Confidentiality Agreements

A confidentiality agreement, sometimes called a non-disclosure agreement (NDA) or confidential disclosure agreement (CDA), is used primarily in two contexts. First, companies require their employees and independent contractors to promise not to disclose the company’s confidential information without proper authorization. Second, businesses that are entering into discussions about a possible transaction make promises not to disclose each other’s confidential information that is exchanged during those discussions.

Although they are among the most common business contracts, in our experience many of them are very poorly written and do not adequately protect a business’s confidential information.

Two Prohibitions: Do Not Disclose and Do Not Use

Confidentiality agreements generally should address more than unauthorized disclosure of protected information; they also should prohibit the use of the confidential information for unauthorized purposes. CDA’s used in contracts with employees and independent contractors should prohibit the use of the protected information for any purpose other than doing the job that the employee or independent contractor was hired to do. Similarly, a CDA in the context of a discussion of a possible transaction should prohibit not only unauthorized disclosure of the other company’s information but also the use of the information for any purpose other than those discussions.

Reasonable Restrictions on the Definition of Confidential Information

Like other restrictive covenants, confidentiality obligations must have reasonable restrictions to be enforceable, including a reasonably restricted scope. Most confidentiality agreements have a number of common sense exclusions – The protected information does not include information that the recipient of the information possessed before receiving it from the disclosing party; information that is known to the public or perhaps reasonably available to the public (whether or not it is actually known to the public); information that the recipient also learns from another source that has the right to disclose it; and sometimes information that the recipient develops on its own, without the benefit of the other party’s confidential information.

There must also be a reasonable restriction on the period for which disclosure and use are prohibited, but before addressing that topic, we need to discuss one other.

The Relationship Between Trade Secrets and Confidential Information

A trade secret is a form of intellectual property. A person who has information that has independent economic value because of the fact that it is not known to the public and cannot be readily obtained by the public, and that person uses reasonable efforts to maintain the secrecy of that information, can sue people who “misappropriate” it, i.e., people who acquire the information through improper means or disclose or use the information without authorization. Unlike the other primary forms of intellectual property rights (patents, copyrights, and trademarks), a trade secret never expires. It remains a trade secret, and the owner can enforce its trade secret rights, for as long as the information continues to meet the definition of a trade secret.

In contrast, most confidentiality agreements do not require that information have economic value for it to be protected. Instead, the secrecy of the information is enough for it to meet the definition of “confidential information” and to be covered by a CDA.

Reasonable Time Limitation

Like non-compete agreements, confidentiality agreements generally cannot last forever (at least in many jurisdictions). In order to be enforceable, the obligations of confidentiality and non-use must expire after some reasonable period, with reasonableness determined in light of the type of information being protected. But there is an exception – because a trade secret can last forever, to the extent the definition of “confidential information” includes trade secrets, the obligations can also last forever. But there’s another aspect to the dichotomy – if the owner of a trade secret does not employ reasonable efforts to maintain its secrecy, the trade secret rights will be lost, and confidentiality agreements are one of the most important measures the owners of trade secrets use to protect those rights. So, if a confidentiality agreement encompasses information that is not a trade secret, if it lasts too long, it may be held unenforceable. On the other hand, if it encompasses trade secrets and doesn’t last long enough, the owner of the information may lose its trade secret rights.

These and other complicated details can be involved in a confidentiality agreement, issues that may not be immediately obvious. If you are presented with a confidentiality agreement to sign, contact us for a review. If you need to make sure your own confidentiality agreements are enforceable and protect your valuable proprietary information, contact use to review and revise your forms.

Defend Trade Secrets Act of 2016 (or DTSA)

Until 2016, trade secret law was almost entirely a matter of state law, but that changed with the DTSA, a statute that created federal penalties for the misappropriation of trade secrets. The DTSA also has very specific requirements for certain types of confidentiality agreements, and our lawyers can make sure your agreements comply.