Key Takeaways

  • The primary purpose of a confidentiality agreement (or NDA) is to protect sensitive information, such as trade secrets, client data, or business strategies.
  • NDAs can be unilateral, mutual, or multilateral, depending on the number of parties and the direction of confidentiality obligations.
  • Key provisions include the definition of confidential information, exclusions, permitted disclosures, obligations, and remedies for breach.
  • NDAs are vital in protecting intellectual property, especially before filing patents or during licensing and investment discussions.
  • Written NDAs are more enforceable than oral or implied agreements, and tailored drafting ensures coverage of specific business needs.
  • Businesses across industries—from startups to large corporations—rely on NDAs to secure information during mergers, partnerships, and employment relationships.

The purpose of a confidentiality agreement, which is also referred to as a nondisclosure agreement or NDA, is to protect information exchanged between two or more parties. Anyone who signs a confidentiality agreement is promising to keep the relevant information secret.

Confidentiality agreements are often used to protect details of new products, client lists, details of marketing campaigns, and information regarding distinctive manufacturing procedures. By using an NDA, a company can keep its trade secrets private. Moreover, if one party to the agreement fails to uphold its promise, the other party will have the option to take legal action and possibly to sue.

Types of Nondisclosure Agreements

  • Nondisclosure agreements can be reciprocal contracts, which means that all parties involved must uphold the privacy of the information.
  • They can also be unilateral contracts, whereby only one party is required to keep the relevant information private.
  • Mutual nondisclosure agreements are beneficial when both parties involved will be using the restricted information, for example, in the case of inventor groups.
  • Standard unilateral NDAs, which are most frequently seen in the area of innovation, are utilized when just one party will be conveying the restricted information. This might be to a possible investor or a licensee.

Common Uses of Confidentiality Agreements

Confidentiality agreements are widely used in a variety of business and professional settings. Common scenarios include:

  • Employment Relationships – Employees may be asked to sign NDAs to prevent them from disclosing company secrets, formulas, or proprietary processes.
  • Business Partnerships – When two companies collaborate, they may exchange sensitive marketing plans, pricing strategies, or customer data.
  • Mergers and Acquisitions – NDAs ensure that due diligence information, such as financial statements or trade secrets, remains secure.
  • Investor Discussions – Startups often require potential investors to sign NDAs before sharing prototypes, business models, or future growth strategies.
  • Creative Industries – Writers, designers, or software developers use NDAs to protect unique ideas before pitching or licensing them to others.

By setting clear expectations, NDAs reassure all parties that information disclosed in these contexts will remain secure.

The Importance of Confidentiality Agreements

If you are planning to refer to your important information as a trade secret, then it is essential that you take measures to maintain the confidentiality of that information. Therefore, a contract that requires the receiver of the information to uphold its confidentiality is crucial. As soon as a trade secret becomes known, then it loses its trade secret status.

An NDA can be used to safeguard any kind of information that is not widely known. Under a nondisclosure agreement, the recipients of the information are required to keep that information private. It also makes it illegal for them to pass that information on in any way that would result in the information no longer being a trade secret.

Key Clauses in Confidentiality Agreements

A well-drafted confidentiality agreement typically includes:

  1. Definition of Confidential Information – Specifies what materials, data, or knowledge are covered.
  2. Exclusions – Information already public or lawfully obtained elsewhere may be excluded.
  3. Obligations of the Receiving Party – Outlines how the recipient must handle, store, and limit use of the information.
  4. Permitted Disclosures – Identifies exceptions, such as legal compliance or disclosures to advisors under similar obligations.
  5. Duration of Obligation – Establishes how long confidentiality must be maintained (commonly two to five years, though trade secrets may require indefinite protection).
  6. Remedies for Breach – Provides legal options, including injunctions or damages, if the agreement is violated.

Including these clauses ensures enforceability and clarity, minimizing disputes over what qualifies as confidential

Creating a Confidentiality Agreement

  • When drawing up a nondisclosure agreement, you are establishing a private relationship with the other party involved.
  • Typically, these agreements must be made in writing.
  • Some courts in certain jurisdictions have allowed for the oral establishment of confidential agreements.
  • Other courts accept that actions can be seen as proof of the establishment of such a confidential agreement.
  • However, a party should never solely depend on actions or on an oral agreement, as a court may not enforce it.

