Confidentiality agreements, also known as non-disclosure agreements (NDAs), are vital documents for businesses, entrepreneurs, and professionals across various sectors. These agreements help protect sensitive information from being disclosed to unauthorized parties, safeguarding proprietary information, trade secrets, business plans, client lists, and intellectual property. However, despite their widespread use, confidentiality agreements present various legal challenges that can significantly impact both the disclosing and receiving parties.
Defining Confidential Information
A key issue in confidentiality agreements is defining the scope of “confidential information”. The party disclosing information (the “disclosing party”) must ensure that the agreement covers all necessary data, while the party receiving it (the “receiving party”) wants to avoid overly broad definitions that could restrict their operations.
Avoid Over-broad Definitions
Defining everything as confidential can create friction and make the confidentiality agreement unenforceable, limiting the receiving party’s ability to function or engage in business independently. Additionally, in case of a legal controversy courts may be reluctant to enforce overly broad agreements, deeming them unreasonable.
That said, while a confidentiality agreement should not be too broad in scope, the agreement should not be too limiting so that the disclosing party’s interest is not protected. Ideally, a confidentiality agreement should specify what constitutes confidential information, such as specific documents, data, or discussions, always considering the disclosing party’s situation, context and particular interests.
The confidentiality agreement should also differentiate between what is considered proprietary information versus what is considered publicly available information, and out of the scope of the confidentiality obligations of the receiving party.
Exclusions in confidentiality agreements
To avoid disputes, a well-drafted confidentiality agreement should carve out exclusions for information that is already public, independently developed, or legally obtained from third parties.
In sum, when it comes to confidentiality agreement, a best practice is to be precise, use detailed language that leaves no room for ambiguity when defining confidential information, avoid catch-all phrases and make provisions for what will not be considered confidential.
Duration of Confidentiality Obligations
Another significant legal issue revolves around the duration of the confidentiality obligations. While the disclosing party will want the protection to last indefinitely, the receiving party might prefer a shorter term.
Considering both parties interests, in case of legal controversies around confidentiality agreements, courts tend to favor confidentiality agreements that have reasonable time limits. Accordingly, it is usually better to specify a reasonable time limit for confidentiality obligations based on the nature of the information being protected. For trade secrets, perpetual confidentiality might be necessary, but for general business information, a shorter term (e.g., three to five years) may be more appropriate.
Non-Disclosure vs. Non-Use Provisions
Confidentiality agreements usually cover two fundamental obligations: non-disclosure and non-use of the confidential information. However, these two concepts can become entangled, leading to legal challenges.
Non-Disclosure:
This prohibits the receiving party from sharing the information with third parties without authorization.
Non-Use:
This prevents the receiving party from using the confidential information for their benefit or to the detriment of the disclosing party.
Limited Use:
A well-drafted confidentiality agreement should clarify that the receiving party can only use the information for specific purposes, such as evaluating a potential business transaction. Otherwise, the receiving party may argue they had implied rights to use the information in other ways.
Enforceability Issues
The enforceability of confidentiality agreements depends on several factors, including the reasonableness of the terms, jurisdiction, and the nature of the breach. Courts scrutinize these agreements to ensure they don’t impose unfair restrictions on the receiving party.
When it comes to enforcing confidentiality agreements courts often examine whether the terms of the NDA are reasonable, especially in those aspects related to time, scope, and subject matter. If the confidentiality agreement is deemed overly restrictive or vague, a court may refuse to enforce it. In the best of the case the Court may elect to enforce a modified or adjusted form of the agreement after an exercise of interpretation of what the parties’ intent might have been. However, being in that scenario is risky.
In some cases, courts may refuse to enforce an confidentiality agreement if doing so would be against public interest, such as when the agreement suppresses whistleblowing or prevents the disclosure of information vital to public safety.
Finally, keep in mind that the enforceability of confidentiality agreements can vary from jurisdiction to jurisdiction, from one state court to another.
Breach and Remedies
A significant legal issue in confidentiality agreements is addressing what happens in the event of a breach. When confidential information is disclosed or used without authorization, it can result in substantial harm to the disclosing party.
A breach of contract can occur when the receiving party shares confidential information with a third party, uses the confidential information for their benefit, or fails to adequately protect it from unauthorized access.
Remedies
Confidentiality agreements typically include remedies for breaches, such as injunctive relief (a court order preventing further disclosure), monetary damages, or both. However, quantifying damages can be difficult, particularly if the harm involves loss of competitive advantage or future profits.
Limitation of Liability
Some contract clauses in confidentiality agreements may attempt to limit the receiving party’s liability in the event of an inadvertent breach. However, courts may reject such limitations, particularly if the breach causes significant harm for the disclosing party. Accordingly, it is a best practice to clearly outline the consequences of a breach, including the availability of injunctive relief and specific types of damages.
Ownership of Confidential Information
Another legal issue that arises in confidentiality agreements is ownership of the confidential information after disclosure. The disclosing party must ensure that their ownership rights are clearly stated in the agreement, and also that the receiving party understands the limits on the use of the information.
For that purpose, a confidentiality agreement should specify that the confidential information remains the sole property of the disclosing party, and that the receiving party has no ownership interest or rights in the information, unless the specific transaction requires different a provision.
Return or Destruction of Information:
An issue sometimes overlooked is the return or destruction of confidential information. At the end of the confidentiality period or upon termination of the agreement, the receiving party should be required to return or destroy all copies of the confidential information. The confidentiality agreement should also outline the process for returning or destroying the confidential information when the agreement ends.
Confidentiality in Employment Agreements
Confidentiality agreements or clauses are also frequently used in employment contracts. In the context of an employment relationship, it is common for employees to have access to sensitive business information. Therefore, confidentiality clauses are used to protect the employer’s proprietary information. However, in the employer-employee context, these agreements can raise unique legal challenges.
Restrictiveness:
Overly restrictive NDAs in employment agreements, particularly those that prevent employees from using their general knowledge and skills in future jobs, may not be enforceable in some jurisdictions. To manage this the confidentiality agreement should be limited in time, subject matter and geographic scope.
Confidentiality vs. Non-Compete:
Employers often confuse confidentiality agreements with non-compete clauses, which restrict an employee’s ability to work for competitors after leaving the company. These two concepts should be treated separately and carefully to avoid legal issues.
Whistleblower Protections:
Laws in some jurisdictions, such as the U.S. federal Whistleblower Protection Act, may render certain confidentiality provisions unenforceable, particularly if they prevent employees from reporting illegal activities to authorities.
Confidentiality agreements are essential tools for protecting sensitive information, but they are not free from legal complexities. Issues such as defining confidential information, setting reasonable time limits, enforcing non-use provisions, and addressing breaches all require careful consideration. By drafting clear, balanced, and enforceable agreements, businesses and individuals can safeguard their proprietary information while minimizing the risk of legal disputes.