Article
Confidentiality and Nondisclosure Agreements Explained
In a confidentiality or non-disclosure agreement, parties agree to keep private nonpublic information received during a business relationship, including in the early stages of exploring a potential business relationship. The need for confidentiality and non-disclosure agreements arises in a wide variety of contexts, including mergers and acquisitions, joint ventures, sales and services, employment, and intellectual property licensing.
Once parties have established an ongoing business relationship, non-disclosure provisions are often negotiated and incorporated into the relevant transaction documents, which may replace stand-alone agreement, and are incorporated into the larger contract management workflow for the remainder of the contract lifecycle.
This article outlines essential information regarding confidentiality and non-disclosure agreements, including a succinct definition, the differences and scope of these agreements, and a downloadable confidentiality agreement template.
What is a confidentiality agreement?
Confidentiality agreements protect parties entering into business relationships or transactions that require the exchange of sensitive, private information otherwise inaccessible to third parties. Confidential information is the heart of any confidentiality agreement. For the agreement to adequately protect against unwanted disclosure, the parties must clearly describe the information or types of information they wish to protect and the scope of each party’s non-disclosure obligation.
The provider of confidential information typically wants to define its confidential information as broadly as possible to include all material shared with the recipient. The recipient, on the other hand, must be careful to carve out any information from the definition that the recipient may later be legally required to disclose; otherwise, the recipient risks choosing between breaking the law and breaking its confidentiality obligation.
Parties may also wish to expressly carve out personal data from the definition of confidential information and negotiate separate terms that govern the use and protection of such data, as applicable privacy and data security laws tend to be much stricter than general confidentiality requirements.
Is a non-disclosure agreement the same as a confidentiality agreement?
Non-disclosure agreements (NDAs) and confidentiality agreements are both legal contracts between two or more parties that specify the criteria for maintaining the confidentiality of certain information. Whereas NDAs are often used in business and legal settings to protect trade secrets, client lists, and financial data, confidentiality agreements are typically devised in employment or personal situations to protect sensitive information.
Confidentiality and non-disclosure agreements typically:
- Describe the context for the parties’ agreement, referencing any related transactional documents.
- Define the specific information to remain confidential.
- Outline the parameters for the parties’ use of confidential information.
Do confidentiality agreements expire?
Most confidentiality and non-disclosure agreements provide a specific term of non-disclosure (e.g., one to three years). Some confidentiality and non-disclosure agreements, on the other hand, are open-ended in duration, although they will not be legally enforceable to the extent the confidential information becomes public. Because a confidentiality or non-disclosure covenant will not be enforceable if the confidential information enters the public domain, parties often qualify that the confidentiality obligation applies only while the information remains nonpublic.
Having a reasonable duration is particularly important in employment-related agreements. Employers must balance their legitimate business need for confidentiality against employees’ rights to engage in protected concerted activity, such as discussing the terms and conditions of their jobs. For example, the duration of employees’ confidentiality obligations related to an internal investigation may be deemed as overly restrictive if it exceeds the duration of the investigation. In addition, various states have laws that limit the ability of employers to require their employees to sign non-compete agreements, which are generally used to prevent the use of information or know-how by former employees in a way that may unfairly benefit a competitor.
What are the limits of confidential information?
Confidentiality and non-disclosure agreements may include a unilateral covenant governing one party’s access to and use of confidential information, or they may contain mutual obligations of the parties to keep each other’s confidential information private. The typical confidentiality obligation imposes a duty to use confidential information only for its intended purpose. The agreement may allow limited disclosure of confidential information to designated agents or advisers if these third parties are made aware of the duty of confidentiality and acknowledge their duty to observe it. The duty of confidentiality generally requires the non-disclosing party to keep the information secure, exercising the same level of care as that used for its own confidential information. A confidentiality or non-disclosure agreement may prohibit confidential information from being copied and may require confidential material to be returned or destroyed when no longer needed or the agreement is terminated.
Standstill
A standstill provision prevents the party receiving confidential information of a company from engaging in a hostile acquisition transaction or taking steps towards a hostile acquisition transaction for a period (often one to three years) or, if applicable, for so long as the recipient party holds at least a certain percentage of that company’s shares (typically 5%).
As an example, standstill provisions are common in private investments in public equity (PIPE) transactions when PIPE investors receive material confidential information, or in acquisition transactions when acquirers receive confidential information, in each case prior to the parties entering into definitive transaction documents. The recipient party may argue that a standstill provision isn’t necessary due to the restrictions placed on its use of confidential information. However, the party providing confidential information may argue that it is easier to prove that a standstill provision has been breached than it is to prove that its confidential information was wrongfully used in formulating the terms of a hostile transaction.
