| There are general applications of these kinds of contractual clauses and there are specific versions or variations of the same. Specialized types of confidentiality agreements are often used in connection with:
Mergers and acquisitions
Certain finance or lending transactions
Joint ventures
Cross-border acquisitions
This post will only address the general principles and that govern and inform the drafting and effect of confidentiality and nondisclosure clauses. |
Nearly all businesses have valuable confidential information and, for many, confidential information is a dominant asset. Protection of confidential information within an organization is usually a vital business priority.
Companies also share, receive, and exchange confidential information with customers, suppliers, and other parties in the ordinary course of business and in a wide variety of commercial transactions and relationships. These transactions and relationships include when companies enter into:
Consulting engagements.
Service agreements.
Strategic alliances.
Contractual confidentiality obligations are fundamental and necessary to help protect the parties that disclose information in these situations. Depending on the circumstances, these obligations can be documented in either:
A free-standing confidentiality agreement (also known as a nondisclosure agreement or NDA).
A confidentiality clause within an agreement covering the transaction.
Why Is It Necessary to Have Written Confidentiality Clauses or Agreements?
Some businesses may not appreciate the importance of entering into written confidentiality agreements, preferring to rely on informal understandings and arrangements. However, there are numerous reasons to enter into written confidentiality agreements, such as:
Avoiding confusion over what the parties consider to be confidential.
Allowing more flexibility in defining what is confidential.
Delineating expectations regarding treatment of confidential information between the parties, whether disclosing or receiving confidential information.
Enforcing written contracts is easier than oral agreements.
Memorializing confidentiality agreements is often required under upstream agreements with third parties (for example, a service provider's customer agreement may require written confidentiality agreements with subcontractors).
Maximizing protection of trade secrets, because under state law this protection can be weakened or lost (deemed waived) if disclosed without a written agreement.
Covering issues that are indirectly related to confidentiality, such as non-solicitation.
Maintaining standards that are expected of most commercial transactions and relationships.
Mutual, Unilateral, and Reciprocal Forms
Depending on the type of transaction or relationship, only one party may share its confidential information with the other, or the parties may engage in a mutual or reciprocal exchange of information. There are distinct forms of confidentiality agreements to accommodate these different arrangements. Unilateral Confidentiality Agreements Unilateral confidentiality agreements contemplate that one of the parties will disclose confidential information to the other party, for example, where a consultant will have access to the client's business information in the course of an engagement. In unilateral confidentiality agreements, the nondisclosure obligations and access and use restrictions will apply only to the party that is the recipient of confidential information but the operative provisions can be drafted to favor either party.
Mutual Confidentiality Agreements
In mutual confidentiality agreements, each party is treated as both a discloser of its own confidential information and a recipient of the other party's confidential information (such as where two companies form a strategic marketing alliance). In these situations, both parties are subject to identical nondisclosure obligations and access and use restrictions for information disclosed by the other party.
Even in transactions and relationships where the confidential information to be exchanged is not of equivalent kind or value, the parties may still agree to use a mutual confidentiality agreement. When preparing or reviewing a mutual confidentiality agreement under these circumstances, each party should consider whether it will primarily disclose or receive information, and the relative value and sensitivity of the information to be exchanged, and adjust the operative provisions accordingly.
For example, an outsourcing customer should ensure that the definition of confidential information is as broad as possible and that the recipient is subject to strict nondisclosure obligations. The service provider, on the other hand, will typically want a narrower definition and less restrictive obligations.
In some circumstances, the parties may share certain confidential information with each other but not on a mutual basis. Instead of entering into a fully mutual confidentiality agreement, the parties enter into a reciprocal confidentiality agreement, in which the scope and nature of the confidential information that each party will disclose is separately defined and their respective nondisclosure obligations and access and use restrictions may differ accordingly. For example, in a typical outsourcing transaction, the service provider:
May be required to disclose only limited technical information and pricing details to the customer.
Will be given extensive access to sensitive information about the customer's business methods and processes.
In this situation, the customer may be especially concerned that this information is not shared with the service provider's other customers, which may be the customer's competitors.
Limitations and Risks of Confidentiality Agreements Confidentiality agreements are very useful to prevent unauthorized disclosures of information but they have inherent limitations and risks, particularly when recipients have little intention of complying with them. These limitations include the following:
Once information is wrongfully disclosed and becomes part of the public domain, it cannot later be "undisclosed."
Proving a breach of a confidentiality agreement can be very difficult.
Damages for breach of contract (or an accounting of profits, where the recipient has made commercial use of the information) may be the only legal remedy available once the information is disclosed. However, damages may not be adequate or may be difficult to ascertain, especially when the confidential information has potential future value as opposed to present value.
Even where a recipient complies with all of a confidentiality agreement's requirements, it may indirectly use the disclosed confidential information to its commercial advantage.
Despite these limitations, the commercial benefits of disclosing the information under a confidentiality agreement normally outweigh the risks. To protect its confidential information most effectively, the disclosing party should carefully manage the disclosure process and have a contingency plan for dealing with unauthorized disclosures by the recipient.
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