Confidentiality agreements: Do they work?

People sign non-disclosure agreements for different reasons. A non-disclosure agreement (also called a confidentiality agreement or a confidential disclosure agreement) is often a critical part of a legal settlement, a condition for employment, or the first step to establishing a business relationship.

You need to be very careful in how you define confidential information, how you establish the confidential relationship, and how you enforce the agreement in order to protect your information. This article will help you make confidentiality agreements work for you.

What is confidential?

A good non-disclosure agreement starts with a clear definition of confidential information. For example, a defense contractor’s employee confidentiality agreement may specify that everything about the nature of the employee’s work is confidential: her projects, her work product—even the fact that she is employed by the contractor.

Whereas, a non-disclosure agreement that an investor signs to evaluate an investment in a new startup may specify that only information about the startup’s products is confidential. The investor’s agreement may further specify that confidential information must also be given to the investor in writing and clearly marked ‘confidential.’

A clear definition avoids confusion as to what the recipient needs to keep confidential.

Even a broad definition can still be clear. For example, the defense contractor can identify all information that each employee receives in the course of her job must be kept confidential. Alternatively, the investor’s NDA is much more specific. Either way, the non-disclosure agreement must provide a clear definition that specifies what exactly is confidential.

A good definition of confidential information also should include what is not confidential. Several confidentiality agreements include provisions excluding information that is made public by the owner or information that law enforcement needs. It is unreasonable to draft a confidentiality agreement that prevents disclosure in all cases and rational exclusions from a non-disclosure agreement to help avoid needless litigation. For example, if the startup were to publish a report that included information it had disclosed to the investor, it is unlikely that any court would enforce the non-disclosure agreement after the fact.

Why grant access?

Do not take non-disclosure agreements lightly. Receiving confidential information is risky and should be done for a specific purpose. For example, the startup would likely limit the investor’s use of confidential information to her analysis of the investment opportunity. The startup may even require the investor to return the information upon completion of her diligence to limit its use to the defined purpose of the non-disclosure agreement.

Confidential information is a kind of intellectual property and a non-disclosure agreement is a kind of license to use that intellectual property. For example, a financial services firm may employ analysts and give them access to a custom database of financial information. Per the terms of their employment, the employees cannot disclose that information to anyone else. The financial services firm can also limit the employee’s use of that information to providing financial services for the firm’s clients. The employees could not use what they learn from the database for their own investment or for any work outside the scope of employment with the firm.

Immediately useful

An executed non-disclosure agreement is useful in its own right. If you talk with an investor about your invention before you file a patent application, then a confidentiality agreement is proof to the patent office that you did not disclose the invention publicly. Employee confidentiality agreements allow employers to show compliance with regulations requiring privacy. Not every non-disclosure agreement exists just to be enforced.

Breach of confidentiality does happen, and that is when non-disclosure agreements need to work. If the investor shares the startup’s market research with its competitors what damages can the startup claim? All the investment it did not get? The usefulness of a non-disclosure agreement is not in punishing breach of confidentiality. Instead, think of your non-disclosure agreement as clear proof of a relationship—and a big stick to shut someone up.

When drafting a non-disclosure agreement, including provisions allowing equitable remedies: the ability to get an injunction to prevent public disclosure. That injunction will allow the court to enforce an order requiring that the recipient keep your information confidential. For example, you hire an engineer to design a component for your new, confidential machine. If you find out that the engineer is about to show that machine at a conference, you can serve the engineer with a court order because the non-disclosure agreement he signed allows you to get an injunction in advance of public disclosure. Keep in mind the injunction is the last resort and can only be obtained when there is real evidence that the non-disclosure agreement is about to be breached.

Proper enforcement of a non-disclosure agreement starts long before the breach or threat of a breach. It starts before the agreement is signed. Proper enforcement of a non-disclosure agreement starts with how you protect your information. The defense contractor will likely have elaborate security systems, top-of-the-line networks, and even armed guards on-premises. Someone who takes such care of confidential information will have an easier time enforcing a very burdensome non-disclosure agreement. If you cannot prove you secure your confidential information then it will be harder to enforce any non-disclosure agreement.

Make non-disclosure agreements work for you

Non-disclosure agreements work—but only if they are done correctly. Define your confidential information and make sure that you specify what the recipient can use the information for. Include realistic exclusions and make sure to reserve injunctive remedies. Secure your confidential information and document your efforts to keep it secure. Only allow people access to your information if they have a legitimate need and be sure to limit access to the confidential information only to further that need.