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The Confidentiality Clause: Essential Guidelines

illustration of a contract with a confidentiality clause

Every company has valuable confidential information. For instance, a tech company has proprietary code that they do not want competitors to know about. The tech company may lose its competitive edge if employees, partners, and others tell the public or competitors about the code. Using a confidentiality clause in your contracts and agreements is one of the best ways to keep your confidential information away from the public or potential competitors.

Read on to learn more about confidentiality clauses, how to use and manage contracts with confidentiality clauses, and why they’re important to your business. We will also cover when using a confidentiality agreement instead of a confidentiality clause might be a better choice.

What is a Confidentiality Clause?

A contract confidentiality clause prevents signing parties from divulging personally identifiable information to the public, market competitors, or other third parties. Depending on your company and industry, the confidential information may include:

  • Confidential business information revealed during discussions, analyses, proposals, and negotiations
  • Inventions
  • Personally identifiable information about employees and clients
  • Trade secrets

Confidentiality clauses are usually simple, straightforward, and limited in scope. As the name implies, they are a single clause within a larger contract or agreement. A one-sided, or unilateral, confidentiality clause, sometimes called a nondisclosure clause, limits the sharing of information by one of the signing parties, such as an employee signing an employment agreement. Confidentiality clauses can also apply to both signing parties—a mutual confidentiality clause—such as two businesses in a sales agreement where both parties agree not to share each other’s business information.

Where To Use Confidentiality Clauses

Companies can use confidentiality clauses in any contract that exposes employees, partners, and other people to sensitive or confidential information that should not be shared with the public, third parties, or competitors. The best places to take advantage of such clauses are in shorter-term contracts or for specific information with limited scope. You can use these clauses in employee and contractor agreements, licensing agreements, and purchase and sale agreements.

Employee and Contractor Agreements

Employers include confidentiality clauses in employment contracts to limit employees and contractors from divulging confidential information, such as:

  • Business plans
  • Inventions
  • Operation plans
  • Pricing information
  • Trade secrets

Employee and contractor agreements cover the time of employment, or the time needed for a contractor to complete a job. A confidentiality clause can protect an employer beyond the time of employment by extending the time that an employee or contractor may not divulge information about the company that employed them. For instance, if an employee moves on to one of your competitors, the employee has a contractual obligation to not share your information with their new employer.

As you can imagine, this is never an ideal situation, but if your competitor suddenly comes out with a product identical to yours, you may have potential legal recourse against the employee.

Intellectual Property License Agreements

An intellectual property (IP) license agreement allows one party to use another party’s IP. If you include, as the IP holder, a unilateral confidentiality clause in your IP license agreement, you limit the other party from disclosing your:

  • Accounting information, including expense reporting, company liability information, and profit and loss reporting
  • Business operations, including your financial information, manners and methods of conducting business, and external business contacts
  • Customer information
  • Other IP, including patents, trade secrets, copyrights, logos, test data and results, details and status of research, and development of products and services

Purchase and Sale Agreements

Sellers may also use confidentiality clauses in purchase and sale agreements to prevent buyers from sharing confidential information exposed during the sale process.

When you use a confidentiality clause in your purchase and sale agreements, you limit buyers from disclosing:

  • Your business operations information, such as internal and financial data
  • Your IP, including your proprietary rights and details and status of research and development
  • Your processes and equipment used to create and produce your goods or services
  • Your scientific and technical information about any machine or process you use

When To Use a Confidentiality Agreement Instead of a Confidentiality Clause

Confidentiality Clauses for Simple Agreements

A confidentiality clause binds parties to nondisclosure of proprietary or confidential information within the larger confines of a contract or agreement. Its scope is generally limited in time and type of information. Their simplicity makes them easy to drop into simple agreements where you know what information you want to protect. But the same simplicity and lack of detail can make them difficult to enforce if a breach occurs, adding potential risk to your business transaction.

Confidentiality Agreements for Complex Business Interactions

When businesses enter into more complex interactions and agreements, such as mergers and acquisitions and joint ventures, contracts become more complex or extend over longer periods. A simple confidentiality clause will be lost in the details of the larger contract. Under these circumstances, you need to consider a separate mutual confidentiality agreement or unilateral nondisclosure agreement (NDA) to protect current and future information and IP.

A separate confidentiality agreement allows you to broaden the scope and timeframe of the nondisclosure of information. Both parties can detail their expectations and what constitutes a breach of confidentiality. It also allows you to be more specific about remedies and penalties for breaches of confidentiality.

When two businesses or parties first enter into more complicated long-term interactions, it’s difficult to predict what specific future information or activities need to be protected. Over the long term, protected information will change over time. A confidentiality agreement can be written to cover future unknowns and define very specific penalties or legal action to remedy breaches of the agreement.

A separate confidentiality agreement also avoids parties from overlooking their confidentiality obligations, which might happen if confidentiality provisions are limited to a single clause within a larger contract.

Unilateral confidentiality agreements

Companies often use NDAs, or unilateral confidentiality agreements, before applying for patents or when sharing information with potential investors. This one-sided agreement will protect a patentable idea from being released to the public, as doing so is a waiver of patent rights in most jurisdictions. When courting a potential investor, it’s usually just the business owner that is disclosing confidential information, hence the unilateral NDA.

Using Confidentiality Clauses Strategically

A confidentiality clause within a business contract can keep confidential information safe by limiting what an employee, contractor, or business partner can say or do with your confidential business information.

Companies often use confidentiality clauses in routine contracts, such as in employee and contractor agreements and purchase and sale agreements. Companies tend to use separate confidentiality agreements for lengthier and more complicated scenarios, such as joint ventures.

Many companies write confidentiality clauses from scratch. But this is inefficient, especially when you have multiple ongoing projects. To save time and money, consider using contract lifecycle management (CLM) software. Streamlined, intuitive, and powerful, CLM software lets users create and launch contracts and approval processes in minutes. They also come with up-to-date contract templates that follow your organization’s policies and legal requirements.

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