Equitable relief
Confidentiality and non-disclosure agreements frequently provide that money damages alone are an inadequate remedy for breach of the agreement, so equitable relief (including injunctions) is deemed the more appropriate enforcement mechanism.
How do you write a confidentiality agreement?
[Download this sample mutual non-disclosure and confidentiality agreement that can be adapted for your individual needs.]
Confidentiality agreement template
A reciprocal, or “mutual,” non-disclosure and confidentiality agreement (also commonly titled simply a “non-disclosure agreement” or a “confidentiality agreement”) provides protection to individuals and companies from the misappropriation or unauthorized disclosure of information revealed in confidence or for a limited purpose. It is used in situations where both parties to an agreement contemplate disclosing company-private information in connection with a commercial opportunity, collaboration, or proposed transaction. Download the full confidentiality agreement sample here.
WHEREAS, the Parties desire to explore further potential opportunities or transactions involving [Describe Opportunity or Transaction Generally] (the “Purpose”);
WHEREAS, in connection with such [Purpose] [proposed commercial relationship], each of the Parties wishes to receive a disclosure of valuable proprietary or confidential information of the other, and is willing to ensure that such information will be treated as confidential and used only as permitted by the terms of this Agreement.
NOW THEREFORE, in consideration of the mutual covenants, promises, representations, and warranties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
[Download this sample mutual non-disclosure and confidentiality agreement that can be adapted for your individual needs.]
1. Definitions
For purposes of this Agreement, the following terms shall have the meanings set forth below:
1.1 “Affiliate” means with respect to any entity, any other entity that controls, is controlled by or is under common control with such first entity.
1.2 “Confidential Information” means information furnished by the disclosing party, whether orally, in writing, electronically, in other tangible form or format, or through or by observation, and identified as confidential or proprietary or otherwise disclosed in a manner such that a reasonable person would understand its confidential nature.
(a) Confidential Information includes, without limitation,
(i) information that is related to products, product plans, services, service plans, market studies, reports, documentation, drawings, computer programs, software code (object or source codes), inventions (whether patentable or not), concepts, designs, flow charts, diagrams, product specifications, formulas, data, schematics, customer and supplier lists, price lists, designs, creations, models, business materials, work-in-progress, methods of manufacture, technical information, know-how, improvements, and Trade Secrets (as defined in Section 1.4 below);
(ii) all information relating to the disclosing party or the business, business plans, markets, condition (financial or other), operations, assets, liabilities, results of operations, forecasts, strategies, cash flows or prospects of the disclosing party (whether prepared by the disclosing party, its advisors or otherwise), historical or projected financial statements, budgets, sales, capital spending budgets, plans, or identities of key personnel; and
(iii) any information about or concerning any third party (which information was provided to the disclosing party subject to an applicable confidentiality obligation to such third party) in each case disclosed or furnished by or on behalf of the disclosing party before, on or after the date hereof, whether or not marked or designated as confidential or proprietary.
(b) Notwithstanding the foregoing, information shall not be considered Confidential Information for purposes of this Agreement, which can conclusively be demonstrated by independent written files or records if:
(i) the receiving party or its Affiliates already possess the information without an obligation of confidentiality at the time of disclosure;
(ii) the information is or becomes generally available to the public other than as a result of an unauthorized disclosure of such information or a violation of this Agreement by the receiving party or its Affiliates;
(iii) the information has been or is made available to the receiving party or its Affiliates by a third party that, to the receiving party’s or its Affiliates’ knowledge, is not under an obligation of confidentiality to the disclosing party or its Affiliates; or
(iv) the information is independently developed by the receiving party or its Affiliates without violating any obligations in this Agreement.
1.3 “Records” or “records” means and includes writings, spreadsheets, presentations, web pages, emails, voicemails, drawings, graphs, charts, photographs, sound recordings, optical or magnetic disks, and data compilations in whatever form recorded or stored from, which information can be obtained and/or translated, if necessary, into reasonably usable form, and any reproductions thereof.
1.4 “Trade Secret(s)” means any information (a) that is actually secret; (b) where the disclosing party has taken reasonable measures to maintain its secrecy; and (c) where independent economic value is derived from that secrecy.
