The secrets of the Confidentiality Agreement

On many occasions, you are required to sign a confidentiality agreement without being familiar with its secrets.

A Confidentiality / Non-Disclosure Agreement is a legal contract aimed to assist in the protection of sensitive information that is exposed between the parties thereto. Without proper protection, the recipient might use such information in manner that will impair the disclosing party. For example, the use may result in aiding competition with the reviling party, harm to its reputation, impairing its efforts to register a patent and damaging negotiations it is conducting.

The law provides some protection to certain information, such as patent protection and confidentiality undertakings arising out of good faith duties; however, those are regarded as specific. On the other hand, the confidentiality agreement’s purpose is to provide a wider umbrella for the protection of the information exposed between the parties thereto.

Confidentiality agreements are signed in a verity of circumstances, among others between companies and their employees, suppliers, consultants, partners, bodies with which they cooperate and potential investors. In the Hitech field, almost each relationship begins with the signature of a confidentiality agreement.

There are two main sorts of confidentiality agreements:

A. On sided: agreements protecting only one of the parties. Such sort of agreements fits where one of the parties exposes sensitive information, while the other does not do so.

B. Mutual Agreements: agreements protecting both parties thereto. This sort of agreements suits where each party is expected to expose information to the other.


The “Confidential Information”

One of the most important definitions in the confidentiality agreement is the definition of the information to be protected under the agreement, i.e. the Confidential Information. The Confidential Information is usually defined as any information that the disclosing party discloses to the receiving party and/or related to the disclosing party. In some cases, the disclosing party is required to identify the confidential information in order for it to be considered Confidential Information. In most cases, the definition of the “Confidential Information” contains a list of examples, in which it is important, for the disclosing party, to specify the information sorts that are more sensitive from its perspective.

Certain information is usually excluded from the definition of “Confidential Information”, for example:

A. Public information;

B. Information that is the possession of the recipient prior to its first disclosure thereto by the disclosing party;

C. Information that the recipient will receive from a third party;

D. Information developed by the recipient independently without use of the Confidential Information.

Further, most confidentiality agreements permit disclosure of confidential information when it is required by applicable law. Such exception is subject to various conditions, such as notification by the recipient to the disclosing party about the aforesaid disclosure requirement as soon as possible.


Undertaking re the Confidential Information

The most basic undertaking of the recipient is not to disclose the information to third parties. When the recipient is a corporation, it is usually allowed to disclose the information to employees (and sometimes also to consultants, contractors etc.) that need the information for the purpose of its disclosure, which also has to be defined in the agreement.

In most cases, the confidentiality agreement shall also contain provisions requiring that the recipient protects the information in the manner it protects its own information of similar importance, by at least in a reasonable manner.

In addition, the recipient is required to return the information to the disclosing party or destroy it, at the request of the disclosing party.
Other Issues

It is important to define in any confidentiality agreement what is the period during which the recipient will have to protect the information. The period varies from several years to indefinitely.
Another important issue, for the disclosing party’s perspective, is that the recipient shall acknowledge that breach of the agreement may cause the receiving party irreparable damage and therefore justifies an injunction in favor of the disclosing party.

When the agreement is signed at the beginning of a relationship and there are no detailed contractual contracts between the parties, it is important, from the disclosing party’s perspective, to emphasize in the confidentiality agreement that it does not provide representations regarding the confidential information.

It is also important to include in the confidentiality agreement a provision clarifying that the agreement is not assignable or transferable to third parties (generally, it does not make sense).


From the disclosing party side, it is important to have a practice according to which any relationship with a party that may be exposed to sensitive information begins with the signature of a confidentiality agreement. From my experience, the value of such practice is not only legal, rather it also puts emphasis on awareness to the confidentiality matter as part of a culture of information protection, with both the disclosing party and the receiving party. Furthermore, a confidentiality agreement is a legal contract for all intents and purposes and should not be taken lightly. As any other agreement, it has to be adjusted to the relevant parties and circumstance, such as the actual risks of each part, the relevant sorts of information, practice etc.


What are your thoughts regarding confidentiality agreements? What is their contribution?


An Hebrew article version of this post was published with today’s TheMarker –