Confidentiality Agreements

Understanding Confidentiality Agreements

Confidentiality agreements, also known as non-disclosure agreements (NDAs), are legal contracts between two or more parties to maintain confidentiality, with the aim of protecting private or confidential information. The purpose of these agreements is to set out explicit terms and conditions about what information can be disclosed, to whom, and the acceptable usage of that information.

Confidentiality agreements are designed to protect sensitive information, such as trade secrets, business strategies, customer lists, proprietary technology, and other unique knowledge or data that a company possesses. The agreement prohibits the recipient from releasing information to the public or unauthorized third parties. The disclosure of such information could compromise the competitive advantage of the business or damage the business in some other way.

Confidentiality agreements are typically used in a wide array of business scenarios. They are commonly utilized during business mergers and acquisitions, where sensitive financial and strategic information is exchanged. They’re also common in employment contracts to safeguard company-specific details and to protect proprietary information when businesses engage with contractors, consultants, or other third parties.

The duration of confidentiality agreements varies depending on the nature of the information and the agreement between the parties. A typical term might be two to five years, but some agreements stipulate that the obligation to maintain confidentiality persists indefinitely, even after the termination of the contract or employment relationship.

Common issues that can arise in the context of confidentiality agreements include disagreements over the scope of the information deemed confidential, breaches of the agreement, and disputes over jurisdiction and enforcement. If the terms of the agreement are too broad or unclear, it may result in legal conflicts. If one party breaches the agreement, the aggrieved party might have to resort to legal remedies, which could be costly and time-consuming. Moreover, if the parties are in different jurisdictions, enforcement of the agreement could become complex, particularly if the laws regarding confidentiality differ significantly.

Typical Uses Of Confidentiality Agreements

Confidentiality agreements, often termed as non-disclosure agreements (NDAs), play a critical role in a wide variety of business contexts. In the business world, these legal contracts are typically used to safeguard proprietary or sensitive information. One common scenario is during mergers and acquisitions where a lot of classified financial and operational information is shared between the entities involved. NDAs are also frequently used in the realm of employment, where new employees or contractors are often required to sign these agreements to protect sensitive company information, trade secrets, or intellectual property. Startups may use NDAs when discussing their unique business model or technology with potential investors, partners, or employees. They are also used in business transactions involving patent licensing or product development.

Regarding enforcement, confidentiality agreements are generally enforced in a court of law. If a party to the agreement feels that the other party has breached the confidentiality agreement, they can file a lawsuit. The aggrieved party would typically seek an injunction to prevent further breaches and/or damages for any harm caused by the breach. The specific forum for such lawsuits would depend on the jurisdiction clause in the agreement itself, which stipulates the legal jurisdiction that will govern the agreement. For multinational entities, the enforcement could get complex due to differences in laws across countries, but typically, enforcement would be sought in the jurisdiction where the breach has the most significant impact or where the breaching party is located. It’s also worth noting that, increasingly, confidentiality agreements include arbitration clauses, requiring disputes to be resolved by arbitration rather than through the court system.

Confidentiality & The Illinois Trade Secret Act

Confidentiality agreements, or non-disclosure agreements (NDAs), often go hand-in-hand with state trade secret laws in protecting a company’s valuable information. Trade secret laws, like the Uniform Trade Secrets Act (UTSA) adopted by many states in the U.S., provide legal protection for a company’s trade secrets – information that derives its value from being not generally known and not readily ascertainable, and which the owner has taken reasonable steps to keep secret.  In Illinois, confidentiality agreements are typically aligned with the Illinois Trade Secrets Act (765 ILCS 1065).

Confidentiality agreements complement these laws by explicitly defining what constitutes confidential information or trade secrets within a specific business context, and set forth the obligations of the receiving party to protect this information. By having parties sign such an agreement, a business takes a ‘reasonable step’ towards keeping its trade secrets confidential, a requirement under trade secret laws like the UTSA. This not only strengthens the protection of the information but can also enhance a company’s ability to seek recourse under trade secret laws should a breach of confidentiality occur.

However, the alignment between the confidentiality agreement and the state’s trade secret act depends on the precise language of the agreement and the specifics of the state law. For instance, if a confidentiality agreement is too broad or vague in defining what is confidential, it may not align well with the state’s trade secret act, which may require a more specific description of the trade secret. Therefore, when drafting a confidentiality agreement, it is crucial to be aware of the specific trade secret laws in the relevant state to ensure the agreement offers the desired legal protection.

Confidentiality Agreements vs Nondisclosure Agreements

“Nondisclosure Agreement” (NDA) and “Confidentiality Agreement” are terms often used interchangeably in the business and legal world, and they largely refer to the same type of agreement. Both types of agreements are legally binding contracts designed to protect sensitive or confidential information from being disclosed to unauthorized parties.

Both NDAs and Confidentiality Agreements typically contain provisions outlining the following: the parties to the agreement; a definition of what constitutes confidential information; the scope of the confidentiality obligation by the receiving party; the exclusions from confidential treatment; the term of the agreement; and the consequences of a breach.

While there is substantial overlap in their usage and meaning, the context or nuance might suggest slightly different emphases. The term “Nondisclosure Agreement” tends to emphasize the act of not disclosing the information received, and is often used in situations where a business idea or proposal is being revealed for purposes such as investment, collaboration, or licensing. In these cases, the primary concern is often that the receiving party might take the idea and use it for their own benefit.

On the other hand, a “Confidentiality Agreement” often implies a broader set of obligations including non-use of the confidential information received, and might be more common in situations where ongoing access to sensitive information is part of a relationship, such as employment, consultancy, or certain vendor relationships.

Ultimately, however, the specific terms and conditions of the contract are more important than what it is called. Whether termed an NDA or a Confidentiality Agreement, the most crucial thing is that the document contains clear and comprehensive provisions to protect the disclosing party’s confidential information.

Contact Our Chicago Business Attorneys

At our business law firm, we understand the critical role that confidentiality agreements play in safeguarding your business’s invaluable assets – whether it’s innovative product ideas, unique business strategies, or simply your client lists. If you’re an entrepreneur, an online seller, a product developer, or a business owner, your ideas and information are the backbone of your success. They deserve top-notch legal protection. Our experienced business attorneys can provide expert assistance to help you draft robust confidentiality agreements, tailored to meet the unique needs of your business and align with current state laws. We’re here to ensure that your trade secrets remain just that – secret. Don’t leave the security of your business to chance; contact our firm today to see how we can help protect what matters most to you.