If you own a business or work for a company, there is a high chance that you deal with confidential information. Almost all businesses have valuable confidential information. For some businesses, that confidential information is the lifeline of their business and a dominant asset.
Businesses typically exchange confidential information with customers, suppliers, and other parties in many circumstances. Some examples include entering into:
Consulting engagements;
Service agreements; and
Strategic alliances.
Having contractual clauses is crucial to help protect the parties disclosing confidential information. These protections are often in the form of a confidentiality agreement (i.e., a nondisclosure agreement or NDA) or a confidentiality clause in a separate contract. Regardless of the form confidentiality requirements are in, they all prevent you from discussing confidential information with unauthorized parties.
It is not just your confidential information that you should be worried about. Businesses are responsible for protecting information that is disclosed to them by suppliers, customers, business partners, and others to comply with confidentiality clauses in relevant contracts.
Primary Obligations with Confidential Information
The primary obligations recipients of confidential information typically must abide by are:
Nondisclosure Obligations: Includes restrictions against disclosing confidential information to third parties (e.g., to subcontractors)
Restrictions on Access and Use: Legal agreements typically restrict access to and use of confidential information within the recipient's business and among its employees.
Disclosing Party's Security Requirements: The disclosing party's physical and cyber security requirements may be stricter than the recipient's, placing a more significant burden on the recipients to follow more stringent requirements.
Return and Destroy Obligations: Obligations to return or destroy materials containing confidential information are typically present.
Trade Secrets
Additionally, certain confidential information may be treated as trade secrets and afforded protection under the law. For example, the following types of information will be considered trade secrets if certain criteria are met:
Business methods
Marketing plans
Client lists
Production processes
Software algorithms and source code
Pricing and discount structures
Recipes and chemical formulas
When to use Confidentiality Agreements
There are many scenarios where it would be wise to obtain a confidentiality agreement. For example, most commercial transactions involve the exchange of information, but the following are examples of when confidentiality agreements may be used:
Assessing or engaging a business or marketing consultant or agency, where confidential information is disclosed to enable the consultant to perform the work.
Entering into a co-marketing relationship or a similar type of strategic alliance.
Soliciting proposals from service providers (e.g., vendors and software developers) typically involves exchanging strategies, pricing, personnel records, business methods, and other confidential information.
Selling a company to protect the information that the company may disclose during negotiations.
Hiring employees to protect the information disclosed to the employee during employment.
The parties should sign a confidentiality agreement as soon as possible or at least before substantive negotiations begin. If confidential information is disclosed before a confidentiality agreement is signed, think about covering prior disclosures when a confidentiality agreement is signed.
Why You Should Have a Confidentiality Agreement
It is normal for a business not to want to sign a lengthy confidentiality agreement, preferring to stick to informal understandings (i.e., verbal promises). However, entering into a confidentiality agreement can have the following benefits:
Define Confidential Information: Avoid confusion over what is confidential by defining what is considered confidential.
Flexibility: Flexibility in defining what is confidential.
Establish Responsibilities and Expectations: Outline expectations and responsibilities for how confidential information should be treated among the parties.
Enforceability: Written contracts are easier to enforce than verbal agreements.
It is Required: Many third-party agreements require a confidentiality agreement.
Maximize Trade Secrets Protection: In the US, patent rights may be lost when an invention's details are publicly disclosed. Having a confidentiality agreement can help protect trade secrets when information is shared during the regular course of business.
Remember that once information is wrongfully disclosed, it may become part of the public domain; thus, it cannot be undisclosed later. It is difficult to prove a breach of confidentiality, and damages for breach are typically the only legal remedy. However, damages may be difficult to ascertain, and money is usually inadequate to make the suffering party whole. The point: once the information is disclosed, it is difficult to undo the damage.
What is Confidential Information?
We have gotten this far, and you may be wondering what confidential information is. What is considered confidential information is defined in the confidentiality agreement. However, some examples of information that are typically considered confidential include the following:
Business and marketing plans.
Business methods and procedures.
Financial budgets, projects, and results.
Formulas and chemical compositions.
Pricing, sales data, prospects and customer lists, and information.
Terms of contracts.
What Happens When a Party Breaches a Confidentiality Agreement?
When a recipient shares confidential information and breaches a confidentiality agreement, the disclosing party may sue the recipient for damages. The most common claims in a suit for breach of confidentiality include:
Breach of contract (i.e., breach of the confidentiality agreement)
Breach of fiduciary duty
Copyright infringement
Misappropriation of trade secrets
Other intellectual property law violations.
Conclusion
It may seem daunting to sign legal agreements, but the benefits of having a confidentiality agreement far outweigh the drawbacks. Take the time to protect yourself from the outset and watch your business prosper. Contact Jabbour Law today to get started!