Knowing how to draft a confidentiality agreement allows you to create a document that keeps your business information from being shared with another party in the course of operations. In terms of intellectual property (IP), confidentiality agreements can help protect your patent rights. Sometimes, you can draft contracts like these on your own. Every business person should learn the basics.

What Is a Confidentiality Agreement?

A confidentiality agreement is a legally binding contract between two or more entities. One party agrees to keep certain information confidential. Often, the relationship between the parties is employer/employee.

Why Do You Need a Confidentiality Agreement?

Your business can have different kinds of information you need to keep confidential. Some examples are:

  • Customer lists.
  • Private data.
  • Product development ideas.
  • Financial data.

Information is a valuable business asset. Companies must control who has access to it with carefully drafted contracts. Such a document helps prevent employees, partners in a joint venture, and other parties from sharing knowledge with outside entities. Think of it as a shield against the damage that an unauthorized breach of your information can cause, albeit a weak one.

While a confidentiality agreement won't prevent every inappropriate incident of sharing, it can be a powerful deterrent to anyone considering an illegal disclosure of information. The possibility of legal proceedings may be enough to make an unhappy former employee or a competitor rethink a plan to disclose your private information.

How Are Confidentiality Agreements and Non-Compete Agreements Used?

Using a confidentiality agreement together with a non-compete agreement creates another layer of protection for your business. This prevents one party from starting up a business similar to yours after your contract with them has ended.

Business owners should know that state laws generally don't favor the use of non-compete agreements. However, courts will generally enforce them to keep an employee from taking private information gleaned from his or her job duties over to a competing firm or using it in a new business.

When a confidentiality agreement, also known as a confidentiality clause, is used along with a non-compete contract, each part has a specific function.

  • The confidentiality agreement restricts the information that the recipient is able to share. If an employee takes data related to customers' purchasing history, for example, and uses it to try to sell them a new, competing service, this is a breach of the confidentiality agreement.
  • The non-compete agreement keeps the person from competing with the company for a specific length of time within a defined geographic area.

What Are Some Types of Confidentiality Agreements?

  • One-sided agreement: This type of agreement is usually between an employer and an employee who has access to confidential information in the course of his or her duties. An example of a one-sided agreement might be an accountant or bookkeeper who has access to the company's financial data.
  • Joint venture or partnership agreement: In this arrangement, two entities sign a two-sided agreement. Each partner will be disclosing confidential information to the other, so each side must protect itself against illegal disclosure of information.

What Should Be Included in a Confidentiality Agreement?

Confidentiality agreements should include some basic provisions.

  • The definition of the confidential information must be included. This may be the subject of some negotiations. The party disclosing the information will prefer a broad definition, while the party receiving the confidential information wants the definition to be very narrow.
  • The parties must agree to be bound by the agreement. The party disclosing the information must describe in detail how the party receiving the information is to use it.
  • The agreement must clearly state that the party disclosing the information is the owner of the information and will continue to be the owner of it.
  • If the agreement includes any exceptions, they must be spelled out in the contract. An example might be when the information can be made public through a third party or with a court order.
  • The time limitation or term of the agreement should be included in the contract. The length of time should be reasonable, generally not longer than two years.

An NDA template is acceptable in most circumstances, but you should still have it reviewed by your attorney, especially if it is related to an employee's access to highly sensitive content. A particular document may or may not be valid in your state.

If you need help with learning how to draft a confidentiality agreement, 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.