Protecting your business’s confidential information through confidentiality agreements (Part II)
In our previous blogpost we discussed some specific dos and don’ts around employee confidentiality agreements. In part II of this two-part series on confidentiality agreements (or sometimes referred as “nondisclosure agreements”), we will provide an overview of some of the key provisions typically included in any confidentiality agreement, irrespective of form. The verbiage of these provisions will rarely be identical across all confidentiality agreements in place for a business, and often the content will depend on several factors including parties’ bargaining leverage, nature of the information being disclosed, whether information will be shared by one or both parties, relationship between the parties, and the overall transaction being contemplated.
Parties: In identifying parties to the agreement, consider expanding the definition of disclosing party and recipient party to include affiliates of respective parties, if, based on the structure of their business, confidential information will be shared or exchanged with affiliates
Business Purpose: Consider limiting the disclosure or exchange of confidential information to a specific business purpose, which should be defined in the agreement. Clearly identifying the purpose for which information is being disclosed or exchanged, helps restrict use and exchange of confidential information for any other purpose other than the stated purpose.
Definition of confidential information: As discussed in Part I of this series in context of employee confidentiality agreements, including an overbroad provision not tailored to a business's specific needs bears the risk of being rendered unenforceable. However, consider making the definition broad enough to cover not only information specifically disclosed (however disclosed- in writing, electronically, or orally, and whether marked as “confidential”) but also any information derived from such information, and the existence and terms of the agreement itself.
Exclusions: Typical exclusions from the coverage of confidential information include information that already is or becomes public (through no breach by a party under obligations to keep information confidential), was already in the recipient's possession on a non-confidential basis before the parties entered into the confidentiality agreement, is received from a third party that is not bound by any confidentiality obligations to the other party, or is independently developed by the recipient without using the disclosing party’s confidential information. These carve-outs are standard, however, typically the disclosing party will push for narrower exclusions while the recipient will request for broader exclusions.
Non-disclosure obligations: Along with the definition of confidential information, the non-disclosure obligation form the core of the agreement. Typical practice is to include an affirmative duty to keep all information disclosed by one party to another in confidence confidential subject to disclosure only to specific representatives, or with express consent, or as required by law.
Use restrictions: It is typical for a confidentiality agreement to also include use restrictions. This makes sense. If the obligation of recipient is limited to non-disclosure, a recipient may still use the disclosed information internally for its own purposes. It is typical to limit use of the confidential information to the specific purpose for which information is being disclosed or exchanged.
Security requirements: Some confidentiality agreements will include specific security measures the recipient must adopt to safeguard the disclosing party’s confidential information. At a minimum, consider including a provision that requires the recipient to protect the disclosing parties’ confidential information with the same degree of care used to protect its own confidential information—this is a reasonable request and we have received no push back against such a provision.
Survival of nondisclosure obligations: Typically, a pro-discloser confidentiality agreement will require that the confidentiality obligations remain effective for an indefinite period even if the term of the agreement has expired, while a pro-recipient form will try to limit this obligation to anywhere between 1-5 years after termination of the agreement (although information may continue to be protected under federal and state trade secret laws independent of contractual obligations).
Return or destruction of confidential information: Disclosing party will usually push for a provision that requires the recipient to return all confidential information upon the termination of the confidentiality agreement, while a recipient will want the option to destroy any copies of confidential information in its possession at termination rather than returning them. Recipient will particularly want this option when they have combined their own information with that of the disclosing party. If disclosing party agrees to accommodate a request that a provision permitting destruction of copies of confidential information in recipient’s possession be included, disclosing party should consider adding to it that recipient will be required to certify it has destroyed all information in its possession upon request by disclosing party. Also, typically, this provision also includes an exception for retention of copies so far as that may be required by any law or for evidentiary purposes.
Equitable relief: A pro-discloser confidentiality agreement should also include an acknowledgement from the recipient that, it understands the disclosing party will be irreparably harmed from unauthorized disclosure of its confidential information and, therefore, besides any other remedies, it will be entitled to injunctive relief.
The content of the above-described provisions will also turn on whether the agreement being negotiated contemplates a one-way or two-way sharing and exchange of confidential information. In a one-way confidentiality agreement, only the recipient is subject to the nondisclosure obligations and access and use restrictions, while in mutual confidentiality agreements, that is agreements in which both parties will exchange information, the typical practice is to subject both parties to identical non-disclosure obligations and use restrictions.
We often see businesses use free online templates of confidentiality agreements for all their transactions without tailoring the agreements based on recipient, jurisdiction, purposes of use, and the business's overall strategy for securing its confidential information. Our two cents are not to cut corners or scrimp on contracts necessary to protect your business's assets, and your confidential information is an asset. After all, if you do not value your confidential information enough to properly consider how to safeguard it, no one else will.