on February 22, 2012
by Bradley W. Miller

Seven Essential Ingredients Every Confidentiality Agreement Should Have

A confidentiality agreement (also called a non-disclosure agreement) is a promise by someone that they will keep secret the information given to them by another. Confidentiality agreements are used in many different types of situations. If you have information you want someone else to keep a secret, a confidentiality agreement may be appropriate.

Just like any other contract, the terms of a confidentiality agreement will vary depending on the situation. However, there are some common ingredients that every confidentiality agreement should contain.

1. Discloser – the person or entity that has information to share. The Discloser owns the information. Often this is the party who requests and provides the confidentiality agreement for the other party to agree to.

2. Recipient – the person or entity that will be given the information. The Recipient is bound by the terms of the agreement to keep the information secret.

3. Confidential Information – the subject matter of the agreement. The most important component of a confidentiality agreement is the definition of what information is deemed confidential. The definition should be inclusive enough that it covers all the information that the Discloser wants protected. However, if the definition is too broad or vague, not only will it be difficult for the Recipient to follow, but it could be found unenforceable by a court. Parties will often also include what information is not considered confidential. A common exclusion is information that the Recipient knew prior to the disclosure.

4. Obligations of Recipient – where the Recipient agrees to keep the information confidential. This will include both the Recipient agreeing not to disclose the confidential information to third parties, and a limitation on how the Recipient may use it. The parties may also agree to other obligations such as keeping the confidential information locked in a safe, a la the recipe for Coca-Cola.

5. Permissible Uses – what the Recipient may do with the confidential information that is received. This section answers the question of why the Discloser is providing the information to the Recipient in the first place. There can be two parts to this. The first is what the Recipient itself can do with the information. In a product pitch by an inventor to a manufacturing company, the company may only be able to use the confidential information to decide whether to invest in or buy the product idea from the inventor. No other use is permitted. The second part is whether the Recipient can share the information with a third party. While the main purpose of the confidentiality agreement is to keep the Recipient from the disclosing confidential information, there may be times were it may be appropriate to do so. For the product pitch, it would make sense for the company to be allowed to share some of the information with an outside market research group to determine whether there is a market for the inventor’s product.

6. Duration – how long the information must be kept confidential. The term should be long enough to protect the interests of the Discloser, but not be so long as to create a burden on the Recipient. For example, a salesperson who sells life insurance for an insurance company will learn the names and contact information of customers of the company during his employment. This is information the company will want him to keep confidential. While requiring confidentiality for only 10 days after learning the information isn’t likely to provide the company with much protection, it would probably be a burden to require the salesperson to permanently keep confidential the names and contact information of all of his customers. When it comes to describing the duration, the agreement should be as specific as possible to avoid any confusion or dispute.

7. Remedies for Violation of the Agreement – what happens if the Recipient wrongfully discloses or uses the confidential information. The remedies the Discloser has should be specifically laid out in the agreement. If they are not, the Discloser is limited either to the damages that can be proven, which is often difficult to do, or a nominal amount. The most common remedy is the ability for the Discloser to receive injunctive relief, forcing the Recipient to immediately stop the improper disclosure or use of the information. So called “fee shifting” provisions are also common. These allow the Discloser to receive its legal fees in any lawsuit regarding the information. The other type of remedy used is a liquidated damages clause. A liquidated damages clause states that because it is so difficult to determine the actual damages that result from a violation, the parties have agreed to a set amount that they believe is a fair estimate of what the damages might be. The Discloser would then be entitled to that amount. If the amount in the liquidated damages clause is unreasonable though, courts will consider it a penalty and refuse to enforce it.

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