Legal Matters | Archive

Use of Confidentiality Agreements

by Richard Kay
for Virginia Business
October 1, 2007

Are you planning the sale of a business unit? Is a consultant ready to advise you on a new marketing strategy? Perhaps you are simply getting ready to have a technician come upgrade your computers. This should make you pause. Whenever a third party needs to see your company's secrets or talk to your employees about a proprietary business matter, that party will have access to private information.

The common way to protect company secrets is by using a confidentiality agreement. Simply put, a confidentiality agreement is a contract allowing the disclosure of private proprietary information to a receiving party while protecting the disclosing party from the misuse of that information. You might think using such a formal agreement (sometimes called an NDA, CDA or secrecy agreement) is overkill in a routine day-to-day matter such as computer upgrades, but without them, there is a greater likelihood your information will be made public and your level of recourse for divulged secrets is limited.

Whenever a visitor is at your business, he or she will likely have access to a whole host of information - some of which you intend to divulge, some perhaps not - regardless of whether or not sensitive documents are to be reviewed or systems examined. What the eyes take in and what the ears overhear might be damaging to your business if made public.

The simple layout of your production facility, the methods of your security, the names of employees who are working on a project, or any one of hundreds of other examples may give your company an edge over your competitors and contain information that you want to remain secret. Do not assume that a salesman visiting your facility won't share (intentionally or otherwise) what he sees or hears with his other clients, and they might be your most direct competitors. Each business has its own idiosyncrasies that make it unique, and you should be as serious about protecting those distinctive characteristics as you were in developing them.

Many business owners tend to view confidentiality agreements as routine and ordinary, and that one form is as good as another. While most NDAs cover the same topics, the wording often differs from document to document, and what is stated and how it is stated is critical to how information is protected. Read them carefully before you sign.

When drafting or reviewing the agreement, consider the following:

"Who are the parties to the agreement (be sure to use the full legal names), and which people within the organization can view the information?

"Should both parties be protecting information, making a Mutual NDA necessary?

"What data or material should be considered confidential (customers, employees, documents, marketing materials, models, computer programs, drawings, financial data and projections, business plans, other?). How will that data be identified - must it be marked "confidential"to be protected? Marking sounds like a good requirement, but the process is often better in theory than in actual practice, and a marking requirement won't protect the unintended disclosures. Inserting a "reasonableness"standard is sometimes the way to work around this stumbling block.

"Confidential information can be written, spoken, or recorded, and the protected materials should include all copies and reproductions.

"The fact that you are in discussions with the third party might be something you want kept confidential, especially in purchase and sale negotiations. This should be added to the contract language.

"Limit the authorized use of the confidential information to the purposes of the agreement.

"If you will allow the third party to share the information with its employees, must those employees be bound to the exact same terms found in the NDA or will you need different terms? Limit the scope to those employees and others with an actual "need to know."

"Must the information be returned or destroyed at the end of the discussions?

"Consider the duration of the agreement - both how long the information must be kept confidential and also how long the agreement will cover future disclosures between the parties.

"Also, consider adding a provision prohibiting the other side from soliciting your employees for employment for a reasonable period of time.

There are many other issues to consider that are beyond the scope of this article (damages, remedies, jurisdiction, etc.), but remember to review all of the terms carefully. Maintaining an adequate internal structure to control the flow of company information to third parties is not only common sense but an obligation, especially in this post-Sarbanes-Oxley environment.

Most important, don't wait until the last minute to present your NDA to the other side. Time might be an ally or enemy, and you will want to control when the sharing of information can start.

Present the other side with your form - and don't automatically cave in to the other side's demands that "our form is the only document that our management allows."Both parties have risks whenever signing a contract and the enforcement of an NDA just might be as important as any sales agreement you execute.