is important to understand if any other parties will need to be brought in to fulfill a confidential agreement.
  2. Confidentiality agreements are only as strong as a court rules they are. One should not simply assume that confidentiality agreement’s power is unchallengeable. If a dispute regarding such an agreement is brought to court, the party desiring to enforce confidentiality is the one burdened with proving that a breach of contract and subsequent injury occurred. If the terms of such a contract seem unfair or unreasonable to the court, the ruling may go against the disclosing party.
  3. The nature of “confidentiality” can be disputed. Confidential information must be proven to be so. If the party disclosing the sensitive information cannot prove that such information is extraordinary or unique, then a court is unlikely to enforce a confidentiality agreement related to it.
  4. Information obtained by certain means cannot be covered by confidentiality agreements. This includes information that a party had prior knowledge of, information that was received from a source other than the disclosing party, and information that is available to the general public.

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