2. Mutual obligations of confidentiality and non-disclosure
For a period of [Number (#)] years following the disclosure of Confidential Information, and for an indefinite period of time following the disclosure of Trade Secrets, the receiving party shall:
2.1 receive and hold the Confidential Information in strict confidence;
2.2 take such steps as may be reasonably necessary to prevent the disclosure of Confidential Information using not less than the same degree of care that the receiving party uses to prevent the unauthorized use, dissemination, or publication of its own most valuable confidential and proprietary information (but with at least the same degree of care used by a reasonably prudent business person);
2.3 not disclose such Confidential Information to any third party for any purpose whatsoever without (a) the prior written approval from the disclosing party; and (b) the agreement on the part of such third party to be bound by the restrictions on use and non-disclosure set forth in this Agreement; provided, however, that the receiving party may disclose Confidential Information to the receiving party’s Representatives (as defined herein), who are bound by the confidentiality and use provisions of this Agreement;
2.4 not permit access to the Confidential Information to anyone other than employees, officers, directors, advisors, and consultants of the Parties or their Affiliates (collectively, the “Representatives”) and then, only to the extent those individuals (a) need to know the Confidential Information to carry out the Purpose; (b) are informed by the receiving party of the confidential nature of the Confidential Information; and (c) are bound by the terms of their employment or engagement to treat the Confidential Information in a manner consistent with the terms of this Agreement;
2.5 not disclose, or permit any of its Representatives to disclose, without the prior written consent of the disclosing party, to any other person the fact that the Confidential Information has been made available, that discussions or evaluations are taking place concerning the Purpose, or any of the terms, conditions, or other facts with respect thereto;
2.6 acknowledge that the Confidential Information is, and will at all times remain, the exclusive property of the disclosing party; and
2.7 use the disclosing party’s Confidential Information only for the strictly limited Purpose and for no other purpose whatsoever. Notwithstanding the foregoing provisions of this Section 2, the receiving party is specifically prohibited from (a) using, directly or indirectly, any of the Confidential Information furnished to it hereunder for its own benefit or for the benefit of others, except for the Purpose as set forth above; or (b) creating any improvements, modifications, or derivative or related works or materials which incorporate or utilize, directly or indirectly, any Confidential Information (such improvements, modifications, derivative or related works, if any, receiving party acknowledges and agrees shall be deemed Confidential Information of the disclosing party).
3. Compelled disclosure
Notwithstanding the foregoing, if the receiving party is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand, or other process) to disclose any Confidential Information, it will provide the disclosing party with prompt notice of such request so that the disclosing party may seek an appropriate protective order and/or waive compliance herewith. If, in the absence of such protective order or waiver, the receiving party is compelled to disclose Confidential Information to any tribunal or other authority, the receiving party shall (a) disclose only that part of the Confidential Information that, in the opinion of its legal counsel, is required to be disclosed; (b) deliver to the disclosing party written notice of the Confidential Information to be disclosed as far in advance of its disclosure as is practicable; and (c) use commercially reasonable efforts to obtain an order or other reliable assurance that confidential treatment will be accorded to such portion of the Confidential Information required to be disclosed.
4. Return of materials
Upon request of the disclosing party, in the disclosing party’s sole discretion, the receiving party shall either return to the disclosing party or destroy all documents and other writings supplied by the disclosing party, together with all copies of any such documents or other writings, and shall certify to the return or destruction of all tangible Confidential Information and references thereto and the destruction of any references thereto on magnetic or other intangible media. In addition, that portion of the Confidential Information which consists of analyses, compilations, data, studies, or other documents prepared by the receiving party or its Representatives will be immediately destroyed at the written request of the disclosing party and such destruction will be confirmed to the disclosing party in writing. The return to the disclosing party or destruction of such Confidential Information shall not relieve the receiving party of any obligation of confidentiality contained herein.
5. Injunctive relief
The Parties acknowledge that money damages will be both incalculable and an insufficient remedy for a breach of this Agreement by either Party. Accordingly, the Parties agree that, in the event of any breach of this Agreement, the non-breaching Party shall be entitled to equitable relief, including, without limitation, injunctive relief or specific performance. If either Party elects to seek injunctive relief for breach of this Agreement, such election shall not preclude the non-breaching Party from pursuing other legal remedies at law. Notwithstanding Section 10.5, below, regarding choice of forum, the Parties agree that equitable relief may be sought in any court of competent jurisdiction for the sake of expediency.
6. No representation or warranty
The Parties understand, acknowledge, and agree that neither the disclosing party nor its Representatives is making any representation or warranty as to the accuracy, reliability, or completeness of any Confidential Information and that neither the disclosing party nor its Representatives shall have any responsibility or liability (including, without limitation, in contract, tort, or otherwise) to the receiving party or any of its Representatives arising from use or reliance on the Confidential Information. THE DISCLOSING PARTY PROVIDES THE INFORMATION SOLELY ON AN “AS IS” BASIS.
