Every business has company information it wants to keep confidential. One way to do that is to have a confidentiality agreement between your business and those who know about this information.
What Is a Confidentiality Agreement?
A confidentiality agreement—sometimes called a non-disclosure agreement or NDA—is a business contract to protect sensitive company information, products, trade secrets, and proprietary (company-exclusive) systems.
Some of the situations when you might need a confidentiality agreement:
- When interviewing or hiring an employee or independent contractor who will have access to confidential material
- When selling your business, to keep the potential buyer from disclosing your business information to others
- When showing your business plans or your business financial information to potential investors
- To employees and others working on a patent or invention
State Laws on Confidentiality Agreements
Confidentiality agreements are considered restrictive covenants because they restrict or limit the freedom of an individual. In the case of the NDA, the restrictions might hinder someone from going into business, finding work, or making money. Because they are restrictive, these agreements must conform to the laws of the state where they are written or where the parties agree.
Some states restrict or disallow some types of confidentiality agreements. California, for example, restricts NDA’s in the case of sexual assault or harassment and Florida restricts NDA’s in cases involving public hazards.
Although an NDA is usually tried in a state court, in some cases an NDA might be tried in a federal court. The Defend Trade Secrets Act of 2016 (DTSA) allows some cases of trade secret violations to be tried in federal courts, instead of a state court.
Before you create a confidentiality agreement, check with an attorney to make sure if it is allowed in your state and what court has jurisdiction.
What Should I Include in a Confidentiality Agreement?
Here are some of the general sections in a confidentiality agreement form.
- Set the date of the agreement. It’s important to set the date when the agreement becomes effective.
- Describe the two parties, sometimes called the “Disclosing Party” and the “Receiving Party.” Include names and identification, so there can be no misunderstanding about who signed the agreement.
- State the reason for the agreement; for example, the Receiving Party is being hired by the Disclosing Party for a position with access to “Confidential Information.”.
- Identify what company property you want to include in the agreement (the “Confidential information.”) Describe the confidential information in detail.
Describing the Confidential information in detail is important because if it isn’t in the description, it isn’t protected.
Also, describe what you want to exclude from the agreement. For example, information may be excluded if:
- The Receiving Party owned it before the agreement
- The Receiving Party legally received it from another source
- It’s generally known by the public
- The Receiving Party is required to disclose in a lawsuit or administrative proceeding
- It is being or has been developed by the Receiving Party’s employees, consultants, or agents
This is the most important part of the agreement because it defines what you can protect.
Here are some aspects of a business that you might want to include, depending on the circumstances:
- Information about customers
- Intellectual property (patents, copyrights, trademarks/service marks)
- Marketing and sales information
- Information about products, including those being developed
- Computer codes, applications, websites, and computer technology
- Accounting and tax information
Describe what the other party is agreeing to. The agreement might include:
- Exercising reasonable precautions against disclosure of the information
- Not disclosing Confidential Information without the written consent of the Disclosing Party
- Using the information only for business purposes, and only on a “need to know” basis
- Not disclosing the information to anyone who has not signed an NDA
Describe what happens if the other party breaches the contract by revealing Confidential Information. A typical remedy for this type of contract is an injunction; an order by a court to stop the other party from revealing any more secrets.
In some federal cases, under the DTSA, a court may grant the owner the right to seize the property which may be used in “extraordinary circumstances.” You may also require the return of Confidential Information.
State when the agreement ends and what notice must be given to the other party about the termination. You can set one of two options for when the agreement ends:
- The other party agrees not to use the Confidential Information for a specific period of time (at the end of the relationship, for example) or
- The other party agrees not to use the Confidential Information during the time of the relationship or any time thereafter
Get Help with a Confidentiality Agreement Form
Get help from an attorney in creating the language for this agreement. As you can see, this form is complicated and every situation is different. It’s important to get it right if you want to protect your business. Every business is unique and you want to make sure your business is protected.