What is a confidentiality agreement and when do you use it?
A confidentiality agreement (also known as non-disclosure agreement or NDA for short) is a promise by one party (the recipient) to keep the information of the other party (the discloser) secret. The confidentiality agreement may be unilateral or bilateral in nature. A unilateral confidentiality agreement imposes the duty to keep the information secret on only one of the parties. A bilateral or mutual confidentiality agreement imposes the duty to keep the information confidential on both of the parties when they do receive information of the other party.
An agreement is referred to as a confidentiality agreement when all of the terms and conditions are directed to the requirements to keep information secret. Alternatively, an agreement may contain confidentiality requirements as part of a larger agreement. For example, an independent contractor’s agreement that provides for the assignment of intellectual property created by an independent contractor might include confidentiality provisions.
This article is pertinent to both confidentiality agreements and agreements that contain confidentiality requirements.
- What is a confidentiality agreement and when do you use it?
- Where do you get the confidentiality agreement forms?
- Pros and cons of a confidentiality agreement
- How do parties normally get stuck with an unfair confidentiality agreement?
- Checklist of terms and conditions for confidentiality agreement
- Key clauses for confidentiality agreement
- Identification of the parties
- Types of information to be covered under the agreement
- Identifying information to be treated as confidential information
- Exclusions of covered information
- Level of confidentiality
- Authorized uses of confidential info
- IP ownership rights
- Choice of law and jurisdiction
- Related Articles for Invention Agreements
- Key clauses for confidentiality agreement
When to use confidentiality agreements?
Confidentiality agreements are used in many different situations. For example, settlement agreements might have a confidentiality requirement. When you hire an engineer, your independent contractor’s agreement with the engineer might require the engineer to keep your information confidential. However, this article does not discuss fully these types of agreement, wherein the confidentiality requirements are ancillary to some broader purpose of the agreement. In these agreements, different types of provisions may be included. For example, the independent contractor agreement might include a non-solicitation clause so that you do not hire away their contactors that work on your job.
Related article: Basic agreements
This article discusses confidentiality agreement in the context of intellectual property and those circumstances where you want to convey or receive an idea, invention, intellectual property, or a marketing proposal for the purposes of evaluation.
The situations where the information in this article may be useful include:
- An inventor wants to pitch an idea to an investor, potential licensee or buyer, and vice versa.
- A startup wants to hire an engineer to design and prototype their invention, and vice versa.
Where do you get the confidentiality agreement forms?
Because each situation is different, the confidentiality agreement that is right for you might require some adjustments to make it suitable for your situation.
The terms of the agreement will change if you are the discloser or the recipient or if you have the core information to be disseminated. For more information, see the checklist of terms and conditions below.
Contact me if you would like for me to check your situations and prepare one for you.
A standard confidentiality agreement does not exist. I have a standard confidentiality agreement for a particular situation but this would be different from the next patent attorney. No one-size-fits-all confidentiality agreement exists. Some of the web-based confidentiality agreements do have some form of customization. Here are a few that I’ve found on the internet. I have not checked out their quality and do not know whether they would be suitable for you in your situation. Use at your own risk.
- Confidentiality Agreement (www.legalcontracts.com)
- Free Confidentiality Agreement (www.lawdepot.com)
- Create a Free Non Disclosure Agreement (www.formtemplates.org)
Online google search
Search on www.google.com for “sample confidentiality agreements”.
It is unclear whether patent agents can provide a confidentiality agreement for you, because a confidentiality agreement is a contract and contracts are based on state law. If they provide one for you that is customized, then it might be considered the unauthorized practice of law.
When two parties start a conversation that they might want to be protected by a confidentiality agreement, then inevitably, one of the parties might say that it should not be a problem because “they have a standard confidentiality agreement you could use.” It is typically a mistake to accept their confidentiality agreement, because their agreement will include terms and conditions that are favorable to them, not you. At best, it might be well balanced, but it will never be tilted in your favor.
If they say something like this, I recommend that you immediately say that you have one that they can use even if you don’t have one. At least you have a fighting chance to enter into a fair agreement or at least one that is tilted in your favor.
The other side might require you to sign their confidentiality agreement. In this situation, you could ask if the terms are negotiable. If not, you should get counsel to review the agreement so that you know what your responsibilities will be under the agreement.
Pros and cons of a confidentiality agreement
Understanding the benefits and limitations of a confidentiality agreement will help you to know the risks involved in relying upon the confidentiality agreement. Just because a confidentiality agreement can protect you against investors, potential licensee and buyers from stealing your idea, it doesn’t mean that it is sufficient protection.
However, if your funds are limited, then a confidentiality agreement might be the only way to get the information to the other person. It might not be superior protection but at least it is some protection against those that you have to deal with and might also misappropriate your idea.
Benefits of a confidentiality agreement
The benefits of a confidentiality agreement are speed and cost.
Confidentiality agreements can normally be delivered after a short conversation with a patent attorney within a day or two. The cost for the confidentiality agreement, if you are trying to protect your invention, is significantly lower the cost to prepare and file a comprehensive patent application on your invention.
Confidentiality agreements also mitigate the risk of an inadvertent public disclosure that might start your one-year grace period to file a patent application on your invention in the United States. For foreign countries that require absolute novelty, confidentiality agreements mitigate the potential for the recipient from publicly disclosing your invention and forfeiting your right to seek patents in foreign countries on your invention.
Limitations of using a confidentiality agreement
First, a confidentiality agreement requires you to spend time and money in court to get redress for a breach of the contract, time and money that you might not be willing to spend especially given there are no guarantees that you would win.
