Your Guide To a Confidentiality Agreement
Meta description: A confidentiality agreement provides legal protection to an individual or company that discloses sensitive or proprietary information to another entity. There is a basic format but many variations; for example, depending on whether one or both parties disclose information, the agreement may be mutual or one-way. Stock Image: In the worlds of business, finance and industry, there are times when one individual or company may need to share information of a sensitive or proprietary nature with another entity, whether it be in the same industry or not. If the information were to become more widely or publicly known, or if the recipient were to use the information, there could be financial consequences for the entity who disclosed it. When you ask someone to sign a confidentiality agreement, the other party may be annoyed, thinking that you do not trust them. A confidentiality agreement, however, is not an indication of distrust, but rather a way to afford legal protection to the entity disclosing the information. What Is a Confidentiality Agreement? A confidentiality agreement is simply a legally binding contract between two parties in which one party agrees to disclose confidential information to the other party, and the other party agrees not to use it or share it with others for a specified period of time. A confidentiality agreement can be mutual or one-way. In a mutual confidentiality agreement, two entities are going to be sharing sensitive information with one another, and therefore, neither of the parties may disclose the other's information. In a one-way confidentiality agreement, one party will be disclosing information, while a recipient will be receiving it. The recipient is bound by the conditions of the agreement to keep the disclosed information confidential; however, because the flow of information is only traveling in one direction, the discloser is bound by no conditions of confidentiality. A confidentiality agreement can be either written or verbal. However, if you seek to enter into a confidentiality agreement, it is recommended to have the agreement in writing and have both parties sign it. This way, there is written proof of the agreement taking place. Verbal contracts, including confidentiality agreements, are notoriously difficult to enforce because there is no tangible record of the agreement ever having taken place. What Is the Difference Between a Confidentiality Agreement and a Nondisclosure Agreement? The difference is largely academic; in practice, the two types of agreements function in essentially the same way. The difference is, at least in part, a regional one throughout the English-speaking world, with the term "confidentiality agreement" being preferred in countries like Canada, Great Britain, Australia and New Zealand, while "nondisclosure agreement" (and its abbreviated form, "NDA") is more likely to be used in the United States. While the two terms are often used interchangeably, there are some situations in which one is preferred over the other. In a one-way, or unilateral, agreement in which the flow of information is only in one direction, the term "nondisclosure agreement" is more likely to be used, whereas a mutual agreement is more likely to be termed a "confidentiality agreement." When the agreement is being made with third parties outside of the company, such as customers, vendors, potential investors or suppliers, it is more likely to be described as a "nondisclosure agreement," while an agreement between a company and its employees is more likely to be termed a "confidentiality agreement." When the information involved has the potential to be personally damaging to either or both of the parties involved, the term "confidentiality agreement" is usually preferred. The term "confidentiality agreement" implies a higher level of secrecy than a "nondisclosure agreement," suggesting that the recipient of the information should take a more active role in preserving the confidentiality of the information, rather than just agreeing not to disseminate it to others. For example, in a confidentiality agreement, the recipient of the information may be required to secure the information from unauthorized individuals by keeping paper documents in a locked file cabinet or by using a password or encryption system on electronic documents, measures that may not be included in a simple NDA. Conversely, on a purely subjective level, some people may feel that the term "nondisclosure agreement" has a negative connotation and prefer to use "confidentiality agreement" instead. Where and How Are Confidentiality Agreements Used? Confidentiality agreements are used in a number of different industries: Technology Finance Entertainment Healthcare Confidentiality agreements are frequently used in connection with a new invention or technology. Anyone seeking to secure a patent for a new invention is encouraged to secure a confidentiality agreement before sharing information about the invention. The reason is that if the information about your invention were to become public before you have a chance to patent it, you lose your patentability and the protection it provides. Confidentiality agreements are also very common in the healthcare industry. This is because healthcare facilities keep a volume of sensitive personal and medical information on patients. This information, referred to as "protected health information" or PHI, is safeguarded by a federal law known as the Health Insurance Portability and Accountability Act, or HIPAA. Personally identifiable information on a patient cannot be made public or shared with individuals who do not have a reason to access it. What Must Be Excluded From a Confidentiality Agreement? If you are the party disclosing information, you want the confidentiality agreement to be as broad and far-reaching as possible. However, there is some information that you cannot legally protect with a confidentiality agreement: Information that is publicly known prior to the agreement Information that was received via an alternate source Information the recipient possessed prior to the agreement; confidentiality agreements do not work retroactively In addition, a confidentiality agreement cannot be used to prevent illegal activity, or activity that is harmful to public health and safety, from being reported. What if the confidential information is needed for a court case or subpoenaed? This is a difficult situation, and any party to a confidentiality agreement would do well to consult a lawyer in this event. What Is Included in a Confidentiality Agreement? There are several important elements that must be included in a confidentiality agreement, as well as some optional elements that are not required but often included to the benefit of either or both parties. The following elements must be included in a confidentiality agreement in order for it to be legally binding: The reason for the agreement, i.e., why the discloser is sharing the information with the recipient. The parties involved. The definition of confidential information; if some of the information is conveyed verbally rather than in writing, the agreement may include a clause stating that the discloser is to confirm the confidential information in writing subsequent to the disclosure. The exclusions to the agreement. The scope of the recipient's obligations. Another important element that must be included in a confidentiality agreement is the timeframe or term for which the information must remain confidential. Most confidentiality agreements span a timeframe of two to five years, although if the information becomes public during that time, most agreements specify that the information is no longer confidential and the agreement is voided. It is of particular importance to identify the start date of the confidential term as well as the ending date so that all parties are clear as to the exact timeframe delineated by the agreement. Nevertheless, there is some information that you can reasonably request to be kept confidential forever, such as personal information. Healthcare confidentiality agreements, for example, will almost certainly include a provision that patients' PHI must be kept confidential forever in compliance with HIPAA regulations. A company's customer lists can also remain confidential in perpetuity. There are other provisions in a confidentiality agreement that are not required but may be included to provide more protection. One of these rights is that of injunction, which gives you legal right to prevent a breach of information and will be discussed in more detail in a moment. Other such provisions include the following: Protection of copyrights: The recipient of the information will not be able to use it or claim any rights to it. Non-solicitation: The recipient agrees not to hire any of the discloser's former employees, nor to recruit any of the discloser's current employees, for a set period of time, usually one to two years. The jurisdiction of a dispute: Say that your recipient relocates to another city and then discloses the information in violation of your agreement. Specifying in the initial agreement that any disputes must be handled in your city prevents you from having to travel for court appearances or mediation. What Happens If a Confidentiality Agreement Is Broken? A confidentiality agreement allows you legal recourse if the other party violates its terms. This means that you can file a lawsuit and potentially collect monetary damages. However, if you have reason to believe that the other party is planning to breach the agreement and release the confidential information, a judge can file an injunction against the other party, which is an order to prevent the use or release of information included in the confidentiality agreement. Conclusion A confidentiality agreement can help protect you if you need to disclose sensitive information to another party. If you don't know where to start in drafting a confidentiality agreement, there are templates available for download on the internet, often at little or no cost.