7. Term
The term of this Agreement shall be [Number (#)] years from the Effective Date unless extended or terminated earlier in accordance with the provisions of this Agreement. Either Party may terminate this Agreement by providing thirty (30) days written notice to the other. Neither the termination nor expiration of this Agreement shall affect the obligations of the Parties set forth in Section 2, Mutual Obligations of Confidentiality and Non-Disclosure.
8. Notices
Except as may be otherwise provided herein, all notices, requests, waivers, and other communications made pursuant to this Agreement must be in writing and are conclusively deemed to have been duly given (a) when hand delivered to the other Party; (b) when received if sent by facsimile or electronic mail to the number or the email address set forth below, provided that the sending Party receives a confirmation of delivery; (c) three (3) business days after deposit in the U.S. mail, with first class or certified mail, receipt requested, postage prepaid, and addressed to the other Party; or (d) forty-eight (48) hours after deposit with an internationally recognized overnight delivery service, postage prepaid, addressed to the other Party as set forth below with next business-day delivery guaranteed, provided that the sending Party receives a confirmation of delivery from the delivery service provider. A Party may change or supplement the addresses, facsimile numbers, and email addresses provided in its signature block below, or designate additional addresses, facsimile numbers, or email addresses, for purposes of this Section by giving the other Party written notice of the new address, facsimile numbers, or email addresses in the manner set forth above.
If to Party A: [Address and electronic coordinates]
If to Party B: [Address and electronic coordinates]
9. No binding agreement for transaction
Unless and until a definitive agreement is entered into, neither Party will be under any legal obligation of any kind whatsoever to proceed with respect to a potential business transaction or venture in whole or in part or to continue discussions relating thereto by virtue of (a) this Agreement; or (b) any written or oral expression with respect to a potential transaction by either Party or any of their respective Representatives. The Parties further understand and agree that they shall not have any claims whatsoever against the other Party or the other Party’s Representatives arising out of or relating to the possible business relationship or any potential or actual transaction unless otherwise provided in a definitive agreement.
10. Miscellaneous
10.1 This Agreement shall be binding upon the successors and assigns of the Parties hereto.
10.2 No patent, copyright, trademark, or other proprietary right is licensed, granted, or otherwise transferred directly, or by implication, estoppel, or otherwise, by this Agreement or any disclosure hereunder, except for the right to use such information in accordance with this Agreement.
10.3 It is understood and agreed that no failure or delay by either Party in exercising any right, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power, or privilege thereunder.
10.4 The laws of the [State/Commonwealth] of [State], without giving effect to its conflicts of law principles, govern all matters arising out of or relating to this Agreement, without limitation, its validity, interpretation, construction, performance, and enforcement.
10.5 Each Party hereto unconditionally consents to the personal jurisdiction of the state or federal courts located within the [Jurisdiction] for any actions, suits, or proceedings arising out of or relating to this Agreement and, subject to and except as provided in Section 5 hereof regarding equitable actions, each Party agrees not to commence any action, suit, or proceeding relating thereto except in such courts. Each Party unconditionally waives and agrees not to plead in any such court that any such action, suit, or proceeding brought in any such court has been brought in an inconvenient forum.
10.6 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of the other provisions of this Agreement, which shall remain in full force and effect. If any of the covenants or provisions of this Agreement shall be deemed to be unenforceable by reason of its extent, duration, scope, or otherwise, then the Parties contemplate that the court making such determination shall reduce such extent, duration, scope, or other provision, and shall enforce them in their reduced form for all purposes contemplated by this Agreement.
10.7 This Agreement embodies the entire understanding and agreement between the Parties with respect to the subject matter hereof and supersedes any prior written or oral understandings and agreements relating thereto.
10.8 This Agreement may not be amended or modified except in writing executed by both Parties. This Agreement and any such written amendment or modification may be executed in counterparts.
10.9 Neither Party shall assign this Agreement or any rights provided under this Agreement without the prior written consent of the other Party. Any such attempted assignment shall be null and void. Neither Party shall delegate or subcontract any obligation or performance under this Agreement without the prior written consent of the other Party, and any such attempted delegation or subcontract shall be void.
10.10 No agency or partnership relationship is created between the Parties by this Agreement.
IN WITNESS WHEREOF, each the Parties hereto has caused this Agreement to be executed by a duly authorized representative as of the Effective Date.
| PARTY A By: _________________ Title: ______________ |
PARTY B By: _________________ Title: ______________ |
[Download this sample mutual non-disclosure and confidentiality agreement that can be adapted for your individual needs.]
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