A confidentiality agreement is simply a contract. If someone inadvertently discloses your invention, idea or information beyond what is allowed under the confidentiality agreement, then all you have is the right to seek redress in a court of law. If you are not willing to spend the time and money to take the person to court, then the contract right that you have might not be worth much. In this case, although the initial cost for the confidentiality agreement is inexpensive, the cost to enforce the contract is significant compared to the cost of securing patent pendency for your invention.
With patent pendency, if the recipient takes your invention and files their own improved version of it, your previously filed patent application gives you priority because your patent application was filed first. No time or money is needed for enforcement. However, you do need to acquire the patent if the other person misappropriates your invention.
Secondly, the ownership rights of the invention may get confusing. The other person might create their own invention for an improved version of your idea. How does this happen? After executing a confidentiality agreement, the inventor or startup can tell the other person about the idea. That part is fine. However, when the other person starts to make suggestions, then those suggestions are ideas that belong to the recipient, not the inventor (i.e., the discloser). If those suggestions are really good, then the recipient may now own a valuable idea separate and apart from your invention.
A more common situation is where the inventor discloses a basic idea but the recipient suggests something that is an obvious variant of the basic invention. These obvious variants might also be ideas that the inventor already thought of. In this scenario, if the inventor incorporates those obvious ideas into their patent application or their own product, the recipient may now complain that you stole their idea. Now, if you had a patent application already on file or a notebook that already showed those obvious variants, you could show that you already conceived of those obvious variants.
These two situations are meant to show some examples of ways that confidentiality agreements are an imperfect means for protecting inventors and startups with respect to disclosure of inventions to others without patent pendency.
Warning: How do parties normally get stuck with an unfair confidentiality agreement?
Below is a checklist of common provisions in a confidentiality agreement. Each of the provisions and clauses generally talk about the same things from one agreement to the next. However, the devil is in the details. More of the specifics are discussed below but here is an example.
A confidentiality agreement must have a way to identify what information should be treated as confidential information and what should not. Otherwise, everything must be kept confidential, which most recipients will not agree to. The standard by which confidential information is identified can be different and some standards might be beneficial to the discloser while others are more beneficial to the recipient.
If the confidential information is identified by the nature of the information, then the discloser does not have to orally or in writing confirm that the information should be treated as confidential. This standard is obviously more beneficial to the discloser than the recipient because it covers all of the information that appears to be confidential. This standard also invites litigation, because the recipient might have a different opinion as to what the nature of the information connotes.
If the information to be treated as confidential requires the discloser to identify in writing what is confidential information, then this standard for identifying the confidential information is very beneficial to the recipient because it places a burden on the discloser before the confidentiality requirements are imposed on the recipient.
Each of the terms of a confidentiality can be adjusted in this way so as to be beneficial to the recipient or the discloser.
One way to mitigate the harshness of the agreement is to require that the obligations be mutual so that the standards are imposed equally on both parties. However, this might only work if both parties are disclosing confidential information. If only one party is disclosing confidential information, then this may not give the most benefit for the discloser and vice versa.
Checklist of terms and conditions for confidentiality agreement
Before reading through the checklist, read through the Warning above. Instead of going through all of the possible standard clauses or provisions, here are a few links to a check list.
Key clauses for confidentiality agreement
Identification of the parties
Discloser, recipient and third parties (e.g., employees, associates, etc.) associated with the recipient
Types of information to be covered under the agreement
A laundry list of information to be treated as confidential information is normally given.
Identifying information to be treated as confidential information
The agreement may specify a way to identify which information is to be treated as confidential. The way to identify it can be via a stamping system or oral communication or by the nature of the information. The important aspect to note is what the standard will be to identify confidential information. Sometimes, it says that everything disclosed is to be treated as confidential information unless excluded in the exclusions.
Exclusions of covered information
These exclusions are normally referred to as the cutouts of what is confidential information. These exclusions cover situations where the recipient receives a subpoena to disclose the information or where the information was already known by the public.
Level of confidentiality
This provision deals with the actions that you must take to keep the information confidential. Are you required to keep the information in strict confidence? Any inadvertent disclosure would be a breach of the agreement. You could be required to put in place reasonable measures to keep the information confidential. You could be required to keep the information confidential to the extent that you keep your own information confidential but in no instance will those measures be anything less than reasonable, or vice versa.
Authorized uses of confidential info
The agreement should specify how you can use that information. Typically, for investors, potential licensees and buyers, the authorized use is for evaluation purposes only. They should not be able to exploit the information.
IP ownership rights
This is a hotly contested provision. Oftentimes, people will agree that each party owns their own inventions and ideas. This type of provision would be unfair if the inventor disclosed a basic invention to someone else who comes up with the improved version. The basic version is owned by the inventor. However, the improved version would be owned by the recipient. Because of this, the conversation would not be as free as it should be to make the conversation worthwhile.
The agreement may last for one or two years. It is also conceivable that if trade secrets are concerned that the agreement will last for as long as the trade secret is still a trade secret.
Choice of law and jurisdiction
Confidentiality agreements are covered under state law. Hence, you need to receive counsel from an attorney that can advise you on the state law that governs the agreement. Here is an example of how state law might change the outcome of the agreement.
California Section 16600
Under California Business and Professions Code Section 16600, any agreement that prevents someone from engaging in a profession or career is void to that extent. This normally comes up with independent contractors—engineers, designers and the like. If the agreement prohibits them from securing future work because of a confidentiality agreement that they entered into, then by operation of law, they are not held to the requirement to keep the information confidential. This is only true for agreements where the choice of law is California.
Related article: Trade secret exception to Section 16600