Tailoring NDAs to Your Needs

While many businesses use template NDAs, tailoring the agreement to specific circumstances provides stronger protection. For example:

  • Industry-Specific Provisions – Technology companies may add clauses addressing source code, while healthcare organizations must account for HIPAA compliance.
  • Employee vs. Contractor NDAs – Contractors may require narrower restrictions than full-time employees.
  • One-Time vs. Ongoing Relationships – An NDA for a single project may differ significantly from one covering long-term collaborations.

Careful customization ensures the NDA addresses your unique risks while avoiding overly broad restrictions that might make the agreement unenforceable in court

Oral Agreements Versus Written NDAs

It is extremely hard, and sometimes impossible, to prove the existence of an oral confidentiality agreement. It is equally difficult to prove that past actions implied the establishment of an agreement because both parties might have conflicting stories. Generally, if a party claims the existence of an oral agreement, the case will be judged in favor of the person who is believed.

Therefore, it is best to avoid this situation from occurring by trying to get the agreement in writing. If necessary, you could dilute the terms slightly and make the agreement simple to get a signature. In fact, although a straightforward NDA seems more accessible, it could leave the party providing the information with more rights.

For instance, a simple NDA might not contain any terms that would relieve the recipient of his or her duty to keep the trade secret in the case that secret information becomes publicly known. In a more complex NDA, this is a provision that's typically included.

Enforceability and Legal Considerations

Courts generally favor written confidentiality agreements because they clearly demonstrate the parties’ intent. While oral or implied agreements may be recognized, proving their terms is difficult and often unreliable.

Enforceability may depend on:

  • Reasonableness of Terms – Courts may strike down NDAs that are overly broad or vague.
  • Jurisdictional Rules – Some states impose limits on the duration or scope of NDAs, especially in employment settings.
  • Public Policy Concerns – NDAs cannot be used to conceal illegal activity or prevent whistleblowing.

Understanding these factors helps businesses draft agreements that balance legal strength with fairness.

NDAs and Patents

  • If you have an invention but have not yet applied for a patent, creating a confidentiality agreement is crucial.
  • Even if you have already filed the patent application, you can still get the nondisclosure agreement signed.
  • You will have taken the first steps by creating the confidentiality agreement. However, your patent rights will not be established until the patent application is approved.
  • Therefore, a confidentiality agreement is necessary to maintain secrecy until the patent is approved.
  • Moreover, while revealing an invention, it's also possible that you will reveal marketing plans and other details not outlined in the patent application. These details could also be considered a trade secret.

The Role of NDAs in Protecting Trade Secrets

Trade secrets, unlike patents, remain protected indefinitely as long as they are not publicly disclosed. NDAs are central to maintaining this secrecy. For example, a beverage company may rely on NDAs with employees and suppliers to safeguard its formula.

If trade secrets are exposed without protection, the owner may lose the ability to enforce rights. NDAs therefore act as the first line of defense, allowing businesses to:

  • Control how confidential information is shared internally and externally.
  • Preserve competitive advantage in the marketplace.
  • Establish a legal basis for action if misappropriation occurs.

For businesses relying heavily on proprietary processes or formulas, NDAs are as critical as patent applications.

Frequently Asked Questions

1. What is the purpose of a confidentiality agreement?

The purpose is to protect sensitive business or personal information from unauthorized disclosure, preserving trade secrets and maintaining trust between parties.

2. How long does a confidentiality agreement last?

The duration varies—some cover a set term (two to five years), while others, especially those involving trade secrets, may last indefinitely.

3. Can confidentiality agreements be enforced in court?

Yes, provided they are reasonable, clear, and compliant with jurisdictional laws. Courts are less likely to enforce vague or overly broad NDAs.

4. What happens if someone breaches a confidentiality agreement?

The disclosing party may seek remedies such as monetary damages, injunctions to stop further disclosure, or other equitable relief.

5. Do I always need an NDA for business discussions?

Not always, but they are recommended when sensitive, non-public information will be shared, such as during partnerships, investments, or intellectual property discussions.

If you need help with establishing the purpose of 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, Menlo Ventures, and Airbnb.